One last note on understanding ratios. It is important to understand the difference between vertical and horizontal comparisons with ratios.
Suppose you were to take your Profit and Loss Statements for the last three years and place them on the table next to each other. If you wanted to use a highlight marker to mark the Gross Revenues for each statement, you would start at the statement on the left, find the Gross Revenue and mark it and then you would move HORIZONTALLY to the next statement, find the Gross Revenue, mark it and move to the last statement in the same manner.
This is called Horizontal Comparison. You are using Horizontal Comparisons anytime that you want to compare the numbers of any category in different periods.
Vertical comparison is a little more difficult to understand, but not much. Suppose I am wanting to compare the number of two or more different categories of the same year. Once again with my marker I will start at the top of the first statement and scan down until I find the first category and mark it. I will then proceed VERTICALLY down the page until I find the next category and mark that one as well.
This type of comparison is called Vertical Comparison and you mainly use Vertical Comparison to see how you have performed in any one period.
So in summary, Vertical Comparison is used to see how your company performed in any one period and Horizontal Comparison is used to see how your company and improved or worsened over two or more periods.
Understanding this is just one more key that will help you have a general understanding of the ratios that are so important to your companies health and…
…Your business THRIVES on a solid FOUNDATION!!!