Which of the following is an example of horizontal analysis?
Horizontal analysis, also known as trend analysis, is a financial analysis technique that compares financial data over different periods of time to identify trends and patterns. It helps businesses and investors understand the changes in financial performance and make informed decisions. In this article, we will explore various examples of horizontal analysis to help you identify which one fits the description.
One common example of horizontal analysis is the comparison of a company’s revenue or net income over multiple years. By examining the percentage change in these figures, analysts can determine whether the company is growing, stable, or declining. For instance, if a company’s revenue increased by 10% in each of the last three years, it indicates a strong growth trend.
Another example is the analysis of a company’s inventory turnover ratio over different periods. This ratio measures how efficiently a company manages its inventory. If the inventory turnover ratio has been steadily decreasing over the years, it may suggest that the company is struggling to sell its products, which could be a red flag for investors.
Yet another example of horizontal analysis is the comparison of a company’s return on equity (ROE) over time. ROE is a measure of a company’s profitability and efficiency in using its shareholders’ equity. If a company’s ROE has been increasing over the years, it indicates that the company is becoming more profitable and is effectively utilizing its shareholders’ capital.
In addition to financial ratios, horizontal analysis can also be applied to non-financial data. For instance, a company might compare its customer satisfaction scores over several years to identify any trends in customer loyalty or dissatisfaction.
Lastly, a company could conduct horizontal analysis on its marketing expenses to determine if there has been a consistent increase or decrease in marketing investments. This can help the company evaluate the effectiveness of its marketing strategies and make adjustments accordingly.
In conclusion, horizontal analysis is a valuable tool for understanding financial and non-financial trends over time. By identifying examples such as revenue growth, inventory turnover, ROE, customer satisfaction, and marketing expenses, businesses and investors can gain insights into a company’s performance and make more informed decisions. Remember to always look for the percentage change or trend in the data to determine whether a company is improving, maintaining, or deteriorating over time.
