Problem:
The benefit of vertical analysis is certainly the benefit of comparing companies of two different sizes. Looking beyond the numbers and focusing on the changes in the numbers can provide a seasoned analyst some very useful information about the company operational effectiveness.
The usefulness tends to breakdown when you come upon a company that has fluctuating amounts reported every quarter, every year. I once invested in a company that tended to receive most of its revenues through a competitive bid process. This company didn't have normal operations and its numbers routinely fluctuated based upon how often a new contract was received. Then the numbers were even more erratic when they reported their earnings based upon the work completed for each contract. Situations like this make it difficult to use horizontal and vertical analysis effectively.
So one limitation is fluctuating numbers. What are some of the other limitations of both horizontal and vertical analysis? Should one be used more than the other?