Financial Analysis Tools

Defining Financial Analysis Tools

Financial analysis tools are one of the most efficient ways that can be used for
ensuring good profit from your investments. These financial analysis tools are highly
helpful in evaluating the market and investing in a way so as to maximize the profit
from the investments made. These financial analysis tools are useful for deciphering
(interpret) both internal and external information related to a specific business
organization.
‫ تعتتتبر‬.‫تعد أدوات التحليل المالي من أكثر الطرق فعالية التي يمكن استخدامها لضمان ربتتح جيتتد متتن استتتثماراتك‬
‫أدوات التحليل المالي هذه مفيدة للغاية في تقييم السوق والستثمار بطريقة تؤدي إلى زيادة الربح من الستثمارات‬
‫ تعتبر أدوات التحليل المالي هذه مفيدة لتفسير المعلومتتات الداخليتتة والخارجيتتة المتعلقتتة بمؤسستتة أعمتتال‬.‫التي تتم‬
.‫معينة‬

Applications of Financial Analysis Tools

Mainly, the financial analysis tools can be used for SWOT analysis. The term SWOT
is short for:
S – Strength

W – Weaknesses

O – Opportunities

T – Threats

The economic conditions in the present day market are analyzed by management
professionals with assistance from SWOT analysis performed by the various
financial analysis tools. Each section of the evaluation process contains specific
information which is helpful in gauging the general performance of a company.
Moreover, financial analysis tools are really important for any investor for the
company’s performance shows direct impact on the price of a company’s stock.
SWOT ‫يتم تحليل الظروف القتصادية في السوق الحالية من قبل متخصصين فتتي الدارة بمستتاعدة متتن تحليتتل‬
‫ يحتوي كل قسم من عملية التقييم علتتى معلومتتات محتتددة‬.‫الذي يتم إجراؤه بواسطة أدوات التحليل المالي المختلفة‬
‫ تعتبر أدوات التحليل المالي مهمة حق ا لي مستتثمر حي ث‬، ‫ علوة على ذلك‬.‫تساعد في قياس الداء العام للشركة‬
.‫يظهر أداء الشركة تأثيقرا مباشقرا على سعر سهم الشركة‬
Vertical Analysis (‫التحليل العامودي )الرأسي‬

What is Vertical Analysis?

Vertical analysis is the proportional analysis of a financial statement,

where each line item on a financial statement is listed as a
percentage of another item. This means that every line item on an
income statement is stated as a percentage of gross sales , while
every line item on a balance sheet is stated as a percentage of total
assets.

The most common use of vertical analysis is within a financial statement for a
single reporting period, so that one can see the relative proportions of account
balances. Vertical analysis is also useful for trend analysis, to see relative changes
in accounts over time, such as on a comparative basis over a five-year period. For
example, if the cost of goods sold has a history of being 40% of sales in each of
the past four years, then a new percentage of 48% would be a cause for alarm.

Formula ‫الصيغة‬
The formula for vertical analysis of income statement can be derived by dividing
any item in the income statement by the total sales and express it in terms of
percentage. Mathematically, it is represented as,

Vertical Analysis of Income

Statement

= Income Statement Item / Total

Sales * 100
Vertical Analysis of the Income Statement

The most common use of vertical analysis in an income statement is to show the
various expense line items as a percentage of sales, though it can also be used to
show the percentage of different revenue line items that make up total sales. An
example of vertical analysis for an income statement is shown in the far right
column of the following condensed income statement:

$ Totals Percent
Sales $1,000,000 100% (1000000 / 1000000 ) 100%
Cost of goods sold 400,000 40% (400000 / 1000000 ) 100%
Gross Profit 600,000 60% (600000 / 1000000 ) 100%

Salaries and 250,000 25% (250000 / 1000000 ) 100%

wages
Office rent 50,000 5% (500000 / 1000000 ) 100%
Supplies 10,000 1% (10000 / 1000000 ) 100%
Utilities 20,000 2% (20000 / 1000000 ) 100%
Other expenses 90,000 9% (90000 / 1000000 ) 100%
Total expenses 420,000 42% (420000 / 1000000 ) 100%
Net profit 180,000 18% (180000 / 1000000 ) 100%

The information provided by this income statement format is useful not only for
spotting spikes in expenses, but also for determining which expenses are so small
that they may not be worthy of much management attention.

