Vertical Analysis

MoneyBestPal Team
A method of financial statement analysis that compares each line item to a base figure, such as total revenue or total assets.

Vertical analysis is a technique for analyzing financial statements that contrast each line item with a reference point, such as total assets or revenue. It is sometimes referred to as a percentage analysis or a common-size analysis.

Investors and analysts can assess a company's relative performance, effectiveness, and profitability over time and in comparison to other businesses in the same industry with the aid of vertical analysis. Finding trends and patterns in the financial data is also helpful.

Vertical analysis has the benefit of removing the impact of scale and size on the financial statements. The vertical analysis enables a fair comparison of businesses with various sizes and levels of operations by expressing each line item as a percentage of a base figure.

The financial statements are made simpler and simpler to grasp by vertical analysis, which is another benefit. The vertical analysis highlights the important factors and constituent parts of a company's financial performance by emphasizing the proportions rather than the absolute figures.

On an income statement, each line item is divided by total revenue and expressed as a percentage to perform vertical analysis. A company's cost of goods sold as a percentage of revenue, for instance, would be 20% if its revenue was $100 million and its cost of goods sold was $20 million. As a result, the business spends $20 on producing every dollar of sales.

A balance sheet's vertical analysis involves dividing each line item by the total assets and expressing the result as a percentage. If a corporation has $200 million in total assets and $50 million in current obligations, for instance, its current liabilities as a percentage of total assets would be 25%. Accordingly, the company owes its short-term creditors 25 cents for each dollar of assets.

Vertical analysis can be used to compare a company's financial performance to that of its competitors, industry averages, or its previous results. The financial situation and operational strengths and weaknesses of a corporation can also be determined using this method.