When they noticed marketing costs had grown from 15% of revenue, they adjusted their budget to match future revenue. Vertical financial analysis is a great tool, but it has its pros and cons. Vertical financial analysis goes hand in hand with horizontal financial analysis, and they have to be used together, but they serve different purposes. Horizontal analysis indicates how to prepare a vertical analysis long-term trends and highlights areas of strength and those that need improvement.

It provides a snapshot of a company’s financial health at a specific point in time and helps identify its assets, liabilities, and equity. By analyzing this information, individuals can make informed decisions about investing or lending to a company. Are you looking to gain a deeper understanding of your company’s financial health? One powerful tool that can help you achieve this is vertical analysis of the balance sheet. By breaking down the components of the balance sheet and calculating percentages, you can uncover valuable insights about how your company’s assets, liabilities, and equity are distributed.

Vertical analysis looks at the contributing percentage of each line item to the total base figure. It can provide information on what metrics are improving and which are worsening. It can be used to compare different components of companies and the same company in different time periods. It thus becomes easier to compare the profitability of a company with its peers. The above steps are essential formula for vertical analysis of income statement and the calculation and preparation of the statement.

Compare Financial Data

Vertical analysis is used in order to gain a picture of whether performance metrics are improving or deteriorating. In the world of business, there’s a critical distinction between different types of profit that can impact decisions at every level. The next one, well rent expense, it didn’t change year over year, 2411 but it’s coming out of less net sales, right? So we can imagine it’s going to be a bigger percentage because we’ve got a smaller denominator. Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics.

A study by PwC indicated that companies using vertical analysis were 15% more efficient in comparative financial evaluations. The main benefit of vertical analysis is that it helps businesses determine whether certain items consistently increase or decrease over time. Additionally, this fundamental analysis method helps businesses identify trends and patterns in their financial statements.

The following figure is an example of how to prepare a vertical analysis for two years. As with the horizontal analysis, you need to use more years for any meaningful trend analysis. This figure compares the difference in accounts from 2014 to 2015, showing each account as a percentage of sales for each year listed.

Multi-year comparisons

This technique fosters informed decision-making and strategic planning, vital for sustained success in today’s competitive financial landscape. The first step of vertical analysis is to make a new income statement, such as the common size income statement stated below. Here, we have divided each item by the company’s total sales and shown each category as a percentage of total sales for year 1-3 respectively. Vertical analysis of financial statements is also very useful in analyzing key trends over time. For example, through vertical analysis, we can assess the changes in the working capital or fixed assets (items in balance sheet) over time.

Calculate Line Items as a Percentage of Total

Vertical analysis, a method used in proportional accounting assessments, involves evaluating financial statements by expressing each line item as a percentage of a base figure. When applied to the cash flow statement, this technique allows for a clearer understanding of how each component contributes to the overall cash flow. This approach helps in identifying trends and comparing financial performance across different periods or companies.

• By expressing each line item as a percentage of a base amount, it standardizes the data, making it easier to identify trends and make comparisons.
• This figure compares the difference in accounts from 2014 to 2015, showing each account as a percentage of sales for each year listed.
• The primary purpose of vertical analysis is to facilitate the comparison of financial statements over time or between different entities.

Vertical Analysis – Formula

Vertical analysis represents each item on a financial statement as a percentage of the total. Apple’s balance sheet shows a healthy capital structure with 64.1% in non-current assets, mainly marketable securities and property, plant, and equipment. The above vertical analysis example shows the company’s net profit where we can see the net profit in both amount and percentage. The income statement can be compared with previous years, and the net income can be compared where it helps to compare and understand the percentage of rising or loss of income.

Common Size Financial Statements

It automatically collects data and helps generate common-size financial statements. This way, analysts don’t have to do this manually, and can perform vertical and horizontal analysis easily. By converting each line item into a percentage of a key figure, ACME can standardize their financial data, making it easier to compare performance over time or with competitors. Vertical financial analysis becomes a handy tool for tracking and improving their overall performance. A Common-Size Income Statement is a financial statement where each line item is expressed as a percentage of total revenue. This standardization simplifies comparison and highlights the relative importance of each component.

A good way to do some ratio and trend analysis work is to prepare both horizontal and vertical analyses of the income statement. Both analyses involve comparing income statement accounts to each other in dollars and in percentages. The most obvious benefit of vertical analysis is that it provides an easy way to compare financial data over time. This can help you identify trends and spot potential opportunities or risks for a company. Interpreting these results allows you to identify areas that require attention or improvement within a company’s financial structure. Understanding such trends is crucial for making informed decisions about resource allocation, investment strategies, and overall business planning.

Key Learning Points

• By converting complex financial data into percentages, it becomes more accessible for stakeholders to interpret and analyze.
• Incorporating vertical analysis into your financial decision-making process allows for deeper understanding and informed choices.
• The formula for vertical analysis allows for easy comparison of financial data between different periods and companies in the same industry.
• In this blog, we’ll explain what it is exactly, how it compares to other types of analyses and how top companies use it to improve budgeting, forecasting, and decision-making.

In vertical analysis, each item in a financial statement is expressed as a percentage of some base item. When analyzing a balance sheet vertically, all accounts are listed as a percentage of total assets. Vertical analysis, also known as common-size analysis, is particularly useful for comparing information among companies of different sizes. Managers can also perform vertical analysis of a series of balance sheets to see how account balances change over time. The cash flow statement is also analyzed vertically by expressing each cash flow item as a percentage of total cash inflows or outflows.

Comparing this number with the previous year’s figure of 62.2% can help us gain insight into how the company manages its expenses. We can see that the cost of goods sold as a percentage of revenue decreased slightly from the previous year, which is a positive sign, and more research can be performed to figure it the cause. But it doesn’t stop there – we will also teach you how to interpret the results of your analysis and apply them for making informed financial decisions.

Factors such as inflation, market trends, and regulatory changes can significantly impact financial statements but are not considered in this method. In vertical analysis, each line item on a financial statement is expressed as a percentage of a chosen base figure from that statement. Vertical analysis makes it much easier to compare the financial statements of one company with another and across industries.

This allows standardized comparisons across periods or between companies of varying sizes. It is also beneficial to prepare a vertical analysis of the income statement for investors or any other stakeholders who are interested in the company’s performance. It is also essential for the management from the point of view of growth and performance analysis.

For example, if accounts receivable is higher than normal and cash is lower than normal, it could be that the company is having trouble collecting sales made on credit. Under the “Total Stockholders’ Equity” line item, ensure there is a line item that reads “Total Liabilities and Stockholders’ Equity”. Double-check that that the total of liabilities and stockholders’ equity equals total assets and write “100%” next to the line item total.