Vertical Analysis: What It Is, How It Works, and Key Examples

The common size percentage can also be used to compare different companies within the same industry or companies that use different currencies. Vertical analysis, when combined with other analytical methods, empowers you to make informed decisions, evaluate financial performance, and drive business success. Embrace the power of vertical analysis and unlock deeper insights into financial statements like a true expert. In this guide, we explored the methodology of vertical analysis, walked through the steps to perform vertical analysis on income statements, balance sheets, and cash flow statements. We discussed how to vertical analysis interpret the results, considered limitations, and highlighted practical applications. Horizontal analysis, also known as trend analysis, compares historical data on a financial statement over different accounting periods.

Vertical Analysis for Balance Sheets

For example, through vertical analysis, we can assess the changes in the working capital or fixed assets (items in balance sheet) over time. These examples demonstrate how vertical analysis allows for meaningful comparisons, identification of trends, and assessment of the relative proportions and relationships within financial statements. By applying vertical analysis to real-world scenarios, you can unlock valuable insights and make informed decisions based on the financial health and performance of a company. Vertical analysis, also known as common-size analysis, is a financial analysis technique used to evaluate the relative proportions of different line items within a financial statement. It involves expressing each line item as a percentage of a base figure, typically taken as 100%.

• For example, if the cost of goods sold has a history of being 40% of sales in each of the past four years, then a new percentage of 48% would be a cause for alarm.
• Operating expenses, which include selling, general, and administrative costs, indicate cost management.
• The purpose of vertical analysis is to provide insights into the distribution and significance of various components within a financial statement.
• The cash flow statement is vital in assessing a company’s ability to generate cash and its cash management practices.

Key Learning Points

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Fixed Profit

Vertical analysis is said to get its name from the up and down motion of your eyes as you scan the common-size financial statements during the analysis process. Most often, vertical analysis is used by management to find changes or variations in financial statement items of importance like individual asset accounts or asset groups. Looks at the proportional representation of each line item on financial statements by expressing them as a percentage of total sales. Armed with the knowledge and understanding gained from this guide, you can confidently apply vertical analysis in your financial analysis endeavors.

• We can see that for every dollar of sales in 2017, we get to keep 8.3¢ after all of our expenses.
• Key lines include current assets, long-term assets, current liabilities, and long-term liabilities.
• When we carry out vertical analysis on the income statement, it shows the top-line sales figure as 100% and every other item is shown as percentage of the total sales for that year.
• Since every company is different, it can be difficult to compare financial performance or strategic resource allocation, even to direct competitors.
• When selecting a vertical analysis tool or software, consider your specific needs, budget, and the level of automation and customization required.

Top 15 Financial Metrics and KPIs in 2024

This method is particularly useful for identifying trends over time and comparing companies of varying sizes. Performing vertical analysis involves a systematic approach to ensure accuracy and value. First, select a base figure for Car Dealership Accounting each financial statement—total sales for the income statement, total assets for the balance sheet, and total cash inflows for the cash flow statement. This foundational step establishes the framework for proportionate analysis.