Accounting Question - Combining Vertical Analysis with Horizontal Analysis of financial statements?

Question

Firstly I understand the concept of vertical analysis (representing line items as percentage of either total asset or revenue), and horizontal analysis (calculating the year-on-year changes or %changes of financial items).

My question is, when performing horizontal analysis, instead of calculating the yearly difference of actual line items, can I calculate the yearly difference of line items that are already represented as a percentage of asset or revenue?

Basically, I am saying whether it will be considered correct if I firstly perform vertical analysis on the statements by turning line items into percentage of total asset or revenue, then perform horizontal analysis on these percentages in order to find trends?

Answer 1

Basically, I am saying whether it will be considered correct if I firstly perform vertical analysis on the statements by turning line items into percentage of total asset or revenue, then perform horizontal analysis on these percentages in order to find trends?

The picking of numbers to view trends isn’t a matter of correctness - it is a matter of usefulness.

It is immediately useful to look at whether and by how much an asset grows. This is akin to ‘velocity’.

I can imagine wanting to see the ‘acceleration’ by comparing percentage changes as you propose. An asset with consistently positive ‘acceleration’ year after year produces increasing profits as time goes on.

Whether or not such an analysis is useful depends on your objectives.