In order to use the vertical analysis equation, you need to figure out your base figure. On a business’s balance sheet, you can find the relevant base figure as the company’s total assets or liabilities. Though this is dependent on what you are attempting to measure as different financial documents will have different base figures. The balance sheet common size analysis mostly uses the total assets value as the base value. A financial manager or investor can use the common size analysis to see how a firm’s capital structure compares to rivals. They can make important observations by analyzing specific line items in relation to the total assets.

Applying Vertical Analysis to the Cash Flow Statement

This means what is vertical analysis revenue will be set at 100% and all other line items within the income statement will represent a percentage of revenue. This means Mistborn Trading saw an increase of $20,000 in revenue in the current year as compared to the prior year, which was a 20% increase. The same dollar change and percentage change calculations would be used for the income statement line items as well as the balance sheet line items. The figure below shows the complete horizontal analysis of the income statement and balance sheet for Mistborn Trading. Vertical Analysis Of an Income Statement The task of vertical analysis of an income statement is to make us aware of the weight of every item in the statement. This way, we observe how much of the sales is spent on, e.g., cost of goods sold, staff salaries, or marketing.

How to perform a vertical analysis on a company’s income statement?

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 interpret the results, considered limitations, and highlighted practical applications. The income statement, also known as the profit and loss statement, reveals a company’s revenues, expenses, and net income over a specific period. It highlights the profitability of the business and helps assess its operational efficiency. Whether you’re an investor, business owner, or financial professional, understanding vertical analysis can help you make informed decisions and identify key trends within financial statements.

Deeper composition insights

As a collective of industry professionals and enthusiasts, we aim to empower organizations with actionable strategies, innovative tools, and thought leadership that drive value and efficiency. Stay tuned for up-to-date content designed to simplify procurement and keep you ahead of the curve. It is also helpful to compare your findings with industry averages or competitors to get an idea of how well the company performs relative to its peers. For example, if you notice that the company’s cost of goods sold is higher than the industry average, this could be a sign that they are not managing their expenses as efficiently as other companies.

• Would you like to review the financial performance from the past months/years or demonstrate your business’s financial health to stakeholders?
• For the balance sheet, total assets or total liabilities and equity are commonly used as base figures in vertical analysis.
• Vertical analysis is exceptionally useful while charting a regression analysis or a ratio trend analysis.
• This helps the finance team see how much of their resources are tied up in inventory compared to other assets like cash or receivables.
• The interpretation shows us how to evaluate the performance of the business using the numbers and make comparison.
• These methods provide insights into a company’s financial condition by comparing financial data over time and examining the relationships between various financial statement items.

Net income represents 10% of total revenues, and this margin can be compared to the previous year’s margin to see the company’s year-over-year performance. The frequency of conducting vertical analysis depends on the company’s reporting requirements and the need for financial analysis. It can be done quarterly, annually, or whenever there is a need to evaluate financial performance.

You can then retained earnings get a summary of how the business is operating and performing over time. It simplifies financial data by converting absolute numbers into percentages, making it easier to spot inefficiencies, track trends, and assess performance over time. Vertical analysis is particularly valuable in industries where cost control is key (manufacturing, distribution, and FMCG). When costs are expressed as a percentage of revenue or assets, it’s easier to understand how individual cost components impact overall profitability. Vertical analysis enables trend analysis as it converts financial statement line items into percentages of a base figure.

• A Common-Size Cash Flow Statement is a financial statement where each line item is expressed as a percentage of total cash inflows or outflows.
• When performing vertical analysis, analysts typically examine each of the core financial statement components independently.
• Vertical analysis can also be used to compare the companies numbers to competitors or the industry averages.
• Company A has COGS of 58% of revenue and Company B has COGS of 62% of revenue, Company A likely has an advantage in profitability from lower costs.
• Horizontal analysis studies financial data over time to find trends and growth.

In the realm of finance, vertical analysis aids in comparing the composition of income and expenses over time or against industry peers. By converting figures into percentages, it normalizes financial data and makes it easier to identify trends, patterns, and areas of concern. Vertical analysis is a kind of financial https://www.bookstime.com/ statement analysis wherein each item in the financial statement is shown in the percentage of the base figure. It is one of the popular methods of financial statements as it is simple and also called a common size analysis. Here, all the income statement items are stated as a percentage of gross sales. Horizontal analysis involves comparing financial data from multiple periods to identify trends, growth patterns, and changes over time.