What is Vertical Analysis? Formula + Calculator

It is a useful tool for investors, analysts, and financial professionals in order to measure the performance of a company. It makes it easier to compare line items between periods or between companies by expressing each item as a percentage of the same base figure. By using vertical analysis, investors and analysts can more easily identify trends in financial performance, while managers can more easily compare budgeted performance with actual performance. Performing vertical analysis is relatively straightforward, but it does require some basic knowledge of financial statements.

• It can be done with the company’s Financial Statements or with the use of the Common Size Statements.
• Drag down the cell with the formula to copy it to the other revenue line items.
• The percentages on a common-size balance sheet allow you to compare a small company’s balance sheets to that of a very large company’s balance sheet.
• For example, in this illustration, the year 2012 is chosen as a representative year of the firm’s activity and is therefore chosen as the base.

The vertical analysis of the balance sheet will result in a common-size balance sheet. The percentages on a common-size balance sheet allow you to compare a small company’s balance sheets to that of a very large company’s balance sheet. A common-size balance sheet can also be compared to the average percentages for the industry. Horizontal analysis differs slightly from vertical analysis in that it presents each item in the financial statements as a percentage of itself at an earlier period in time. It is used to assess a business’s ability to grow its revenue while managing its expenses and to get an idea of how efficient the business is at using its assets, liabilities, and various sources of cash. In this example of vertical analysis, you can see that you only need to use balance sheet items from a single accounting period.

Relationship Between Total Asset Turnover & Capital Intensity Ratio

So, it can be concluded that the vertical analysis of the income statement helps in various financial assessments that primarily include trend analysis and peer comparison. This technique is one of the easiest methods for analyzing financial statements. However, given its lack of standard benchmark, this method finds limited use in the decision making of most of the companies. Net sales are used as the base for the income statement, and total assets (or total liabilities and shareholders’ equity) are used as the base for the balance sheet. If we wanted to do a vertical analysis of this line item, we would compare it to the total revenue for the year.

With increased visibility into a company’s finances, vertical analysis can be an invaluable resource when making key decisions about strategic planning and operations management. Vertical analysis, also known as common-size analysis, is used to evaluate a firm’s financial statement data within an accounting period. This tool uses one line item on the statement as a base against which to evaluate all other items in the same statement. This kind of analysis can be performed on many types of financial statements including the balance sheet and the income statement.

Disadvantages of Vertical Analysis

Vertical analysis expresses each amount on a financial statement as a percentage of another amount. In fact, some sources of industry data present the information exclusively in a common-size format, and most of the accounting software available today has been engineered to facilitate this type of analysis. In general, managers prefer expenses as a percent of net sales to decrease over time, and profit figures as a percent of net sales to increase over time.

Vertical analysis is a financial statement analysis technique that compares each line item on a statement to a specific percentage of the total amount for that category. The issue with only https://www.bookstime.com/articles/vertical-analysis performing horizontal analysis is that it presents one line item as it pertains to itself. Therefore, it is important to see the total picture by combining horizontal and vertical analysis.

What is the difference between vertical analysis and horizontal analysis?

That means the variable expenses in the balance sheet of year 2 and 3 are shown as a percentage of variable expenses of year 1. Let us assume that variable expenses on year 1, 2, and 3 were $151, $147, and $142 respectively. The process is virtually identical to our common size income statement, however, the base figure is “Total Assets” as opposed to “Revenue”.

• Vertical analysis is used in order to gain a picture of whether performance metrics are improving or deteriorating.
• Likewise, a high percentage rate indicates the need to improve the use of Assets.
• However, you can do this very quickly for multiple years, particularly if you’re using an income statement template.
• Horizontal analysis studies changes to variables over time, using historical data to predict future trends.
• In this second example, I will be doing a vertical analysis of Company B’s current assets based on its annual balance sheet.
• The income statement also uses this presentation with revenue entries referencing total revenues and expense entries referencing total expenses.
• In addition to the data for your company, collect the same data for similar companies in your industry.

It can be used to compare companies of different sizes, or to compare different items within the same company over time. The advantage of using vertical analysis is that it makes it easier to compare financial statements from different periods of time or from different companies. You now know about the vertical analysis of financial statements and how it differs from the horizontal analysis.

Tools for Financial Measurement

This could be useful in identifying areas where a company may be able to cut costs without affecting its overall bottom line too much. In vertical analysis, each item in a financial statement https://www.bookstime.com/ is expressed as a percentage of a base figure. The base figure can be either the total of all items in the financial statement or some other reference point, such as total assets.

Then, consider that in 2014, 50% of Cost of Goods Sold was 50% where it was 55% a year ago. When creating a Vertical Analysis of an Income Statement, the amounts of individual items are calculated as a percentage of Total Sales. For a business owner, information about trends helps identify areas of wide divergence. In general, an analysis of Financial Statements is vital for a person running a business.

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. This information can be used to revised budgeted funding levels in future periods. This type of analysis is often used to evaluate a company’s financial health, as it can show how well different parts of the business are performing relative to each other. Note that the line-items are a condensed Balance Sheet and that the amounts are shown as dollar amounts and as percentages and the first year is established as a baseline. Financial Statements often contain current data and the data of a previous period.