## Horizontal vs Vertical Financial Analysis
There are two fundamental directions in which you can read financial statements. The names describe the direction of comparison.
### Horizontal Analysis (across time → reads left-to-right)
- Compares financial statements from different years to assess changes over time.
- Can be built on ratios derived from financial information over the same period across multiple years.
- Answers: "How has this item moved year on year?"
- Also called trend analysis.
### Vertical Analysis (within one period → reads top-to-bottom)
- Focuses on the financial statement of a single year.
- Especially useful for inter-firm comparison (normalizes for size).
- Method:
- Profit & Loss items → expressed as a % of gross sales.
- Balance Sheet items → expressed as a % of total assets.
- Answers: "What share of the whole does each item represent?" (this produces common-size statements).
### How to remember
- Horizontal = History (multiple years, time trend).
- Vertical = Value within one statement (one year, everything as a proportion of a base).