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Vertical Analysis

Vertical analysis is a method of financial statement analysis where each line item is expressed as a percentage of a base figure, such as total assets or sales. This makes it easier to understand the relationship between items and compare performance over time or between companies. Vertical analysis shows trends in metrics by displaying line items as percentages, revealing if areas like expenses or profits are improving or deteriorating as a portion of sales or assets. It is often used alongside horizontal analysis, which compares absolute changes in dollar amounts over several periods. An example demonstrates an income statement where sales, costs, expenses, and profits are all listed as a percentage of total sales.

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594 views5 pages

Vertical Analysis

Vertical analysis is a method of financial statement analysis where each line item is expressed as a percentage of a base figure, such as total assets or sales. This makes it easier to understand the relationship between items and compare performance over time or between companies. Vertical analysis shows trends in metrics by displaying line items as percentages, revealing if areas like expenses or profits are improving or deteriorating as a portion of sales or assets. It is often used alongside horizontal analysis, which compares absolute changes in dollar amounts over several periods. An example demonstrates an income statement where sales, costs, expenses, and profits are all listed as a percentage of total sales.

Uploaded by

Mica Ann Matinao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Vertical Analysis: Definition, How It Works,

and Example

What Is Vertical Analysis?


Vertical analysis is a method of financial
statement analysis in which each line item is
listed as a percentage of a base figure
within the statement. Thus, line items on an
income statement can be stated as a
percentage of gross sales, while line items
on a balance sheet can be stated as a
percentage of total assets or liabilities, and
vertical analysis of a cash flow statement
shows each cash inflow or outflow as a
percentage of the total cash inflows.

KEY TAKEAWAYS
 Vertical analysis makes it easier to
understand the correlation between
single items on a balance sheet and
the bottom line, expressed in a
percentage.

 Vertical analysis can become a more


potent tool when used in conjunction
with horizontal analysis, which
considers the finances of a certain
period of time.

How Vertical Analysis Works


Vertical analysis makes it much easier to
compare the financial statements of one
company with another, and across
industries. This is because one can see the
relative proportions of account balances. It
also makes it easier to compare previous
periods for time series analysis, in which
quarterly and annual figures are compared
over a number of years, in order to gain a
picture of whether performance metrics are
improving or deteriorating.

For example, by showing the various


expense line items in the income statement
as a percentage of sales, one can see how
these are contributing to profit margins and
whether profitability is improving over time.
It thus becomes easier to compare the
profitability of a company with its peers.
Financial statements that include vertical
analysis clearly show line item percentages
in a separate column. These types of
financial statements, including detailed
vertical analysis, are also known as
common-size financial statements and are
used by many companies to provide greater
detail on a company’s financial position.

Common-size financial statements often


incorporate comparative financial
statements that include columns comparing
each line item to a previously reported
period.

Important: Vertical analysis is used in


order to gain a picture of whether
performance metrics are improving or
deteriorating.

Vertical vs. Horizontal Analysis


Another form of financial statement analysis
used in ratio analysis is horizontal analysis
or trend analysis. This is where ratios or line
items in a company's financial statements
are compared over a certain period of time
by choosing one year's worth of entries as a
baseline, while every other year represents
percentage differences in terms of changes
to that baseline.

For example, the amount of cash reported


on the balance sheet on Dec. 31 of 2018,
2017, 2016, 2015, and 2014 will be
expressed as a percentage of the Dec. 31,
2014, amount. Instead of dollar amounts,
you might see 141, 135, 126, 118, and 100.

This shows that the amount of cash at the


end of 2018 is 141% of the amount it was at
the end of 2014. By doing the same analysis
for each item on the balance sheet and
income statement, one can see how each
item has changed in relationship to the other
items.
Example of Vertical
Analysis
For example, suppose XYZ Corporation has
gross sales of $5 million and cost of goods
sold of $1 million and general and
administrative expenses of $2 million and a
25% tax rate, its income statement will look
like this if vertical analysis is used:

Sales 5,000,000 100%


Cost of goods 1,000,000 20%
sold
Gross profit 4,000,000 80%
General and 2,000,000 40%
Administrative
Expenses
Operating 2,000,000 40%
Income
Taxes (%25) 500,000 10%
Net income 1,500,000 30%

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