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Horizontal analysis, also known as trend analysis, is the process of tracking a company’s performance history and progress by comparing line items in comparative financial statements or financial ratios over time. To put it another way, it enables analysts to compare accounts or performance metrics over time to determine whether the company is improving or declining. This evaluation formula is typically used by either investors or internal company management because both require information about a company’s performance in order to make decisions. Investors must decide whether to invest or sell their current holdings, while management must decide what steps to take to improve the company’s future performance.
A vertical analysis of a financial statement is a proportional analysis in which each line item is listed as a percentage of another item. This means that each line item on an income statement is expressed as a percentage of gross sales, whereas each line item on a balance sheet is expressed as a percentage of total assets. Vertical analysis is most commonly used to show the relative proportions of account balances in a financial statement for a single reporting period. Vertical analysis is also useful for trend analysis, which allows you to see relative changes in accounts over time, for example, on a five-year comparative basis.
Asset correlation is a measure of the relationship and dependability of two or more assets. It is an important part of asset allocation because the goal is to combine assets with low correlation. The correlation is expressed as a number ranging from +1 to -1. A correlation of zero indicates that the assets have no relationship. A +1 indicates that there is a 100% positive correlation (they always move together in the same direction). An absolute negative correlation is represented by a value of -1. (they always move together in opposite directions of each other).
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