What is Vertical Analysis? Process & Examples

Hence why it’s called vertical analysis – you add your calculations vertically next to each item. Since these proportions are expressed as percentages, you can easily compare them to other time periods or other companies. In this article, you will learn about the vertical analysis of financial statements and how to incorporate it into your company’s accounting practices.

Disadvantages of Vertical Analysis

While vertical analysis focuses on individual line items as percentages, ratio analysis compares relationships between line items. By combining the insights from vertical analysis and ratio analysis, analysts can gain a comprehensive understanding of a company’s bookkeeping financial position, liquidity, profitability, and solvency. Vertical analysis of financial statements is also very useful in analyzing key trends over time.

FAQs About Vertical Analysis

Would you like to review the financial performance from the past months/years or demonstrate your business’s financial health to stakeholders? Recognizing the objective will assist you in determining the appropriate foundation for your calculations. You simply receive a concise view of your line items without performing complex calculations. Using tools such as Power BI to chart your results, you can visualize your performance and make informed decisions for a successful vertical analysis formula plan. This financial analysis can help you build a solid financial report by comparing the percentages to the budgeted expectations.

Marketplace Financial Model Template

The financial statements prepared by using this technique are known as common size financial statements. The balance sheet is a report of a company’s financial worth in terms of book value. It is broken into three parts to include a company’s assets, liabilities, and shareholder equity. This figure is considered a company’s book value and serves as an important performance metric that increases or decreases with the financial activities of a company.

• Vertical analysis helps investors assess the financial health and stability of a company, compare companies within an industry, and identify potential risks and opportunities.
• Vertical financial statement analysis is a valuable tool for evaluating the financial health and performance of a company.
• By seamlessly integrating data from multiple sources, converting it into a suitable format, and offering dynamic reporting and visualization options, Acterys streamlines the vertical analysis process.
• 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.

For example, if the cost of sales has consistently been 45% in the past, then a sudden new percentage of 60% should catch the analyst’s attention. The reasons for this change should be investigated and action taken to bring the percentage back to its normal level. And when applying this technique to the income statement, each of the expense is compared to the total sales revenue. The expenses are presented as a proportion of total sales revenue along with the absolute amounts. For example, if the sales revenue of a company is $10 million and the cost of sales is $6 million, the cost of sales will be reported as 60% of the sales revenue.

• Through accounting ratios, you can compare two-line items in your financial statement and point which items are bringing in more profit.
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• When using this alongside horizontal analysis, you can get a full picture of a company’s financial position.
• You can identify trends, analyze the impact of specific expenses or revenue sources, and evaluate profitability ratios using vertical analysis.
• We can easily understand that the total expenses gradually increased from 43% to 52%, and the net income get reduced from 1st year to 2nd year.
• This is because you can see the relative percentages in relation to the numbers as well as each other.
• The same can be done with the income statement, where the previous years can be compared and find out the change in the working capital and fixed assets over time.

This method helps in identifying significant impacts on profitability and enables a consistent approach to measure cost areas of the business over time. Vertical analysis proves to be an essential technique for evaluating the structural composition of https://www.bookstime.com/ financial statements and making informed financial decisions. Vertical analysis is a technique used in financial statement analysis to show the relative size of each account compared to the total amount. 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.