Vertical Analysis What Is It, Formula, Examples, Advantages

For example, some minor adjustments could be to remove the “Revenue (% Revenue)” line item since it is not necessary and offers no practical insights. The placement is not much of a concern in our simple exercise, however, the analysis can become rather “crowded” given numerous periods. In contrast, the process is practically the same for the balance sheet, but there is the added option of using “Total Liabilities” instead of “Total Assets”.

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For the income statement, the most common “base” figure used in vertical analysis is total net revenue or net sales. Some analysts may also use total expenses or operating expenses, but revenue is the most prevalent approach. To start, the table below shows the company’s historical financial statements – the income statement and balance sheet – of our hypothetical company, which we’ll be using throughout our two-part exercise. For example, a company may have significant one-time expenses or revenues that distort the overall picture when viewed purely in percentage terms. The key advantage of vertical analysis is improving comparability between companies.

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It enables the accountant to see relative changes in company accounts over a given Financial Forecasting For Startups period of time. Businesses that experience seasonal fluctuations in their revenue and expenses may find that vertical analysis provides an incomplete picture. For instance, a retail company might see a spike in revenue during the holiday season, which could skew the percentage calculations and lead to misleading conclusions if not taken into account.

• A research conducted by the Indian School of Business (ISB) found that Indian companies using vertical analysis were better able to manage their resources.
• In the above vertical analysis example, we can see that the income decreases from 1st year to 2nd year, and the income increases to 18% in the 3rd year.
• Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis.
• For the income statement, the base figure used in vertical analysis is typically total net sales or total revenue.
• For the balance sheet, total assets or total liabilities and equity are commonly used as base figures in vertical analysis.

Structural Composition

Expressing each income statement line item as a percentage of total revenue shows the relative proportion of revenue that is absorbed by each expense or cost. This allows comparisons of income statement components across periods or between companies. For example, seeing that the cost of goods sold was 60% of revenue this year compared to 55% last year shows it is taking up a larger proportion of sales. Vertical analysis makes financial statements comparable between companies of different sizes by converting line items into percentages of a base figure. 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. Company A has COGS of 58% of revenue and Company B has COGS of 62% of revenue, Company A likely has an advantage in profitability from vertical analysis equation lower costs.

• The information provided in the balance sheet provides the change in working capital, fixed income over some time.
• To start, the table below shows the company’s historical financial statements – the income statement and balance sheet – of our hypothetical company, which we’ll be using throughout our two-part exercise.
• To reiterate from earlier, dividing by total assets is akin to dividing by the sum of liabilities and equity.
• All individual assets (or groups of assets if condensed form balance sheet is used) are shown as a percentage of total assets.
• The gross margin ratio shows the percentage of total sales revenue that is left after costs of goods sold are deducted.
• Vertical analysis is exceptionally useful while charting a regression analysis or a ratio trend analysis.

Comparative Balance Sheet with Vertical Analysis

In this comprehensive guide, we will walk through the vertical analysis process with examples to show you exactly how to calculate vertical analysis for the income statement and balance sheet. Expressing the financial statements as percentages of total revenue or total assets allows easy comparison of the proportion of each item over time. This normalization using percentages is the key benefit of vertical analysis, rather than just comparing the absolute rupee amounts. Vertical analysis, also called common-size analysis, is all about looking at financial statements as percentages rather than absolute dollar amounts.

• Vertical analysis is less effective for companies in different stages of growth.
• For example, seeing that the cost of goods sold was 60% of revenue this year compared to 55% last year shows it is taking up a larger proportion of sales.
• For example, the amount of cash reported on the balance sheet on Dec. 31 of 2024, 2023, 2022, 2021, and 2020 will be expressed as a percentage of the Dec. 31, 2020, amount.
• With this spreadsheet set up, simply update the raw dollar amounts each period and the vertical analysis will instantly recalculate, creating an automated tool to monitor trends and comparisons over time.
• 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.

• Showing the relative size of each financial statement item allows investors and analysts to assess the financial structure of companies.
• To conduct a vertical analysis of balance sheet, the total of assets and the total of liabilities and stockholders’ equity are generally used as base figures.
• To increase the effectiveness of vertical analysis, multiple year’s statements or reports can be compared, and comparative analysis of statements can be done.
• In contrast, the process is practically the same for the balance sheet, but there is the added option of using “Total Liabilities” instead of “Total Assets”.
• According to a report by Deloitte India, 85% of large corporations employ vertical analysis in their financial reviews.
• CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation.

The process is much the same for the balance sheet, except total assets is generally the most widely used base figure. Total liabilities is also an option if specifically wanting to analyze how debt relates to assets. Vertical analysis makes it much easier to compare the financial statements of one fixed assets company with another and across industries. Conceptually, vertical analysis can be thought of as reading a single column of financial data and determining the relationships among each item to reflect the relative size of the various cost and profit metrics. Both techniques provide valuable insights for financial analysis and decision-making, but they serve different purposes and offer distinct perspectives on a company’s financial performance. In the above vertical analysis example, we can see that the income decreases from 1st year to 2nd year, and the income increases to 18% in the 3rd year.