Vertical Analysis of the Balance Sheet

The central issue when creating a vertical analysis of a balance sheet is what to
use as the denominator in the percentage calculation. The usual denominator is
the asset total, but one can also use the total of all liabilities when calculating all
liability line item percentages, and the total of all equity accounts when
calculating all equity line item percentages. An example of vertical analysis for a
balance sheet is shown in the far right column of the following condensed
balance sheet:
Formula
The formula for vertical analysis of Balance Sheet can be derived by dividing any
item in the Balance Sheet by the total Assets and express it in terms of
percentage. Mathematically, it is represented as,

Vertical Analysis of Balance Sheet

= Balance Sheet Item / Total Assets * 100

$ Totals Percent
Cash $100,000 10% (100000 / 1000000 ) 100%
Accounts receivable 350,000 35% 100% ( 1000000 / 350000)
Inventory 150,000 15% 100% ( 1000000 / 150000)
Total current assets 600,000 60% 100% ( 1000000 / 600000)

Non- current assets 400,000 40% 100% ( 1000000 / 400000)

Total assets $1,000,000 100% ( 1000000 / 1000000)
100%

Accounts payable $180,000 18% 100% ( 1000000 / 180000)

Accrued liabilities 70,000 7% 100% ( 1000000 / 700000)
Total current liabilities 250,000 25% 100% ( 1000000 / 250000)

Notes payable 300,000 30% 100% ( 1000000 / 300000)

Total liabilities 550,000 55% 100% ( 1000000 / 550000)

Capital stock 200,000 20% 100% ( 1000000 / 200000)

Retained earnings 250,000 25% 100% ( 1000000 / 250000)
Total equity 450,000 45% 100% ( 1000000 / 450000)
Total liabilities and $1,000,000 100% ( 1000000 / 1000000)
100%
equity

The information provided by this balance sheet format is useful for noting
changes in a company's investment in working capital and fixed assets over
time, which may indicate an altered business model that requires a different
amount of ongoing funding .

Vertical analysis examples

Here are examples of how you can use vertical analysis on an income statement in
different scenarios:

Example of vertical analysis on an income statement with expenses

One of the most common ways you can use vertical analysis is to understand how a
company's expenses are affecting its overall net profit. The following chart shows a
company's income statements with expenses for two years with the total dollar
amounts and percentages:

Line Item Year 1 Percentage Year 2 Percentage

1 2
Total sales $850,00 100% $1,000,00 100%
0 0
Cost of goods $212,50 25% $300,000 30%
sold 0
Gross Profit $637,50 75% $700,000 70%
0
Salaries $255,00 30% $300,000 30%
0
Rent $28,000 3.35% $28,500 2.85%
Utilities $34,500 4.05% $35,000 3.5%
Marketing $25,000 2.94% $50,000 5%
Total expenses $342,50 40.29% $413,500 41.35%
0
Net Profit $295,00 34.70% $286,500 28.65%
0

In this example, you can quickly see that while total sales increased in year two, the
company's gross and net profit percentage decreased. While you would likely expect
the cost of goods sold to increase as the total sales amount increases, using the vertical
analysis method reveals that the costs didn't increase proportionately to the increase in
sales.

In year one, the cost of goods sold was only 25% of the company's overall total sales,
but in year two the percentage increased to 30%. This means the company needs to
reduce its cost of goods sold while trying to increase or maintain its total sales
amount to increase its gross and net profits in year three.
Example of vertical analysis on an income statement with revenue

Another way you can use vertical analysis is to understand how much each product or
service a company offers contributes to its total sales. The following chart shows a
company's income statement with total dollar amounts and percentages for the
revenue generated by each of its products or services:

Line Item Year 1 Percentage Year 2 Percentage

1 2
Total sales $50,000 100% $100,00 100%
0
Cost of goods sold $10,000 20% $25,000 25%
Gross Profit $40,000 80% $75,000 75%
T-shirts $15,000 30% $40,000 40%
Dresses $2,000 4% $4,000 4%
Jeans $10,000 20% $15,000 15%
Children's $15,000 30% $30,000 30%
clothing
Purses $5,000 10% $7,000 7%
Shoes $3,000 6% $4,000 4%

In this example, you can quickly see that while the company's total sales increased in
year two, its cost of goods sold also increased by 5%, causing the company to
experience a 5% profit loss in year two compared to year one. The lower portion of
the chart shows how each of the company's products contributed to the company's
total sales for the year.

