A Comprehensive Guide to Vertical Analysis of Financial Statements

Vertical analysis is a financial statement analysis method that expresses each line item as a percentage of a base item. This guide will walk you through the concept of vertical analysis and provide practical examples to enhance your understanding.
By Jamie

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:

Income Statement Item Amount (USD) Vertical Analysis (%)
Revenue 500,000 100%
Cost of Goods Sold (COGS) 300,000 60%
Gross Profit 200,000 40%
Operating Expenses 100,000 20%
Net Income 100,000 20%

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:

Balance Sheet Item Amount (USD) Vertical Analysis (%)
Total Assets 1,000,000 100%
Current Assets 400,000 40%
Non-current Assets 600,000 60%
Total Liabilities 700,000 70%
Shareholders’ Equity 300,000 30%

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.