Vertical analysis is the application of financial statement analysis to one set of financial statements. Horizontal analysis looks at financial statements and ratios over time. Although owners of small businesses often are also the managers, the initial concern is with owners as investors in the business. Owners use financial statement data as a way to measure whether their money is working as hard in the business as it would in an alternative investment. The data can also tell how well you or your managers have managed the firm's assets.
Net income is the after-tax return.
It is the amount you have contributed directly to the business and amounts that you have reinvested via undistributed profits. ROI gives an indication of the past earning power of your investment and can be used to compare the company's performance in this regard to other companies in the industry. It should also be compared with other investment opportunities open to you. If your company typically generates a return of 10 percent and you can invest elsewhere at 15 percent, it doesn't make sense from a purely economic standpoint to keep your funds tied up in the company. Average equity is used as the denominator to approximate the amount available for use in generating net income over the course of the entire year.