What information can horizontal analysis provide?

Horizontal analysis focuses on evaluating financial statement items over a series of reporting periods. By comparing line items—such as revenues, expenses, or net income—across multiple years, analysts can identify trends, growth patterns, or declines in financial performance. This method allows stakeholders to see how specific items have changed over time, which can be crucial for forecasting future performance, assessing operational efficiency, or making informed investment decisions.

In contrast, the other options involve different analytical perspectives. For instance, assessing current liabilities as a percentage of assets relates to vertical analysis or ratio analysis, while comparing ratios between different companies is not a focus of horizontal analysis but rather benchmarking or comparative analysis. Additionally, examining historical averages delves into statistical analysis rather than the trend-focused approach of horizontal analysis. The unique ability of horizontal analysis to reveal trends across time periods is paramount and makes it a critical tool in financial statement analysis.