Vertical analysis is used in order to gain a picture of whether performance metrics are improving or deteriorating. For example, some minor adjustments could be to remove the “Revenue (% Revenue)” line item since it is not necessary and offers no practical insights. Further, when working with large data sets, we recommend cleaning up the data to improve the overall visual representation of the analysis.

Balance Sheet Vertical Analysis: What It Is and How It Works

Vertical analysis expresses each item on a financial statement as a percentage of the total. Vertical analysis makes it easier to compare companies with different levels of sales or assets by expressing them as percentages rather than absolute amounts. For example, vertical analysis might express an asset, liability or equity account as a percentage of total assets, liabilities or equity respectively.

1. It is done so that accountants can ascertain the relative proportions of the balances of each account.
2. It’s important to keep these limitations in mind and utilize complementary analysis methods to enhance the accuracy and depth of your financial assessments.
3. In addition, vertical analysis can aid in financial forecasting by projecting future trends based on historical data.
4. It involves expressing each line item as a percentage of a base figure, typically taken as 100%.
5. By leveraging these practical applications, you can harness the power of vertical analysis to enhance financial decision-making and improve overall business performance.

The balance sheet helps evaluate the company’s liquidity, solvency, and overall financial health. Whether you’re an investor, business owner, or financial professional, understanding vertical analysis can help you make informed decisions and identify key trends within financial statements. Do you want to take your financial analysis skills to the next level and get more detailed insight into your financial statements?

By analyzing these profitability ratios using vertical analysis, you can gauge a company’s financial performance and compare it to industry benchmarks or previous periods. Vertical analysis, also known as common-size analysis, is a technique used to assess the relative proportions of different line items within a financial statement. This allows for meaningful comparisons and identification of trends over time or across companies. Horizontal analysis, also known as trend analysis, compares historical data on a financial statement over different accounting periods. There is a baseline period and numbers from succeeding periods are calculated as a percentage of the base period. Vertical analysis looks at numbers in financial statements in the same period and calculates each line item as a percentage of the base figure in that section.

Vertical Analysis of Balance Sheet

The purpose of vertical analysis is to provide insights into the distribution and significance of various components within a financial statement. First, gather the balance sheet figures for each line item, such as cash, accounts receivable, fixed assets, etc. You can likely export the company’s financial statements from your accounting software to an Excel spreadsheet for easy analysis. Utilizing tools in conjunction with vertical common size analysis significantly helps with financial reporting.

E-Commerce Profit and Loss Statement

By analyzing these vertical percentages, financial analysts can gain insights vertical analysis is also known as into the asset structure, capital structure, and the relative significance of different components within the balance sheet. The cash flow statement tracks the inflows and outflows of cash in a company during a given period. It categorizes cash flows into operating activities, investing activities, and financing activities.

Importance of Vertical Analysis in Financial Analysis

Vertical analysis helps assess a company’s financial performance and efficiency by examining the proportions of key line items. You can identify trends, analyze the impact of specific expenses or revenue sources, and evaluate profitability ratios using vertical analysis. So, in a vertical analysis of a balance sheet, every line item — cash, accounts receivable, fixed assets, accounts payable, stockholders equity, etc. — is shown as a percentage of total assets. In a vertical analysis of an income statement, every line item is shown as a percentage of gross sales. When performing vertical analysis, analysts typically examine each of the core financial statement components independently. It is not usual, for instance, to assess line items on the income statement as a percentage of gross income.

This type of analysis enables businesses to view the relative proportions of account balances, compare internal changes over time, and identify trends. Vertical analysis is the critical tool in FP&A that provides valuable insights into the relative importance of different items within the financial statements and their impact on overall performance. You can use vertical page analysis on income statement (income statement analysis) or balance sheet (balance sheet analysis). Vertical analysis is an accounting tool that enables proportional analysis of documents, such as financial statements.

In this example, we have expressed each line item as a percentage of the total assets, which serves as the base figure. This allows us to assess the proportions and relationships between different components of the balance sheet. Through careful interpretation of vertical analysis results, you can gain valuable insights into a company’s financial performance, strengths, and areas for improvement.

This shows that the amount of cash at the end of 2024 is 141% of the amount it was at the end of 2020. 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. Common-size financial statements often incorporate comparative financial statements that include columns comparing each line item to a previously reported period.

The metric we calculated is formally known as the “debt to asset ratio”, which is a ratio used to gauge a company’s solvency risk and the proportion of its resources (i.e. assets) funded by debt rather than equity. Unlike the unadjusted income statement and balance sheet, the common size variations can be used for peer-to-peer comparisons between different companies. Performing vertical analysis creates the so-called “common size” income statement and the “common size” balance sheet. Previously, Stefan served as the Corporate Controller for Kodiak Cakes, a private equity owned, leading consumer packaged food company, and as a Controller for Skullcandy, a multinational headphone CPG.

What is Vertical Analysis? Process & Examples

We’ve now completed our vertical analysis for our company’s income statement and will move on to the balance sheet. 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. That’s $100,000 in cash plus $40,000 in accounts receivable plus $50,000 of fixed assets. Instead of determining the percentage of each line number against the base figure over a particular year, you can establish the change of each line number over a period of years.

While financial statements are occasionally shown in this manner, FP&A analysts often customize their approach based on the specific information they aim to understand. Although people assess each financial statement uniquely and compare ratios using various methods, they usually encounter this presentation methodology. Vertical analysis provides insights into the composition of your financial statements and their relationship with the base amount. Also known as the vertical percentage analysis, you can then use this to evaluate company performance and compare it with previous results to understand the direction of your company.

For example, if a specific expense item is consistently increasing as a percentage of revenue, it may indicate a need to optimize costs or explore opportunities for expense reduction. Furthermore, the operating expenses, such as selling and administrative expenses, account for 10% and 6% of net sales, respectively. Finally, the net income margin is 40%, indicating that 40% of the company’s net sales translates into net income. Vertical analysis is a method of financial analysis where each line item is listed as a percentage of a base figure within the statement.