What is Vertical Analysis? Process & Examples

Let’s look at an example to see how applying the vertical analysis formula might work in the real world. FloQast’s suite of easy-to-use and quick-to-deploy solutions enhance the way accounting teams already work. Learn how a FloQast partnership will further enhance the value you provide to your clients.

This implies that each line item is expressed as a percentage of gross sales on an income statement, but on a balance sheet, each line item is expressed as a percentage of total assets. 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. In this example, we have expressed each line item as a percentage of the total assets, which serves as the base figure. This allows us to assess the proportions and relationships between different components of the balance sheet. By analyzing these ratios using vertical analysis, you can gain insights into a company’s cash flow management and capital allocation strategies. By analyzing these ratios using vertical analysis, you can evaluate a company’s financial position, leverage, and liquidity.

  1. If this continues over several months, revisiting credit practices or collection methods may be in order.
  2. Tools like Google Sheets or Excel allow you to automate calculations, so you can focus on analysis.
  3. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.
  4. It enables the accountant to see relative changes in company accounts over a given period of time.

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. The following compares the performance of two companies using a vertical analysis on their income statements for 2019.

Analyzing Vertical Percentages for Liabilities and Equity

Here, analysts and FP&A teams can get a clear view of the company asset allocation, look at how liabilities compare to company assets, and review the equity structure of the business. This simplicity and clarity enables efficient evaluation of a company’s financial health and performance, leading to more effective strategic decision-making by executives. It also helps FP&A teams identify which areas to focus on in their forward planning and projections to boost the bottom line.

Vertical Analysis of Income Statement

Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis. While vertical analysis is a great tool for analyzing your current financial position, horizontal analysis is better for spotting trends between two accounting periods. In this example of vertical analysis, you can see that you only need to use balance sheet items from a single accounting period.

By Industry

Using Layer, you can also automate data flows and user management, gathering and updating the data automatically, carrying out the analysis, and sending out customized reports. Apply vertical analysis of the given Statement of Profit & Loss of ABC Ltd. and interpret the same. For example, over the years, it has been established that the cost of raw materials for an organization is 35-40% of the revenue from operations; an increase in this percentage range will need immediate attention. For each line item on the balance sheet, divide it by the Total Assets and multiply the result by 100.

Further, when working with large data sets, we recommend cleaning up the data to improve the overall visual representation of the analysis. Regardless of the placement, the more important factor is to ensure the analysis clearly shows which period it is reflecting.

Purpose of Vertical Analysis

Vertical analysis becomes even more useful when it’s used to assess changing trends over time. For example, comparing current expenses to previous years as a proportion of revenue is far more useful than looking just at the raw numbers. Take, for example, applying vertical analysis to compare employee salaries with revenue. Since vertical analysis presents results as percentages, it’s clear that salaries are rising in relation to revenue changes. The real benefit of vertical analysis lies in its ability to provide a clear overview of how expenses are trending over time, either increasing or decreasing.

Taking a look at this example, we can see how well it provides a snapshot of the business. While there was a big increase in revenue across the company as a whole in 2023, the majority of this has come from the Asian region. While the US market performance improved, it underperformed the other regions for the vertical analysis of balance sheet year. This could be a normal consequence of a more mature business unit, but highlights a trend worth considering. It could align with a corporate strategy, like an expansion into a new region that’s still gaining momentum. Or, it might indicate an excess in company headcount, necessitating a thorough review.

That’s $100,000 in cash plus $40,000 in accounts receivable plus $50,000 of fixed assets. With our financial data presented in Excel, we can start to calculate the contribution percentages on either the side or below the income statement. Vertical analysis is most commonly used within a financial statement for a single reporting period, e.g., quarterly. It is done so that accountants can ascertain the relative proportions of the balances of each account. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

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