A Comprehensive Guide to Vertical Analysis of Financial Statements

What is Vertical Analysis?

Vertical analysis is a technique used to analyze financial statements in which each line item is expressed as a percentage of a base figure within the same statement. This allows stakeholders to understand the relative size of each component and how it contributes to the overall financial picture.

Example of Vertical Analysis on the Income Statement

Let’s consider a simplified income statement for Company ABC for the year ended December 31, 2023:

Vertical Analysis Calculation

• Revenue is the base item and is always 100%.
• COGS is calculated as (300,000 / 500,000) * 100 = 60%.
• Gross Profit is (200,000 / 500,000) * 100 = 40%.
• Operating Expenses is (100,000 / 500,000) * 100 = 20%.
• Net Income is (100,000 / 500,000) * 100 = 20%.

This analysis shows that COGS accounts for 60% of the revenue, indicating a significant portion of sales is consumed by production costs.

Example of Vertical Analysis on the Balance Sheet

Now, let’s look at a simplified balance sheet for Company ABC as of December 31, 2023:

Vertical Analysis Calculation

• Total Assets is the base item at 100%.
• Current Assets is calculated as (400,000 / 1,000,000) * 100 = 40%.
• Non-current Assets is (600,000 / 1,000,000) * 100 = 60%.
• Total Liabilities is (700,000 / 1,000,000) * 100 = 70%.
• Shareholders’ Equity is (300,000 / 1,000,000) * 100 = 30%.

This analysis reveals that 70% of the company’s assets are financed through liabilities, which provides insights into the company’s financial structure and leverage.

Conclusion

Vertical analysis is a valuable tool for stakeholders to quickly assess the relative size and significance of various financial statement items. By expressing each item as a percentage of a base figure, users can easily compare financial performance across periods or with other companies in the industry.