Financial Analysis: Horizontal and Vertical Analysis

Ratio analysis is of great importance when it comes to the assessment of the financial position of any enterprise. Ratios work by comparing two or more items on any of the prepared financial statements of a company such as the balance sheet, income statement, cash flow statement and many others (McManus, 2009, p. 1). Classes of ratios include: liquidity ratios which give an indication of whether the company is able to meet its liabilities in the short run. Profitability ratios are used to determine whether the enterprise has the ability to handle its expenses and make profit in return to the resources it has put into the enterprise. Apart from ratios, Horizontal analysis is carried out to compare each item on the current balance sheet and income statement to that of the previous year(s). Vertical analysis of the balance sheet will express each item on the balance sheet as a proportion of the Total assets in percentage form (Averkamp, 2007, p. 1). On the other hand vertical analysis of the income statement expresses each item on the income statement as a proportion of the Net total sales of that specific year.

Financial health of eBay company will be judged from the results obtained in ratio, vertical and horizontal analysis. From the horizontal analysis of the company, most items in the balance sheet and income statement have a positive trend indicating that the company is doing well in comparison to the previous year. On the other hand the vertical analysis indicates that the gross profit in both years had the highest percentage in relation to the sales. This is also an implication that the financial health of the company is good. The Rate of return on net sales is a profitability ratio which is seen to have increased tremendously from the previous year. This indicates that the company is getting profit from the sales it made that year. The company is also making profit from the assets it has invested in the business since the rate of return on assets is not higher than the cost of getting the assets (Averkamp, 2007, p. 2). This ratio is of importance when a company is deciding on making an investment since each investment should be able to bring some returns. The return on stakeholders’ equity is also a profitability ratio that tells the shareholders how much they are earning on their shares. In our case eBay company has a very low rate of return on stakeholders’ equity which can be an indication that the company is self-funding itself other than generating income for the external community.

The results obtained for eBay company also indicate that the company is able to pay for its short-term liabilities; this is depicted by the large sum of working capital available during the two years since the current assets have always exceeded the current liabilities. The industrially accepted current ratio is 2:1; however, the e-bay’s current ratio is 5:1 for both years. This is not acceptable since it is on the higher side and may indicate that the company has too many current assets that may not be active (McManus, 2009, p. 1). This means that the company may be putting so much into the enterprise in terms of cash, marketable securities or lending too much to the outside thus raising the amount of accounts receivables. This is not advisable for the health of any enterprise because any investment made or cash put into the enterprise should be active to yield profit for it. The lower side of the current ratio, that is below 2:1 is also not healthy for the company since it will indicate that the company is not able to cater for its short-term liabilities (Averkamp, 2007, p. 1). The company has a good ability to pay for its debts from current assets after clearing its current liabilities first. This is as a result of the large amount of current assets the company has. The times interest ratio earned shows the number of times the company’s earnings are able to cover the fixed rate of interest to be paid for the debt obtained.In eBay’s case this ratio increased in the current year of 2000 showing that it took a longer period of time to pay the debt. It can therefore be concluded that the overall performance of eBay company is good especially in the current year compared to the previous year.

Reference List

Averkamp, H. (2007). Difference between horizontal and vertical analysis. Web.

McManus, G. (2009). Financial ratio analysis. Web.