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distortions in common sizing and financial analysis

There are times when the data can give you some inaccurate predictions. Personally, when I audit a company, I typically use 5 years worth of data. I use 5 years because that is all that our computer software is programed to hold. But, the data is only useful if it is comparable. When a company is in a transition, the numbers tend to make little to no sense. For example, when a company purchases another company and merges the operations together. You will see a big spike in the numbers and percentages. But, when you peel back the onion you can tell that the company didn't grow or expand at all. The numbers get distorted by the merge. Similarly, when a company spins off a under performing subsidiary or discontinues a line of business, the horizontal number analysis tends to unreliable.

But, what about the vertical analysis. When the horizontal analysis becomes distorted because of extraordinary events. Does the vertical analysis tend to become distorted by these same scenarios?

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TASK: Does the vertical analysis tend to become distorted by these same scenarios?

RESPONSE: Yes, the vertical analysis gets distorted by discontinued segments and non-recurring events such as restructurings. ...

Solution Summary

This discusses the types of things that distorts vertical analysis and horizontal analysis and gives an example of each.

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