Horizontal and vertical analysis

Horizontal analysis compares each line of a set of accounts with the same line in earlier years, usually as a percentage change, to show the trend. Vertical analysis, also called common size analysis, restates every line as a percentage of one base figure, normally turnover for the profit and loss account and total assets for the balance sheet, so that years or companies of different size can be compared. Neither explains why a figure moved; both tell you where to look.

What do horizontal and vertical analysis actually mean?

In the usual sense, horizontal analysis reads across the columns of a multi year layout. For each line you calculate the change in pounds and the change as a percentage of the earlier year. Over three or more years it is often easier to use index numbers: the first year is set to 100 and each later year is shown relative to it, so turnover of 100, 112 and 131 shows growth of 31% over the period at a glance.

Vertical analysis reads down a single column. Each line is divided by a base figure and shown as a percentage. In the profit and loss account the base is turnover, so cost of sales, overheads and profit become shares of each pound of sales. In the balance sheet the base is usually total assets, so stock, debtors, cash and borrowings become shares of the asset base.

Be careful with the labels. ACCA’s study article on performance appraisal uses them differently: it describes comparing a company’s results with its own previous period as “trend or vertical analysis”, and comparing it with an equivalent company as a horizontal comparison. Before relying on someone else’s analysis, check which method they actually used rather than trusting the name.

Why do UK accounts make this kind of analysis possible?

Comparative figures are a legal requirement. Paragraph 7 of Schedule 1 to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) requires the corresponding amount for the immediately preceding financial year to be shown for every item in the balance sheet and profit and loss account. Where last year’s amount is not comparable, it may be adjusted, but particulars of the non comparability and of any adjustment must be disclosed in a note.

FRS 102 says the same in paragraph 3.14, and paragraph 1A.10 applies it to small entities. So every set of accounts gives you two years side by side. For a longer trend you need earlier sets, which for a company can be downloaded from its filing history, as explained in reading a company’s accounts from Companies House.

FRS 102 paragraph 2.20 explains why consistency is the foundation of both methods: comparability is diminished when alternative accounting methods are applied to the same economic phenomena, and enhanced by telling users the accounting policies used and the effects of any changes.

How do you carry out horizontal analysis?

1. Lay out three to five years of the profit and loss account and balance sheet in adjacent columns, using the same line headings throughout.
2. For each line, calculate the change: (current year less prior year) divided by prior year, multiplied by 100.
3. For longer runs, convert each line to an index with the first year as 100.
4. Rank the movements by size in pounds as well as by percentage, so a large percentage on a trivial figure does not dominate.
5. Note any year where the comparatives were restated, the accounting period was not twelve months, or the business was restructured.

Two arithmetic traps are common. A percentage on a very small base looks dramatic but means little: a cost rising from £2,000 to £6,000 is a 200% increase and may be immaterial. A percentage on a negative base, such as a move from a loss to a profit, has no sensible meaning, so describe it in pounds instead. ACCA also points out that inflation can distort comparisons over time and that past results may be adjusted for the effects of price changes.

How do you carry out vertical analysis?

For the profit and loss account, divide each line by turnover and multiply by 100. The resulting figures for gross profit and operating profit are the familiar margins: ACCA gives gross margin as gross profit divided by revenue multiplied by 100, and operating profit margin as profit before interest and tax divided by revenue multiplied by 100. The value of the common size layout is that every cost line is treated the same way, so you can see which cost has grown as a share of sales. For more on the margins themselves see gross, operating and net profit.

For the balance sheet, divide each line by total assets. This shows the shape of the business: how much of the asset base is tied up in stock or debtors, how much is cash, and how much is financed by short term creditors rather than long term debt or equity. Comparing a common size balance sheet over several years shows drift that ratios on their own can hide, for example debtors creeping from 20% to 30% of total assets.

What does a worked example look like?

Illustration only. A small manufacturer reports the following.

Line	Year 1 (£)	Year 2 (£)	Change	Year 1 % of turnover	Year 2 % of turnover
Turnover	800,000	1,000,000	+25.0%	100%	100%
Cost of sales	480,000	650,000	+35.4%	60%	65%
Gross profit	320,000	350,000	+9.4%	40%	35%
Overheads	200,000	230,000	+15.0%	25%	23%
Operating profit	120,000	120,000	0.0%	15%	12%

The horizontal columns show strong sales growth with no growth in operating profit. The vertical columns show why: cost of sales rose from 60% to 65% of turnover, cutting the gross margin by five percentage points. Overheads were actually better controlled, falling from 25% to 23% of turnover, which recovered two of those points. The questions to ask follow directly: were prices cut to win the extra volume, did material costs rise without being passed on, or did the mix shift towards lower margin products?

How do you interpret the results rather than just describe them?

ACCA’s examiners make the point bluntly: saying a ratio has gone up or down is a statement of fact, not interpretation. What is needed is the plausible reasons for the change, drawn from what is known about the business. They also warn that looking at a single ratio in isolation is rarely useful, that a better result than last year is not necessarily a good result if last year was particularly poor, and that one off events can skew the comparison.

Used together, the two methods answer different questions. Horizontal analysis tells you what grew or shrank. Vertical analysis tells you whether the shape of the business changed. A line that grew quickly but kept the same share of turnover is usually just volume; a line whose share moved is where the explanation lies. The wider cautions in limitations of ratio analysis apply equally here.

What limits the analysis when you only have small company accounts?

Under section 444 of the Companies Act 2006, a company subject to the small companies regime must deliver its balance sheet to Companies House but may choose not to deliver its profit and loss account. Where it does not, there is no public profit and loss account to analyse at all. If the company has prepared abridged accounts, paragraph 1A of Schedule 1 to SI 2008/409 lets turnover, cost of sales and some other items be combined into a single line called gross profit or loss, so turnover is not shown and margins cannot be calculated. The micro entity balance sheet formats in Section C of the same Schedule contain only the main headings, so the detail needed for a meaningful common size balance sheet is often missing. See small company accounts filing options for which version a company may have filed.

Companies House said on 23 October 2026 that abridged accounts will stay after April 2028 and that the plan to make small companies and micro entities file a profit and loss account has been paused, so filleted accounts will continue.

Accounting changes can also break a trend. The FRS 102 Periodic Review 2024 amendments apply for accounting periods beginning on or after 1 January 2026 (paragraph 1.37), and under the revised lease rules a lessee recognises a right of use asset and a lease liability (paragraph 20.45). A balance sheet trend that straddles the first year of the new rules may move because of the accounting, not the trading.

What mistakes come up most often?

• Quoting percentage changes on tiny or negative bases.
• Comparing a short or long accounting period with a twelve month one without adjusting.
• Using the original prior year figures when the current accounts show restated comparatives.
• Comparing common size figures between companies that use different accounting policies or formats.
• Describing movements without offering reasons, or reading a trend without asking what changed in the business.
• Calling the method by one name and calculating the other, which causes confusion when ACCA style terminology is mixed with the more common usage.

For a structured way to explain differences against a plan rather than against last year, see budget variance analysis.

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Related Accountapedia entries

• Net profit margin
• Comparatives for a short or long period
• Return on capital employed (ROCE)
• DuPont analysis of return on equity
• Financial statements explained: P&L and balance sheet

Sources

• ACCA: Appraisal questions
• ACCA: Analysis
• ACCA: Ratio analysis
• legislation.gov.uk: SI 2008/409, schedule 1
• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: Act 2006 c. 46, section 444
• GOV.UK: Companies house to bring in changes to accounts filing from april 2028

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.