Trend and Common-Size Analysis
Horizontal analysis compares financial data across periods to identify trends — compute the dollar change and percentage change for each line item. Vertical analysis expresses each line item as a percentage of a base: income statement items as % of net sales, balance sheet items as % of total assets.
Vertical Analysis of Income Statement
Net Sales: $500,000 = 100%
COGS: $300,000 = 60%
Gross Profit: $200,000 = 40%
Operating Expenses: $120,000 = 24%
Operating Income: $80,000 = 16%
Net Income: $50,000 = 10%
This shows at a glance that 60 cents of every sales dollar goes to COGS.
Red Flags in Analysis
Watch for: declining margins over time, A/R growing faster than sales (collection problems), inventory growing faster than COGS (obsolescence risk), and operating cash flow diverging from net income.