Vertical Analysis of Balance Sheets and Financial Statements

Vertical analysis is a powerful technique that allows you to analyze financial statements in a meaningful and comparative way. By expressing line items as percentages of a base figure, you can identify trends, assess proportions, and gain valuable insights into a company’s financial performance. Salaries and marketing expenses have risen, which is logical, given the increased how to perform a vertical analysis sales. However, these expenses don’t, at first glance, appear large enough to account for the decline in net income. Investors can use horizontal analysis to determine the trends in a company’s financial position and performance over time to determine whether they want to invest in that company.

• It shows each item, such as expenses or assets, as a percentage of a main total, which is your total revenue or total assets.
• The gross margin ratio shows the percentage of total sales revenue that is left after costs of goods sold are deducted.
• In this example, total assets are taken as the base figure (100%), and each asset is then calculated as a percentage of total assets.
• By doing the same analysis for each item on the balance sheet and income statement, one can see how each item has changed in relation to the other items.

Advantages of Vertical Analysis over Horizontal Analysis

First, horizontal analysis analyzes the company’s performance over several accounting periods. While vertical analysis is a great tool for analyzing your current financial position, horizontal analysis is better for spotting trends between two accounting periods. Here, the Total Revenue is considered 100%, and all other figures are expressed as a percentage of this total. This vertical analysis shows that the company’s Cost of Goods Sold is 40% of the total revenue, leaving a gross profit margin of 60%. Operating expenses account for 25% of the total revenue, resulting in an operating income of 35%. After accounting for interest and taxes, the net income is 21% of the total revenue, providing a clear picture of the company’s profitability.

• Whether you’re considering cost-cutting measures, pricing strategies, or investment decisions, vertical analysis helps evaluate the potential impact on key line items.
• Vertical analysis, also known as structural analysis, is a method of analysing financial statements by expressing each line item as a percentage of a baseline figure.
• On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years.
• Here, we’ve chosen “Revenue” as the base figure for the common size income statement, followed by “Total Assets” for the common size balance sheet.
• Remember, on a balance sheet, your base number is always your total assets and total liabilities, and equity.

SaaS Profit and Loss Statement

Investors can use vertical analysis to analyze a stock and compare it against other potential investment options as well. We can now understand that although the gross revenue and net profit figures have improved for Facebook, the net profit margin percentages are similar. In this type of analysis, each line item is represented as a percentage of another item.

Vertical Analysis- Financial Statements- US CPA Questions

Accountants perform vertical and horizontal analysis to gain insight into financial data. On the balance sheet, with Rs. 500 crores of total assets, if current assets were Rs. 150 crores and fixed assets were Rs. 300 crores,. With this spreadsheet set up, simply update the raw dollar amounts each period and the vertical analysis will instantly recalculate, creating an automated tool to monitor trends and comparisons over time. With our financial data presented in Excel, we can start to calculate the contribution percentages on either the side or below the income statement. 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 relation to the other items.

Comparative Balance Sheet with Vertical Analysis

Third, horizontal analysis is more common when appraising the performance of a company against its historic results whereas vertical analysis is common for external benchmarking analysis. In the current year, company XYZ reported a net income of $20 million and retained earnings of $52 million. Consequently, it has an increase of $10 million in its net income and $2 million in its retained earnings year over year. The assets section is informative with regard to understanding which assets belonging to the company constitute the greatest percentage. When we convert data into percentages, we gain a clearer view of the proportion of the company’s overall financial assets and liabilities.

Once the financial statement figures are described in percentage terms, you can easily compare them against industry averages for standardization and benchmarking. Therefore, if you want to compare the performance of a company across accounting periods, you’ll have to conduct separate vertical analyses for each accounting period. Vertical analysis can be particularly helpful if looking to determine cash and accounts receivable balances over several accounting periods. Vertical analysis is typically used for a single accounting period, whether that’s monthly, quarterly, or annually, and can be particularly helpful when used to compare data for several accounting periods. Whether you’re conducting vertical or horizontal analyses, Brixx software offers the intuitive tools you need to make data-driven decisions with confidence. Take the first step towards clearer financial insights and sign up for a 7-day free trial at Brixx.

While horizontal analysis remains valuable for assessing changes over time, vertical analysis offers unique perspectives and granularity in financial analysis. Example of the vertical analysis accounting of the financial statement, which shows the total amount and percentage. Ultimately, the way in which you apply a vertical analysis of your accounts to your business will depend on your organisational goals and targets. The Generally Accepted Accounting Principles (GAAP) do not require adding the percentage column. However, like horizontal analysis, this type of analysis also provides limited information. It must be analyzed in conjunction with other methods for better understanding.

The fixed assets to total assets ratio shows the percentage of assets tied up in things like property, plants, and equipment. The debt to assets ratio measures how much a company is funding operations through debt versus internally generated funding. A higher ratio reflects greater risk and interest expenses but can also indicate effective use of leverage.

This allows you to spot changes in the composition and proportional relationships between line items. Vertical Analysis using the Balance Sheet helps in understanding the proportion of each asset, liability, and equity item in companies. For instance, suppose the total assets of a company are Rs.100 crore and cash is Rs.10 crore, then the cash would be 10% of total assets. 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. Vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflows.

The process is much the same for the balance sheet, except total assets is generally the most widely used base figure. Total liabilities is also an option if specifically wanting to analyze how debt relates to assets. By analyzing these vertical percentages, financial analysts can gain insights into the asset structure, capital structure, and the relative significance of different components within the balance sheet. Accurate and reliable financial statements are essential for conducting effective vertical analysis. If the financial statements contain errors or are not prepared in accordance with accounting principles, the results of vertical analysis may be misleading. Therefore, it is crucial to ensure the integrity of the financial statements before performing vertical analysis.

Analysis of the balance sheet can take many forms, with vertical analysis just one of them. If you’re preparing the balance sheet manually, be sure that your asset totals balance with your liability and equity totals. Both assets and liabilities/equity have a base number assigned, which is always 100%.

Performing a vertical analysis of a company’s cash flow statement represents every cash outflow or inflow relative to its total cash inflows. Vertical Analysis is a form of financial analysis where the line items on a company’s income statement or balance sheet is expressed as a percentage of a base figure. A vertical analysis is also the most effective way to compare a company’s financial statement to industry averages. Using actual dollar amounts would be ineffective when analyzing an entire industry, but the common-sized percentages of the vertical analysis solve that problem and make industry comparison possible. To do that, we’ll create a “common size income statement” and perform a vertical analysis. Students and professionals alike can benefit from vertical analysis of financial statements to get a better understanding of the components of a company’s financials.