Ratio, Vertical, and Horizontal Analyses

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Financial statement analysis is the process of examining relationships among financial statement elements and making comparisons with relevant information. There are a variety of tools used to evaluate the significance of financial statement data. Three of the commonly used tools are the ratio analysis, horizontal analysis, and vertical analysis. Ratio analysis is a method of analyzing data to determine the overall financial strength of a business. These ratios are most useful when compared to other ratios such as the comparable ratios of similar businesses or the historical trend of a single business over several business cycles. Horizontal analysis is a type of fundamental analysis in which certain financial data is used to assess a company’s performance over a period of time. Horizontal analysis can be assessed on a single company over a period of time, comparing the same items or ratios, or it can be performed on multiple companies in the same industry to assess a company’s performance relative to competitors. Vertical analysis is a method of analyzing financial statements in which each item in the statement is represented as a percentage of a single larger item. Vertical analysis makes comparisons between two or more companies in the same industry easier. It also allows a company to weigh current reports against reports of the past, revealing areas that may need improvement. The current ratio for any company is calculated with the use of the following mathematical equation. Current Ratio= (Current Assets)/(Current Liabilities) PepsiCo, Inc. 2005 $10454/$9406=1.11:1 PepsiCo, Inc. 2004 $8639/$6752=1.28:1 Vertical Analysis= (Item on B/S)/(Total Assets)=Percentage or (Vertical Analysis)/(Total Liabilities with Shareholders^' Equity)=Percentage Two measures of vertical analysis: (Current Assets)/(Total Assets)= 10454/31727=33% (Short Term

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