Vertical Analysis

What Is Vertical Analysis?

Vertical analysis is a method of financial statement analysis wherein each detail is listed as a percentage of a base figure inside the statement. Consequently, details on an income statement can be stated as a percentage of gross sales, while details on a balance sheet can be stated as a percentage of total assets or liabilities, and vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflows.

How Vertical Analysis Works

Vertical analysis makes it a lot simpler to compare the financial statements of one company with another, and across industries. This is on the grounds that one can see the relative extents of account balances. It likewise makes it simpler to compare previous periods for time series analysis, in which quarterly and annual figures are compared over a number of years, to gain an image of whether performance metrics are improving or weakening.

For instance, by showing the different expense details in the income statement as a percentage of sales, one can perceive how these are adding to profit edges and whether profitability is working on after some time. It consequently becomes more straightforward to compare the profitability of a company with its friends.

Financial statements that incorporate vertical analysis obviously show detail percentages in a separate column. These types of financial statements, including point by point vertical analysis, are otherwise called common-size financial statements and are utilized by many companies to give greater detail on a company's financial position.

Normal size financial statements frequently incorporate comparative financial statements that incorporate columns contrasting each detail with a previously reported period.

Vertical analysis is utilized to gain an image of whether performance metrics are improving or crumbling.

Vertical versus Horizontal Analysis

One more form of financial statement analysis utilized in ratio analysis is horizontal analysis or trend analysis. This is where ratios or details in a company's financial statements are compared over a certain period of time by picking one year's worth of passages as a baseline, while each and every other year addresses percentage differences in terms of changes to that baseline.

For instance, the amount of cash reported on the balance sheet on December 31 of 2018, 2017, 2016, 2015, and 2014 will be communicated as a percentage of the December 31, 2014, amount. Rather than dollar amounts, you could see 141, 135, 126, 118, and 100.

This shows that the amount of cash toward the finish of 2018 is 141% of the amount it was toward the finish of 2014. By doing likewise analysis for every thing on the balance sheet and income statement, one can perceive how every thing has changed in relationship to different things.

Illustration of Vertical Analysis

For instance, assume XYZ Corporation has gross sales of $5 million and cost of goods sold of $1 million and general and administrative expenses of $2 million and a 25% tax rate, its income statement will seem to be this in the event that vertical analysis is utilized: