Best examples of a comprehensive guide to vertical analysis of financial statements

Examples of vertical analysis before the theory

Most guides start with definitions. Let’s do the opposite and start with real examples of a comprehensive guide to vertical analysis of financial statements in action.

Imagine a mid-sized retailer, MetroStyle Stores, with this simplified 2024 income statement:

• Net sales: $1,000,000
• Cost of goods sold (COGS): $650,000
• Gross profit: $350,000
• Selling & admin expenses: $220,000
• Interest expense: $20,000
• Income tax expense: $30,000
• Net income: $80,000

Vertical analysis converts each line into a percentage of net sales:

• COGS: 65% of sales
• Gross profit: 35% of sales
• Selling & admin: 22% of sales
• Interest: 2% of sales
• Income tax: 3% of sales
• Net income: 8% of sales

Now you can instantly compare MetroStyle to a competitor that does $100 million in sales or to MetroStyle’s own prior years. The dollar amounts don’t matter as much; the structure of the income statement does. That’s the heart of every strong example of vertical analysis.

Why analysts rely on examples of a comprehensive guide to vertical analysis of financial statements

When analysts talk about “common-size statements,” they’re really talking about vertical analysis. The best examples of a comprehensive guide to vertical analysis of financial statements share three traits:

• They show how to normalize companies of different sizes.
• They explain how to track structural shifts over time.
• They highlight where risk and opportunity hide in the percentages.

In 2024 and 2025, this matters more than ever. Rising interest rates have pushed up interest expense as a percentage of sales for leveraged firms. Labor costs and input inflation have squeezed gross margins in manufacturing and retail. Vertical analysis lets you quantify those pressures instead of just guessing.

If you’re comparing a 2021 income statement to a 2024 one, you don’t just want to know that COGS increased by $5 million. You want to know whether COGS went from 60% of sales to 68% of sales. That shift tells a story about pricing power, supply chains, and competitive pressure.

Core mechanics: how vertical analysis actually works

Vertical analysis is simple enough that once you see a clear example of it, you can do it in a spreadsheet in minutes.

Income statement vertical analysis
Each line item is divided by net sales (or total revenue). If total revenue is \(1,000,000 and marketing expense is \)50,000, then marketing is 5% of sales.

Balance sheet vertical analysis
Each asset line is divided by total assets. Each liability and equity line is divided by total liabilities and equity (which are equal to total assets). If total assets are \(5,000,000 and inventory is \)1,000,000, then inventory is 20% of assets.

That’s it. The power comes from what you compare those percentages to: prior years, competitors, industry averages, or your own internal targets.

Income statement: best examples of vertical analysis in practice

To make this a real example of a comprehensive guide to vertical analysis of financial statements, let’s walk through several industries and scenarios.

1. Tech company with high gross margin

Consider a software-as-a-service (SaaS) firm with this 2024 income statement:

• Revenue: $50,000,000
• COGS (hosting, support): $7,500,000
• Gross profit: $42,500,000
• R&D: $10,000,000
• Sales & marketing: $18,000,000
• General & administrative: $6,000,000
• Operating income: $8,500,000
• Net income: $6,000,000

Vertical analysis (percent of revenue):

• COGS: 15%
• Gross margin: 85%
• R&D: 20%
• Sales & marketing: 36%
• G&A: 12%
• Operating margin: 17%
• Net margin: 12%

This pattern—low COGS, high gross margin, heavy sales & marketing—is typical of SaaS. When you line this up against a peer, you can immediately see who’s overspending to acquire customers or underinvesting in R&D.

2. Retailer under inflation pressure

Now compare that to a grocery chain in 2024, facing elevated food and labor costs:

• Net sales: $2,000,000,000
• COGS: $1,600,000,000
• Gross profit: $400,000,000
• Operating expenses (store labor, rent, utilities): $330,000,000
• Operating income: $70,000,000
• Net income: $40,000,000

Vertical analysis:

• COGS: 80% of sales
• Gross margin: 20%
• Operating expenses: 16.5%
• Operating margin: 3.5%
• Net margin: 2%

If this grocery chain had COGS of 77% of sales in 2022 and now sits at 80%, vertical analysis tells you that inflation and pricing pressure have eaten three percentage points of margin. That’s a big deal in a thin-margin business.

3. Comparing two competitors side by side

This is where examples of a comprehensive guide to vertical analysis of financial statements really shine.

Suppose two apparel retailers, A and B, both do $500 million in sales in 2024.

