Preparing statements for analysis
Horizontal and trend analysis
Year-on-year growth and CAGR — and spotting the lines that grow faster than sales.
18 minintermediateMembers
Learning objectives
- Calculate year-on-year growth for each line of the statements
- Calculate a compound annual growth rate (CAGR) over several years
- Identify balances growing faster than revenue and explain what that signals
Common-size analysis shows the shape of the statements. Horizontal (trend) analysis shows how each line moves over time. The most useful comparison is with revenue: in a stable business, receivables, inventory and payables grow roughly in line with sales. When a balance grows much faster, something has changed — credit terms, buying decisions, or sometimes the quality of the revenue itself.
Growthₜ = Xₜ ÷ Xₜ₋₁ − 1
- Xₜ
- the line item in year t
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.