Horizontal Analysis
Horizontal analysis is a type of trend analysis that compares both percent and amount changes from one year to another. This type of analysis is performed on both the income statement and the balance sheet to allow detection of trends and to identify performance issues. The analysis itself can be very useful, especially if more than two years are included. However, caution must be taken not to draw conclusion on this analysis itself, as it can mislead without any context. It is always important to have both company background information, and the aid of other analyses such as ratios to help form a complete picture.
Income Statement
Revenue Sections:
From the income statement one of the most visible changes is both strength and a weakness. The jump in Net Sales from FY6 to FY7 (up 33%) is very substantial indicating a growth year for the company and a very positive result. Net sales are also a source of weakness when we look at the substantial drop in sales from FY7 to FY8, where a 15% reduction took place. Normally this may be cause for alarm and should mandate some immediate action. According to management, because their product is dependent on professional riders obtaining sponsors, the downturned economy has cause several sponsors to stop funding riders, and thus affected sales. This in itself could indicate that there isn’t enough diversification in the company’s revenue sources. Although a niche industry obtains most of its profit from its specialization, it should not depend on it as a sole source of revenue. The company is also dependent on its innovation and market leadership to maintain brand value, so special attention must be given to R&D and advertising funding.
A strength in this section is that COGS has been moving in proportion to sales. Although there is a small margin of difference between the raise/fall of sales versus COGS