Using the vertical analysis method shows you that the proportion of the company's
total sales from dresses and children's clothing remained the same from year one to
year two, the proportion of the company's total sales from jeans, purses and shoes
decreased from year one to year two and the proportion of the company's total sales
from t-shirts increased by 10% from year one to year two. This information suggests
that the company didn't do as well at selling jeans, purses and shoes in year two as it
did in year one.
Combining this information with other information about the company, such as where
they focused their marketing efforts each year, can help you determine the best ways
for the company to increase its total sales and profit margins.
Vertical Analysis
A Vertical Analysis is performed for a specific period such as a month, quarter, year,
etc. then it is compared to similar periods such as the first quarter of 2011, the first
quarter of 2012, the first quarter of 2013, etc.

Vertical Analysis for an Income

Statement ↑
When performing a Vertical Analysis of an Income Statement, Net Sales usually used
as the basis for which all other items are compared. Net Sales is divided by itself
making it 100%. All other items in the Income Statement are divided by the Net Sales.
Vertical Analysis of Balance
Sheet ↑

When creating a Vertical Analysis for a balance sheet, total assets are used as basis for
analyzing each asset account. Total liabilities and stockholder’s equity is used as the
basis for each liability and stockholder account.
Advantages of the Vertical Analysis Formula
1- It is one of the easiest methods of financial analysis.

2- Vertical analysis of financial statement provides a comparable percentage

which can be used to compare with the previous years.

3- Different organization statements can be compared as the comparison is made

in percentage.

4- Vertical analysis is also instrumental in comparing the financial

statements with the previous year’s statement and analyze the profit or loss of
the period.

5- Where it helps to understand the structural composition of the various

components like cost, expenses, assets, and liabilities

‫مزايا صيغة التحليل العمودي‬ 

.‫إنها إحدى أسهل طرق التحليل المالي‬ -1

‫يوفر التحليل الرأسي للبيان المالي نسبة مئويتتة قابلتتة للمقارنتتة يمكتتن استتتخدامها للمقارنتتة متتع‬ -2

.‫السنوات السابقة‬

.‫يمكن مقارنة البيانات التنظيمية المختلفة حيث يتم إجراء المقارنة بالنسبة المئوية‬ -3

‫يعد التحليل الرأسي أي ق‬

‫ضا مفيقدا في مقارنة البيانات المالية مع بيان العتتام الستتابق وتحليتتل ربتتح‬ -4

.‫أو خسارة الفترة‬

‫حيتتث يستتاعد علتتى فهتتم التتتركيب الهيكلتتي للمكونتتات المختلفتتة مثتتل التكلفتتة والمصتتروفات‬ -5

‫والصأول والخصوم‬
Disadvantages of the Vertical Analysis
Formula
1- The vertical analysis of financial statements does not help to make a firm

decision as there is no standard percentage or ratio regarding the change in the

components of the income statement or the balance sheet.

2- The accounting conventions are not followed vigilantly in the vertical

analysis.

3- The liquidity of the organization cannot be measured precisely by using the

analysis.

4- Quality analysis is not done by using vertical analysis of financial statements

as there is no consistency in the ratio of the elements.

‫عيوب صيغة التحليل العمودي‬ 

‫ل يساعد التحليل الرأسي للبيانات المالية في اتخاذ قرار حازم حيث ل توجد نسبة مئوية أو‬ -1

.‫نسبة معيارية فيما يتعلق بالتغيير في مكونات قائمة الدخل أو الميزانية العمومية‬

.‫ل يتم اتباع قواعد المحاسبة بيقظة في التحليل الرأسي‬ -2

.‫ل يمكن قياس سيولة الشركة بدقة باستخدام التحليل‬ -3

‫ل يتم تحليل الجودة باستخدام التحليل الرأسي للبيانات المالية حيث ل يوجد اتساق في نسبة‬ -4

.‫العناصأر‬

Horizontal Analysis ‫التحليل الفاقي‬

Horizontal analysis (also known as trend analysis) is a financial statement
analysis technique that shows changes in the amounts of corresponding financial
statement items over a period of time. It is a useful tool to evaluate the trend
situations.

‫التحليل الفقي )المعروف أي قضا باسم تحليل التجاه( هو أسلوب لتحليل البيانات المالية يعرض التغييتترات‬
.‫ إنها أداة مفيدة لتقييم مواقف التجاه‬.‫في مبالغ عناصأر البيانات المالية المقابلة على مدار فترة زمنية‬

The statements for two or more periods are used in horizontal analysis. The
earliest period is usually used as the base period and the items on the statements
for all later periods are compared with items on the statements of the base period.
The changes are generally shown both in dollars and percentage.