Retailer A (percent of sales):

• COGS: 58%
• Gross margin: 42%
• Store operating expenses: 28%
• Marketing: 6%
• Net margin: 5%

Retailer B (percent of sales):

• COGS: 64%
• Gross margin: 36%
• Store operating expenses: 24%
• Marketing: 4%
• Net margin: 3%

Retailer B looks leaner on operating expenses, but its higher COGS wipes out that advantage. Without vertical analysis, you’d just see two companies with $500 million in sales and different profit levels. With percentages, the story becomes obvious: B has a sourcing or pricing problem.

Balance sheet: examples include banks, manufacturers, and retailers

Vertical analysis isn’t just for income statements. Some of the best examples of vertical analysis come from balance sheets, especially in capital-intensive industries.

4. Bank balance sheet structure

Consider a regional bank in 2024:

Assets

• Total assets: $10,000,000,000
• Cash and equivalents: $800,000,000
• Loans: $7,000,000,000
• Securities: $1,600,000,000
• Other assets: $600,000,000

Liabilities and equity

• Deposits: $8,000,000,000
• Borrowings: $1,200,000,000
• Other liabilities: $200,000,000
• Equity: $600,000,000

Vertical analysis:

Assets (percent of total assets)

• Cash: 8%
• Loans: 70%
• Securities: 16%
• Other: 6%

Liabilities & equity (percent of total)

• Deposits: 80%
• Borrowings: 12%
• Other liabilities: 2%
• Equity: 6%

In a higher-rate environment (like 2023–2024), regulators and analysts care deeply about the mix of loans and securities and how they’re funded. Vertical analysis shows, at a glance, how exposed the bank is to loan credit risk and funding stress.

For background on how analysts and regulators look at bank balance sheets, the Federal Reserve’s education resources are useful reading: https://www.federalreserve.gov/education.htm

5. Manufacturer with rising inventory

Now look at a manufacturer facing supply chain volatility in 2024:

2022 balance sheet

• Total assets: $200,000,000
• Cash: $10,000,000 (5%)
• Accounts receivable: $40,000,000 (20%)
• Inventory: $50,000,000 (25%)
• Property, plant & equipment (PP&E): $90,000,000 (45%)

2024 balance sheet

• Total assets: $230,000,000
• Cash: $8,000,000 (3.5%)
• Accounts receivable: $43,000,000 (18.7%)
• Inventory: $70,000,000 (30.4%)
• PP&E: $109,000,000 (47.4%)

Inventory has grown from 25% to just over 30% of assets, while cash has shrunk as a percentage. Vertical analysis flags that more capital is tied up in stock, which may reflect longer lead times, demand uncertainty, or weaker sales. You don’t need a long narrative; the percentages tell you where to ask questions.

6. Retailer’s real estate vs. lease model

Consider two big-box retailers:

Retailer X (owns many stores):

• Total assets: $5,000,000,000
• PP&E: $2,500,000,000 (50%)
• Inventory: $1,000,000,000 (20%)
• Right-of-use (ROU) assets: $300,000,000 (6%)
• Other assets: $1,200,000,000 (24%)

Retailer Y (heavily leased model):

• Total assets: $5,000,000,000
• PP&E: $1,000,000,000 (20%)
• Inventory: $1,000,000,000 (20%)
• ROU assets: $1,800,000,000 (36%)
• Other assets: $1,200,000,000 (24%)

Vertical analysis shows that X is capital-heavy in owned real estate, while Y is more lease-heavy. That has implications for flexibility, interest rate sensitivity, and how quickly each can shrink or grow its footprint.

Trend analysis: using vertical analysis across years

One of the best examples of a comprehensive guide to vertical analysis of financial statements is a simple, three-year common-size income statement.

Take a consumer electronics company:

2022 (percent of sales)

• COGS: 62%
• Gross margin: 38%
• R&D: 8%
• Marketing: 10%
• G&A: 7%
• Net margin: 9%

2023 (percent of sales)

• COGS: 64%
• Gross margin: 36%
• R&D: 9%
• Marketing: 9%
• G&A: 7%
• Net margin: 7%

2024 (percent of sales)

• COGS: 66%
• Gross margin: 34%
• R&D: 9%
• Marketing: 8%
• G&A: 7%
• Net margin: 5%

Even if sales grew each year, the structure is moving the wrong way. COGS as a percentage of sales is rising, marketing is being trimmed, and net margin is falling. Vertical analysis gives you a clean way to talk about margin compression without getting lost in absolute dollars.

