Chapter 12 horizontal analysis

Horizontal Analysis

A technique that compares financial statement items over time to identify trends and changes in a company's performance, usually expressed as absolute and percentage changes.

Vertical Analysis

A method that expresses each line item on financial statements as a percentage of a base figure, such as total revenue on the income statement or total assets on the balance sheet.

Current Ratio

A financial metric calculated as Current Assets ÷ Current Liabilities, measuring a company's ability to pay short-term obligations.

Inventory Turnover

A ratio calculated as Cost of Goods Sold ÷ Average Inventory, indicating how quickly a company sells and replaces inventory.

Days Inventory Outstanding (DIO)

A metric calculated as (Average Inventory ÷ Cost of Goods Sold) × 365, measuring the average days it takes to sell inventory.

Accounts Receivable Turnover

Calculated as Net Credit Sales ÷ Average Accounts Receivable, this ratio measures how effectively a company collects its receivables.

Debt Ratio

A financial ratio computed as Total Liabilities ÷ Total Assets, indicating the proportion of a company's assets financed by debt.

Times-Interest-Earned Ratio

Calculated as Earnings Before Interest and Taxes (EBIT) ÷ Interest Expense, this ratio measures a company's ability to meet interest payments.

Return on Assets (ROA)

A performance metric calculated as Net Income ÷ Total Assets, measuring how efficiently a company uses its assets to generate profits.

Return on Equity (ROE)

Calculated as Net Income ÷ Common Shareholders' Equity, this ratio measures profitability from the shareholders' perspective.