‫ تتستخدم الفترة الولى عاد قة كفترة أساس وتتم‬.‫يتم استخدام القوائم المالية لفترتين أو أكثر في التحليل الفقي‬
‫مقارنة البنتتود التتواردة فتتي القتتوائم الماليتتة لجميتتع الفتتترات اللحقتتة متتع البنتتود الموجتتودة فتتي بيانتتات فتتترة‬
.‫ تظهر التغييرات بشكل عام بالدولر والنسبة المئوية‬.‫الساس‬

Horizontal Analysis (%)

= [(Amount in Comparison Year – Amount in Base Year) / Amount
in Base Year] * 100

Horizontal Analysis of the Income Statement

Horizontal analysis of the income statement is usually in a two-year format, such
as the one shown below, with a variance also shown that states the difference
between the two years for each line item. An alternative format is to simply add
as many years as will fit on the page, without showing a variance, so that you can
see general changes by account over multiple years. A third format is to include a
vertical analysis of each year in the report, so that each year shows expenses as a
percentage of the total revenue in that year.

‫ متتع وجتتود تبتتاين يوضتتح‬، ‫ مثتتل ذلتتك الموضتتح أدنتتاه‬، ‫عادة ما يكون التحليل الفقي لبيان الدخل بتنسيق لمدة عامين‬
‫ التنستتيق البتتديل هتتو ببستتاطة إضتتافة العديتتد متتن الستتنوات التتتي تناستتب‬.‫أي قضا الفرق بين العامين لكل عنصتتر ستتطر‬
‫ التنستتيق‬.‫ بحيث يمكنك رؤية التغييرات العامة حسب الحساب على متتدار عتتدة ستتنوات‬، ‫ دون إظهار تباين‬، ‫الصفحة‬
‫ بحيتتث تيظهتتر كتتل عتتام النفقتتات كنستتبة مئويتتة متتن إجمتتالي‬، ‫الثالث هو تضمين تحليل عمودي لكل عام فتتي التقريتتر‬
.‫اليرادات في تلك السنة‬

20X1 20X2 Variance %

Sales $1,000,000 $1,500,00 $500,000 50%
0
Cost of goods sold 400,000 600,000 200,000 50%
Gross margin 600,000 900,000 300,000 50%

Salaries and wages 250,000 375,000 125,000 50%

Office rent 50,000 80,000 30,000 60%
Supplies 10,000 20,000 10,000 100%
Utilities 20,000 30,000 10,000 50%
Other expenses 90,000 110,000 20,000 22.2%
Total expenses 420,000 615,000 195,000 46.4%
Net profit $180,000 $285,000 $105,000 58.3%
A decrease in sales could reflect in decrease in number of units sold

or a decrease in unit selling price. This decrease can have an

adverse impact on profitability. Cost of goods sold is the

largest expenses for a manufacturing unit. If the decrease in cost of

goods sold is in proportion to decrease in sales, it indicates that the

management is able to manage it effectively.

Example Showing You Trend Analysis of Income Statement

Particulars Year2 Year1 Changes Change in Percentage

(Year2-Year1) [(Changes/Year1)]*100
sales 40,00,000 36,00,000 4,00,000 11.11%
Cost of Goods Sold 24,00,000 21,00,000 3,00,000 14.29%
Gross Profit 16,00,000 15,00,000 1,00,000 6.67%
General Expenses 2,00,000 1,75,000 25,000 14.29%
Selling Expenses 2,10,000 1,97,500 12,500 6.33%
Total Operating Expenses 4,10,000 3,72,500 37,500 10.07%
Operating Income 11,90,000 11,27,500 62,500 5.54%
Interest expenses 65,000 62,000 3,000 4.84%
Profit Before income tax 11,25,000 10,65,500 59,500 5.58%
Income tax 2,82,000 2,67,000 15,000 5.62%
Net Income 8,43,000 7,98,500 44,500 5.57%

Horizontal analysis formula used in above illustration:

 To calculate changes = Amount in the year 2 – amount in the year 1

 To calculate percentage changes = (changes / year 1 )*100

 Horizontal Analysis of the Balance Sheet

Horizontal analysis of the balance sheet is also usually in a two-year format, such
as the one shown below, with a variance showing the difference between the two
years for each line item. An alternative format is to add as many years as will fit
on the page, without showing a variance, so that you can see general changes by
account over multiple years.

