How to Calculate Financial Performance Using

Horizontal Analysis
By mgmt85, eHow User

http://aadventurecapital.com
Learn how to calculate financial performance of a company using horizontal analysis of the financial
statements.

Difficulty:

Moderately Easy
Instructions
things you'll need:
• Income Statement
• Calculator
• Previous Year Statements
1.

o 1

Horizontal Analysis for financial performance looks at changes across the financial statements in
DOLLAR and PERCENT! This is important because it will show how a company actually is doing
compared to what it looks like it is doing.

o 2
Get out this years and last years income statements.

o 3
We are going to concentrate on Revenue, Cost of Goods Sold, Gross Margin, Operating Expenses,
Operating Income, Interest Expense, Income Tax Expense, and Net Income.

o 4
This is what our Income Statement looks like before the analysis.
Sales year 1 = $290,000
Sales year 2 = $360,000
COGS year 1 = $176,000
COGS year 2 = $224,000
Gross Margin year 1 = $114,000
Gross Margin year 2 = $136,000
Operating Exp year 1 = $60,000
Operating Exp year 2 = $80,000
Operating Income yr. 1 = $54,000
Operating Income yr. 2 = $56,000
Interest Expense yr. 1 = $10,000
Interest Expense yr. 2 = $14,000
Income Tax Exp. yr. 1 = $16,000
Income Tax Exp. yr. 2 = $14,000
Net Income yr. 1 = $28,000
Net Income yr. 2 = $28,000

o 5
Back to sales... year 2 (this yr.) is $360,000 and year 1 (last year/base year) is $290,000. So, 360 - 290
= $70,000 increase in Sales. To find the percent change we take the BASE YEAR divided by DOLLAR
INCREASE and get the percent change. So, 70,000/290,000 gives us a 24.1% increase in Sales.

o 6
Okay, Sales/Revenues look good so the company looks financially okay so far. Let's look at what it cost
the company to sell. $224,000 - $176,000 = $48,000 increase in the costs. $48,000/$176,000 = 27.2%
increase. This increase is more than the sales/revenue increase for the second year comparison. This
means that it costs more to sell the product than we actually made. NOT GOOD.

o 7

Losing Money
The Gross Margin is not as good as we need it coming to a $22,000 increase and a 19.3% increase.
Now, operating expenses is the next thing to look at. $80K - $60K = $20,000 increase in operating
expenses. This also results in a percent increase of 20,000/60,000 = 33.3% This means that our
expenses exceeded the sales which results in a LOSS OF MONEY.

o 8
With everything else on the income statement there is an increase except for the Income Tax Expense
which results in a decrease because of a decline in profitability for the company. Don't have to pay high
taxes if you don't make that much! Overall the company doesn't have a change in company earnings
which also results in no change for Earnings Per Share on Wall Street.

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Tips & Warnings
• Be sure you know what to look for on the Income Statement and not use the wrong
numbers or your results will be wrong.
 • Make sure everything is exact because it will be going to the CFO and CEO of the
company for evaluations.

• LOTS OF MATH INVOLVED HERE

• Always have a Certified individual look over your results if you are not sure

Read more: How to Calculate Financial Performance Using Horizontal Analysis |

eHow.com http://www.ehow.com/how_4599291_financial-performance-using-
horizontal-analysis.html#ixzz1ICGRW How to compute ratios and
proportions

o 1
Identify the amounts that are being compared. If comparing apples to oranges, then the amount of
apples and the amount of oranges must be known. Express each as a number. For example, let's say I
have 20 apples and 10 oranges.

o 2
Decide which will be the first quantity. Are apples going to be described first, or oranges?

o 3
Divide the first quantity by the second quantity. If I choose apples, then I would divide as follows:
number of apples (20) divided by (/) number of oranges (10) equals (=) proportion of apples to oranges
(2)
20/10 = 2

o 4
Describe the result in words. From the result of step 3, I would have 2 apples for every orange.

Other examples

o 1
Lets say your car used 10 gallons to go 300 miles. Compute the miles per gallon for your car.

o 2
Amount of miles (300) divided by amount of gas (10) equals miles per gallon
300 / 10 = 30 miles per gallon.

o 3
You and your four friends won 700 dollars. If the five of you get equal shares, how much money does
each person get?

o 4
Amount of money (700) divided by number of people (5) is the money per person.
700 / 5 = 140 dollars per person.

o 5
If a batch of cookies needs 3 eggs, how many batches can you cook with 12 eggs?

o 6
In this problem, we use the ratio given.
12 eggs divided by 3 eggs per batch = 4 batches.

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Tips & Warnings
• Always try to express the problem as an A per B

• In real life, the numbers are not always simple. Use a calculator when needed.

• math image by jaddingt from F

Read more: How to Calculate Ratios and Proportions in Math |

eHow.com http://www.ehow.com/how_2310756_calculate-ratios-proportions-
math.html#ixzz1ICGsUeaAFfG

How to Calculate Ratio Analysis

By Bradley James Bryant, eHow Contributor

Ratio Analysis
Ratios are primarily used as a way to quantify a comparison between two different items. In words, a
ratio is represented by the word "to" or "compared to." They can be written as fractions, using the word
"to," or with a colon. They can also be expressed as a percentage: 3 to 6, 3/6, 3:6 all mean the same
thing in ratio analysis.

Difficulty:

Moderately Easy
Instructions
things you'll need:
• Calculator
The Steps

o 1
Review an example. The best way to understand how to calculate a ratio for analysis is to work through
an example. Let's say we have a group of shapes consisting of both circles and squares. In our
grouping, we have three squares and six circles. What is the best way to express this grouping as a
ratio?

o 2
Express the ratio using the word "to." Expressed in words, using the word "to," this grouping is
represented by saying "3 to 6" or "the number of squares" to "the number of circles." If you add the two
numbers together, it should equal the total number of shapes in the group.

o 3
Calculate the ratio as a fraction. Expressed as a fraction, our grouping of shapes is 3/6. This is the
"number of squares" divided by "the number of circles." This is the most common way ratios are
expressed.

o 4
Express the ratio using a colon. Another way to show a ratio between two different items is to use a
colon. This is expressed as 3:6 or "the number of squares": "the number of circles."

o 5
Pay attention to order. In our example, "the ratio of squares to circles," squares came first. This order is
very important and must be noted. Whatever word or item is compared first, must also come first in the
ratio.

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Tips & Warnings
• When you calculate a ratio, the two items being compared must have the same units. If
they don't, you will need to "convert" one of the items being compared to the units of the
other by using a conversion factor. See Resources for more information on conversion
factors.

References
• Ask Dr. Math Math Forum
• Purple Math: Ratios
Resources
• Over 100 Unit Conversion Factors
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Read more: How to Calculate Ratio Analysis |

eHow.com http://www.ehow.com/how_5161774_calculate-ratio-analysis.html#ixzz1ICHDRqrM