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    Vertical and Horizontal Analysis of The Income Statement

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    Santi Hernandez Roncancio
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    Vertical and Horizontal Analysis of The Income Statement

    Uploaded by

    Santi Hernandez Roncancio
    6 views2 pages
    Basado en un texto

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    Vertical and Horizontal Analysis of the Income Statement

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    Basado en un texto

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    6 views2 pages

    Vertical and Horizontal Analysis of The Income Statement

    Uploaded by

    Santi Hernandez Roncancio
    Basado en un texto

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Vertical and Horizontal Analysis of the Income Statement

    To identify the reasons for this decline, we can look at both vertical (percentage of sales) and
    horizontal (year-over-year growth) analyses for key income statement items.

    1. Cost of Goods Sold (COGS) Impact:

    Vertical Analysis:

     In 2005, COGS was 28,597 (81.5% of sales).


     In 2006, COGS was 35,100 (82.4% of sales).

    Horizontal Analysis:

     COGS increased by 22.7% from 2005 to 2006, while sales increased by 21.4%.

    Impact: The rise in COGS as a percentage of sales indicates that the company’s cost of
    production or procurement is growing faster than sales. This narrowing gross margin affects
    the EBIT margin because less gross profit is available to cover operating expenses.

    2. Salaries and General Administrative Expenses:

    Vertical Analysis:

     In 2005, salaries were 2,877 (8.2% of sales).


     In 2006, salaries were 3,578 (8.4% of sales).

    Horizontal Analysis:

     Salaries grew by 24.4%, faster than the 21.4% growth in sales.

    Impact: The increase in salaries as a percentage of sales indicates that the company’s
    operating expenses are rising faster than its revenue. This contributes to the reduction in the
    EBIT margin.

    3. Other General Expenses (R&D):

    Vertical Analysis:

     In 2005, R&D expenses were 222 (0.63% of sales).


     In 2006, R&D expenses were 232 (0.54% of sales).

    Horizontal Analysis:

     R&D expenses grew by 4.5%, which is lower than the sales growth rate.

    Impact: The relative decrease in R&D expenses as a percentage of sales suggests that this
    cost is being managed efficiently and isn’t a major contributor to the declining EBIT margin.

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    Summary of the Causes of Changes in EBIT Margin

    The decline in the EBIT margin from 8.08% in 2005 to 7.09% in 2006 is primarily due to:

    1. Increasing COGS: The cost of goods sold rose by 22.7%, outpacing sales growth
    (21.4%). This increase in production or procurement costs has reduced the gross
    margin, leaving less profit available for operating expenses.
    2. Higher Operating Expenses: The rise in salaries and general administrative
    expenses (up 24.4%) also outpaced the growth in sales, further eroding operating
    profits. The company is spending more on salaries and administrative expenses
    relative to its sales growth.
    3. Stable R&D Expenses: While R&D expenses remained relatively constant as a
    percentage of sales, the overall increase in operating expenses, driven by COGS and
    salaries, overshadowed any efficiency gains from R&D.

    Conclusion

    The declining commercial margin (EBIT/Sales) from 2005 to 2006 is mainly due to:

     A faster rise in COGS, reflecting increased production or procurement costs.


     A rise in operating expenses, especially salaries and administrative costs, which
    outpaced sales growth.

    To improve the EBIT margin, the company should focus on controlling both COGS and
    operating expenses relative to sales. This could involve improving operational efficiencies,
    renegotiating supplier contracts, or better managing overhead costs.

    SULZE
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