Change on a base, and share of a base

Two ways to read the same statement

Tamarack’s income statement (CAD thousands) for the two years:

                             2025     2024
Revenue                     4,800    4,000
Cost of goods sold          2,880    2,480
Gross profit                1,920    1,520
Operating expenses          1,020      860
Depreciation                  180      160
EBIT                          720      500
Interest expense               80       60
Income before tax             640      440
Income tax (25 %)             160      110
Net income                    480      330

Horizontal analysis reads across: how much did each line change from the base year, in dollars and as a percentage of the base?

$$\%\text{change}=\frac{\text{current}-\text{base}}{\text{base}}$$

Revenue: $(4,800-4,000)÷4,000=20.00\%$. COGS: $400÷2,480=16.13\%$. EBIT: $220÷500=44.00\%$. Net income: $150÷330=45.45\%$. The pattern is the lesson: costs grew slower than revenue, so every profit line grew faster than revenue. In Excel, with 2024 in column B and 2025 in column C, the formula is =(C2-B2)/B2, filled down.

Vertical analysis reads down: each line as a percentage of one base on the same statement — revenue for an income statement, total assets for a balance sheet. The result is a common-size statement that lets you compare a $4.8 million retailer with a $480 million one.

                             2025      2024
Revenue                    100.00 %  100.00 %
Cost of goods sold          60.00 %   62.00 %
Gross profit                40.00 %   38.00 %
Operating expenses          21.25 %   21.50 %
Depreciation                 3.75 %    4.00 %
EBIT                        15.00 %   12.50 %
Interest expense             1.67 %    1.50 %
Income tax                   3.33 %    2.75 %
Net income                  10.00 %    8.25 %

COGS fell from 62 cents of every revenue dollar to 60 — two points of gross margin gained by buying better or pricing better. Operating expenses fell a quarter of a point as a share of revenue even though they rose in dollars: that is operating leverage seen vertically.

Choosing the base, and reading the traps

A small base inflates a percentage. Interest expense rose from 60 to 80 — a 33.33 % increase that sounds alarming until you see it is 1.67 % of revenue. Always read the horizontal percentage beside the vertical one.

A negative or zero base makes the percentage meaningless. If last year’s net income was −50 and this year’s is +100, the “300 % increase” describes nothing; report the dollar change and say the base was negative.

Horizontal analysis compares the company with itself. Comparing Tamarack’s COGS percentage with a competitor’s is cross-sectional benchmarking (lesson 8.5), not horizontal analysis. Trend analysis extends horizontal analysis over several years by indexing every year to a base year set at 100.