‫ مع تبتتاين يوضتتح‬، ‫ مثل الشكل الموضح أدناه‬، ‫عاد قة ما يكون التحليل الفقي للميزانية العمومية بصيغة مدتها سنتان‬
‫ دون إظهتتار‬، ‫ يتمثل التنسيق البديل في إضافة العديتتد متتن الستتنوات التتتي تل ئتتم الصتتفحة‬.‫الفرق بين السنتين لكل بند‬
.‫ بحيث يمكنك رؤية التغييرات العامة حسب الحساب على مدار عدة سنوات‬، ‫تباين‬

2020 2021 Variance %

Cash $100,000 80,000 $(20,000) (20%)
Accounts Receivable 350,000 525,000 175,000 50%
Inventory 150,000 275,000 125,000 83.33%
Total Current Assets 600,000 880,000 280,000 46.66%

Non-Current Assets 400,000 800,000 400,000 100%

Total Assets $1,000,000 $1,680,000 $680,000 68%

Accounts Payable $180,000 $300,000 $120,000 66.66%

Accrued liabilities 70,000 120,000 50,000 71.42%
Total Current liabilities 250,000 420,000 170,000 68%

Notes Payable 300,000 525,000 225,000 75%

Total liabilities 550,000 945,000 395,000 71.82%

Capital Stock 200,000 200,000 0 0

Retained Earnings 250,000 535,000 285,000 114%
Total Equity 450,000 735,000 285,000 63.33%

Total liabilities and Equity $1,000,000 $1,680,000 $680,000 68%

Horizontal Analysis for an Income

Statement ↑

There are various formats for creating a Horizontal Analysis but the most popular
is to display the variance between Income Statements in dollar amounts and
percentage. The difference in percentage is computed by taking the dollar
difference in an Income Statement item and dividing it by the base year.
Horizontal Analysis of Balance
Sheet ↑

A Horizontal Analysis for a Balance Sheet is created the same as a Horizontal

Analysis for an Income Statement. The variance for each item in the Balance
Sheet is displayed in a dollar amount as well as the percent difference.
 Horizontal Analysis Example (Basic) let us assume that we are provided with the
Income Statement data of company ABC. We need to horizontal analysis on this
company.

Details 2016 (In US 2015 (In US Amount Percentage

$) $)
Sales 30,00,000 28,00,000 200,000 * 7.14% **
(-) Cost of Goods Sold (21,00,000) (20,00,000) 100,000 5%
Gross Profit 900,000 800,000 100,000 12.50%
General Expenses 180,000 120,000 60,000 50%
Selling Expenses 220,000 230,000 (10,000) (4.35%)
Total Operating (400,000) (350,000) 50,000 14.29%
Expenses
Operating Income 500,000 450,000 50,000 11.11%
Interest expenses (50,000) (50,000) § §
Profit before Income 450,000 400,000 50,000 12.50%
Tax
Income Tax (125,000) (100,000) 25,000 25%
Net Income 325,000 300,000 25,000 8.33%
This is a basic example, where we have divided our approach into two
parts. First, we found the absolute difference between the comparative
years.

 For example, Change in Sales = (30, 00,000 – 28, 00,000) = 200,000

 We find the percentage change = 200,000/28, 00,000 * 100 = 7.14%

 TERMS TO KNOW
 Horizontal Analysis
 Evaluates Percentage Changes in Financial Statement Items from one Period to
Another.

 ‫يقيم التغييرات بالنسبة المئوية في بنود البيانات المالية من فترة إلى أخرى‬

 Vertical Analysis
 Evaluates Financial Statement Items as a Percent of a Base Amount.

 ‫يقيم بنود المركز المالي كنسبة مئوية من المبلغ الساسي‬

 Terms Similar to Horizontal Analysis

 Horizontal analysis is also known as trend analysis. Refers to studying the
behavior of individual financial statement items over several accounting
periods
 ‫ يشير إلى دراسة سلوك عناصأر البيانات المالية الفردية‬.‫تيعرف التحليل الفقي أي قضا باسم تحليل التجاه‬
‫على مدى عدة فترات محاسبية‬

 Terms Similar to Vertical Analysis

 Vertical analysis is also known as Common – Size analysis

 ‫يعرف التحليل الرأسي أيضقا بإسم تحليل الحجم المشترك‬