An important nuance of financial analysis is that it has no strict rules. Therefore, the researcher himself determines how to calculate the indicators, as well as the current sets of initial and final information. The method described here is quite conditional and is focused, first of all, on the documentation of the Russian sample, which does not contain ready-made indicators of marginal profit, NOPAT, EBITDA, etc.
Step 1: A horizontal profit/loss analysis is performed
This type of research involves assessing the change in the financial results of the current period with the previous ones. Its main differences are listed below:
For the analysis, at least the benefit of using our student databasetwo profit/loss values are required, one of which is taken as the base for the subsequent comparisons. As a rule, this is the indicator of earlier reporting periods.
Only absolute or relative deviations of the actual level from the baseline are subject to calculation.
The unit of measurement for absolute indicators in our case is rubles, and for relative indicators – percentages or shares.
If the base period value has a zero value or a different sign compared to the current one, then the calculation of the growth rate/increase in production is meaningless. For example: in 2018, the enterprise had a loss of 1 million rubles, and the following year it received 2 million rubles in profit. The calculation of the growth rate in this case will be: 2 ÷ (-1) × 100% – 100% = -300%. It turns out to be an absurd situation when in fact there is a profit, but the calculation shows something completely different.
The positive or negative nature of the change does not depend on the sign of the deviation obtained, but corresponds to the semantic meaning of the indicator. For example, in relation to the company's income or profit, growth is important, and accordingly, the deviation value should be positive, and for expenses or losses, on the contrary, it should be negative.
Deviation formulas for horizontal analysis:
Name of the indicator Formula