Horizontal Analysis of the Balance Sheet.

 Horizontal analysis, also known as trend analysis, is a financial analysis technique that compares financial data over time to identify trends and patterns. In the context of the balance sheet, horizontal analysis compares the balance sheet of a company over two or more periods to identify changes in the composition and size of the company's assets, liabilities, and equity.

The formula for horizontal analysis is as follows:

Horizontal Analysis = ((Current Period Amount - Previous Period Amount) / Previous Period Amount) x 100

Where:

• Current Period Amount is the amount of a specific line item on the balance sheet for the current period being analyzed.
• Previous Period Amount is the amount of the same line item on the balance sheet for the previous period being analyzed.

Horizontal analysis of the balance sheet can help to identify changes in a company's financial position over time. For example, if a company's accounts receivable increased significantly from one period to the next, this could indicate that the company is having trouble collecting payments from customers. Alternatively, if a company's cash balance increased significantly from one period to the next, this could indicate that the company is generating more cash from its operations or has received a large influx of cash from financing activities.

Horizontal analysis of the balance sheet can also be used to compare the financial performance of a company to its peers or industry benchmarks. For example, if a company's inventory turnover ratio is lower than the industry average, this could indicate that the company is holding too much inventory and may be losing out on potential sales.

It is important to note that horizontal analysis of the balance sheet should be used in conjunction with other financial analysis techniques, such as vertical analysis or ratio analysis, to gain a comprehensive understanding of a company's financial performance.