The Financial Accounting Standards Board (FASB) offers conceptual background on financial reporting that pairs well with this kind of analysis: https://www.fasb.org

How vertical analysis supports decisions in 2024–2025

To make this a real-world example of a comprehensive guide to vertical analysis of financial statements, we need to connect the technique to the current environment.

Interest rates and debt costs
As rates have risen since 2022, interest expense as a percentage of sales has become a key focus. Companies that rolled over debt in 2023–2024 often show interest expense climbing from, say, 1% of sales to 3% or 4%. Vertical analysis makes that visible immediately.

Inflation and cost structure
Inflation doesn’t hit every line item equally. In 2022–2024, many firms saw:

• COGS percentages rise in food, construction, and manufacturing.
• Labor-intensive operating expenses rise in health care and hospitality.

Vertical analysis lets management and investors see which cost buckets are expanding fastest relative to revenue.

For broader macro context, the Bureau of Labor Statistics publishes data on inflation and wages that analysts often pair with financial statement analysis: https://www.bls.gov

Digital vs. physical business models
When you compare a streaming company to a cable provider, or an e‑commerce platform to a brick-and-mortar chain, vertical analysis shows how the business models differ:

• Digital businesses: low COGS, high R&D and marketing as percentages of sales.
• Physical retailers: high COGS, higher store operating expenses, lower R&D.

Those patterns matter when you’re evaluating resilience during downturns or shifts in consumer behavior.

Common mistakes when using vertical analysis

Even the best examples of a comprehensive guide to vertical analysis of financial statements can mislead you if you ignore context.

Ignoring one-time items
A large legal settlement or asset sale can distort percentages. If “Other income” jumps from 1% to 10% of sales for one year, you should adjust your view of underlying profitability.

Comparing across incompatible industries
It makes little sense to compare a bank’s common-size statements to a manufacturer’s. Use vertical analysis to compare within industries or adjacent business models.

Forgetting scale and strategy
A startup may have marketing at 50% of sales because it is intentionally burning cash to grow. A mature utility will never look like that. The percentages are not “good” or “bad” in isolation; they must be interpreted in light of strategy and life cycle.

For a deeper grounding in financial statement interpretation, the SEC’s Investor.gov site is worth bookmarking: https://www.investor.gov

Putting it together: how to build your own examples

If you want to create your own examples of a comprehensive guide to vertical analysis of financial statements—for a client, a class, or internal reporting—start with three pieces:

• One income statement for vertical analysis across a few years.
• One balance sheet showing structural shifts (like inventory or leverage).
• One peer comparison where you common-size two competitors.

From there, you can layer in:

• A short narrative on what changed in the percentages and why.
• Links to macro data (inflation, rates, wages) that might explain the shifts.
• Management decisions that respond to what the vertical analysis reveals (pricing changes, cost cuts, capital spending tweaks).

When you do this well, your work stops being a spreadsheet exercise and starts becoming a decision tool. That’s the standard the best examples of vertical analysis should hit.

FAQ: examples of vertical analysis and practical questions

Q1. Can you give a simple example of vertical analysis on an income statement?
Yes. If a company has \(200,000 in sales and \)120,000 in COGS, COGS is 60% of sales. If operating expenses are \(50,000, that’s 25% of sales. Net income of \)20,000 would be 10% of sales. Those three percentages—60%, 25%, 10%—already tell you a lot about the company’s cost structure.

Q2. What are common real examples of vertical analysis used by investors?
Investors often compare gross margin percentages across competitors, track selling and marketing as a percentage of sales for consumer brands, and watch interest expense as a percentage of sales for highly leveraged firms. They also look at inventory and fixed assets as percentages of total assets to understand how capital-intensive a business is.

Q3. How is vertical analysis different from horizontal analysis?
Vertical analysis expresses each line item as a percentage of a base figure in a single period (sales or total assets). Horizontal analysis tracks the percentage change in each line item over multiple periods. Many analysts use both: vertical analysis to compare structure, horizontal to see growth and decline.

Q4. Is there an example of vertical analysis that works well for small businesses?
A small service firm—say, a marketing agency—can track salaries, software subscriptions, and rent as percentages of revenue each quarter. If salaries climb from 40% to 55% of revenue while revenue growth slows, the owner knows profitability is at risk even before cash runs tight.

Q5. Where can I find public data to create my own examples of vertical analysis?
Public companies’ 10‑K and 10‑Q filings on the SEC’s EDGAR database provide full financial statements. You can export those to a spreadsheet and run your own vertical analysis. Combining that with macro data from sources like the Bureau of Labor Statistics gives you context for why certain percentages move over time.