Horizontal Analysis of Financial Statements - YouTube

hello everyone hi welcome to the channel of WallStreetmojo or watch the video

till the end also if you are new to this channel then you can subscribe us by

clicking the bell ican friends today we going to learn a concept are tutorial on

horizontal analysis of the financial statement let's understand this see

horizontal of the financial statement is one of the most important technique to

find out how company is doing financially okay and it is used for

evaluating the trends trends or year and it is it's called

year on year that's called yoy or q on cue that's called quarter-on-quarter

that's QQ right so in this article V or in in this tutorials we will have have a

closer look at the horizontal analysis of the financial statement now first in

the foremost thing what exactly is the horizontal analysis see if you are

investor and thinking about investing in a company only year end and balance

sheet or income statement it wouldn't be enough for you to judge how company is

doing so you need to look at couple of years at least to be sure so better yet

if you see me many years of balance sheet and income statement and and make

a comparison among them now through horizontal analysis of the financial

statement you would be able to see in a to actual data okay

actual data for the consecutive years and would be able to compare each and

every item and on the on the basis of that you can focus the future and and

understand the trade so you don't need any special financial or you can you

cannot you don't need any financial skills to ascertain the difference

between the previous year's data and the last year's data all you need to know

all you need is the diligence and attention of the details you can say of

an analogical mind to decipher why the change exactly happens now this is the

example of GK SR income statement of 2006-2007 then that is the increase in

from 2006 to 2007 has been noted down here and percentage that is yoy changed

that is the current year that is 2007 amount 847,401

minus the base year 801,240 divided by the be easier amount

that is 8 0 to 1 0 so by that you will get all this kind of percentages

now why provision for taxation or has increased close enough to by

12.6% and that while the revenue has increased by only

5.5% see this is a quite visible to us this

as the operating expenses 5.5% EBITDA and EBIT and so on and so

forth you can see the details right see the provision of taxes 12.6% so in

the gk example about we are able to identify the yoy growth rate using the

horizontal analysis now horizontal analysis helps us to identify the

potential area of the growth and the concerns from this this particular so

for example in GK SR are over here we note that the provision for tax has

increased by 12.6% however their revenue has increased by

only 5.5% if we can just see so Y provision increased at a

higher rate that is a question also there has been comparatively this

5.5% is a net revenue right and also there has been a comparatively

higher growth rate of 9.1% I mean in in the selling and the

admin cost right so what could have contributed this increase see as we see

are able to correctly identify the trends in also come up with the relevant

areas to target further analysis let's have a look at the horizontal analysis

or formula C first we need to take the previous here in the base year that this is

the previously at the Base year BZ and the last year as the comparison

here like for example let's say we are comparing between 2006 and 2017

will take 2006 as the base year in 2007 as the comparison yo now the horizontal

analysis is analysis can be done with this formula right we just discussed

okay now I'll take Next example let's assume that you know we are provided

with the with income statement data of let's say company ABC over here and we

need to perform some horizontal analysis on this company so as you can see couple

of details are there sales - COGS which gives you a gross profit you

deduct the expenses so you get the total operating expenses which gives you your

operating income interest expense if any right and finally your profit before tax

income tax and the net income so this is a very basic example where we have

divided our approach into two parts first we would we find the absolute

difference between the comparative years like for example the change in the sales

300000 - 280000 right the change is how much this is basically the change in

amounts as simple as that so the amount this this is the change

and we find the percentage by this fashion we just divide by the base year

it's something like this it's the current year or less the base year divided by

base year so that's how we get our answer

okay there has been some problem over here it's fine

so that that basically comes down to 7.14% and

likewise we can do the same for entire calculation in this fashion right and

for all the entries in the income statement basically

now let's look at the horizontal analysis of Colgate now here we have the

yoy growth rates of Colgate's income statement from 2008 onwards to 2015

right we calculate the growth rate of each of this line items with respect to

the previous years okay and for example I'll say that you know to find the

growth rates of the net sales of 2015 the formula is basically the net sales

of 2015 in this case net sellers of 2015 - net sales of 2014 divided by the net

sales of 2014 but that's half you have find found out the percentages from this

and here some of the observations from the Colgate's horizontal analysis the

last 2 years colgate has seen deep in the net sales figure as you can see

I mean in 2015 the Colgate saw D growth of -7.2 % in 2015 why the cost of

sales over here if you see that however has decreased positively from the

company's point of view and why this is so the net income has decreased decrease

in the last 3 years with much you can say from 11.3% it has

gone to even - 7 % so net income has decreased in the last year which as much

as 36.5% decline in 2015 so from the income statement and

the balance sheet company this is basically the interpretation part I'm

saying that you know a company may poetry pretty good hold on the financial

affairs but as an investor it's your responsibility to check you can either

check each item and understand why there is a difference

your minute attention to details may help your discover may may help you

discover something about the company which the company wanted to hide from

all the potential investor so companies can basically you can say inflate profit

or show undelivered statement by changing few things here and there but

if you pay attention to details you would be able to discover that's what's

actually going within the company now with such analysis you would be able to

understand how the company may do in the upcoming years and what they are trying

to accomplish over the years what's their recent purchase or sales or

revenue or net income fixed assets and so on and so forth neck unlike the other

ratios this technique gives the investor basically an overall picture of where a

company stands in terms of the financial matter what they are trying to do with

the funds and how profitable the company can be in the near future now horizontal

analysis forecasting in the financial modelling see horizontal analysis is

very useful in financial modeling and forecasting there are two approaches the

first is you perform the horizontal analysis on the historical our numbers

of the data and the second step to that is based on the YoY or QQ growth okay

Q your growth rates you can make an assumption about the future growth rates

okay so based on this we can finally make some conclusion that from the above

examples it's clear that through horizontal analysis of financial

statement you need to look at each and every item okay in the income statement

and the balance sheet you would get a really a holistic picture of how a

company is doing so before investing in any company you should do a horizontal

analysis of the company's financial statement and go ahead and do seam and

and do what seems appropriate to you so that's it for this particular topic if

you have learned it enjoyed watching this video please like and comment on

this video and subscribe to our channel for the latest updates thank you