Understanding Vertical Analysis: A Comprehensive Guide for Institutional Investors

The base figure is usually presented first, and then in 100%, and every other item is expressed as a percentage of the base amount. This allows for the easy comparison of financial data across companies or over time. Vertical analysis enables trend analysis as it converts financial statement line items into percentages of a base figure. For example, expressing revenue as 100% and cost of goods sold as a percentage of revenue shows its trend over time.

How to Use Vertical Financial Analysis in Practice

Vertical analysis is a kind of financial statement analysis wherein each item in the financial statement is shown in the percentage of the base figure. It is one of the popular methods of financial statements as it is simple and also called a common size analysis. Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis.

How Horizontal Analysis Works

This allows stakeholders to quickly assess the cost structure and make informed decisions about areas needing improvement or adjustment. From income statement analysis to balance sheet scrutiny, Vertical Analysis provides valuable insights into the profitability, efficiency, and financial health of organizations. It enables informed decision-making, strategic planning, and resource allocation, empowering stakeholders to navigate the complexities of the business landscape with confidence and clarity.

Step 2. Vertical Analysis of Income Statement

Vertical analysis offers numerous benefits that enhance financial analysis and decision-making. Performing vertical analysis requires systematic steps to ensure accuracy and relevance in financial evaluation. Like any financial calculation and analysis, vertical analysis is not complete by itself and has pros and cons. Based on competitor or industry analysis they can decide if they need to improve one of their categories in the balance sheet, and then make a plan for how to go about doing it. Vertical analysis can also be used to compare the companies numbers to competitors or the industry averages.

Using both approaches together offers a more comprehensive perspective, helping finance professionals identify trends, assess cost structures, and make informed decisions. Vertical analysis is a powerful tool for financial analysis, providing valuable insights into the composition and structure of financial statements. By expressing each line item as a percentage of a base amount, it allows payroll for easy comparison and interpretation of financial data. While it has its limitations, when used alongside other analytical methods, vertical analysis can significantly enhance decision-making and financial evaluation processes.

• This method is essential for evaluating a company’s financial health and operational efficiency.
• Recognizing strengths and weaknesses, it streamlines evaluation and assesses financial stability.
• It helps in making smarter, strategic decisions by offering a clear view of a company’s financial situation.
• Thomas Richard Suozzi (born August 31, 1962) is an accomplished U.S. politician and certified public accountant with extensive experience in public service and financial management.
• For example, two retail firms may have vastly different revenue amounts, but expressing the costs of goods sold as a percentage of revenue shows which has a better cost structure.
• Vertical Analysis is a form of financial analysis where the line items on a company’s income statement or balance sheet is expressed as a percentage of a base figure.

Also known as the vertical percentage analysis, double declining balance depreciation method you can then use this to evaluate company performance and compare it with previous results to understand the direction of your company. This method transforms the raw financial data into a proportional analysis, facilitating a more straightforward assessment of economic health and operational efficiency. It creates a common-size statement where standardised figures allow for straightforward comparisons and analysis. A Common-Size Cash Flow Statement is a financial statement where each line item is expressed as a percentage of total cash inflows or outflows.

Vertical Analysis Vs Horizontal Analysis

The significance of vertical analysis accounting is well-established in businesses irrespective of their size or stature. Financial statements that include vertical analysis clearly show line item percentages in a separate column. Common base items include total revenue for income statements and total assets for balance sheets. The choice should reflect the underlying dynamics of the business and facilitate meaningful comparisons. Horizontal and vertical analysis are key for checking a company’s financial health.

• Vertical analysis not only makes it easier to understand the financial statement but also enables meaningful comparisons between companies in different industries and over time (Brealey et al., 2017).
• At the same time, it helps with managing expenses and assessing the efficiency of assets, liabilities, and cash source utilization.
• This reveals how business compare in managing their assets and liabilities, income, expenses, and cash flow (regardless of total size).
• For example, on the income statement if the base chosen is revenue, then each line item would be shown as a percentage of revenue.
• Horizontal analysis detects changes and trends, pointing out strong or weak spots.

On the other hand, horizontal analysis refers to the analysis of specific line items and comparing them to a similar line item in the previous or subsequent financial period. Although common size analysis is not as detailed as trend analysis using ratios, it does provide a simple way for financial managers to analyze financial statements. The process involves selecting a base figure, typically total assets for balance sheets, and converting every other item into a percentage of this base in companies. Vertical Analysis using the Balance Sheet can thus provide insights into the company’s operational efficiency.

Management sets a base amount or benchmark goal to judge the success of the business. The base amount is usually taken from an aggregated from the same year’s what is a vertical analysis? financial statements. The common-size percentage formula is calculated by dividing the analyzed item by the base amount of benchmark and multiplying it by 100.