Armed with the knowledge and understanding gained from this guide, you can confidently apply vertical analysis in your financial analysis endeavors. Remember to choose appropriate base figures, maintain consistency, and consider industry-specific factors to enhance the accuracy and relevance of your analysis. The balance sheet provides a snapshot of a company’s financial position at a specific point in time.

Step 1. Historical Income Statement and Balance Sheet Data

Nevertheless, there are situations where it does make sense to cross-reference ratios of specific accounts, such as expressing liabilities as a percentage of net income. It represents each line within financial statements as a proportion relative to another specified item. If the chosen base in an income statement is revenue, each line item is shown as a percentage of the revenue figure. Alternatively, the base can be net income or total gross income in the case of an income statement. This helps in understanding the proportions and performance of various accounts related to one another. It’s also important to assess the ratio of specific accounts over different time periods.

Startup Profit and Loss Statement

It is done so that accountants can ascertain the relative proportions of the balances of each account. To reiterate from earlier, dividing by total assets is akin to dividing by the sum of liabilities and equity. Would you like to review the financial performance from the past months/years or demonstrate your business’s financial health to stakeholders? Recognizing the objective will assist you in determining the appropriate foundation for your calculations.

Importance of Vertical Analysis in Financial Reporting

A vertical analysis, also known as common-size analysis, is a method of financial statement analysis that shows each line item as a percentage of a base figure within the statement. You can compare companies in the same industry by standard comparisons of key line items. By comparing other companies’ percentages against your own, you can understand the strengths, weaknesses, and changes you will need to make. This allows analyzing the composition of the income statement and understand the relative significance of each item in relation to the company’s revenue.

For example, the amount of cash reported on the balance sheet on Dec. 31 of 2024, 2023, 2022, 2021, and 2020 will be expressed as a percentage of the Dec. 31, 2020, amount. If you want to take your variance analysis to the next level, check out FloQast Variance Analysis. It offers a better way to perform flux and budget variance analysis by automating the data collection process and integrating with your ERP. For each line item on the balance sheet, divide it by the Total Assets and multiply the result by 100.

Employing both vertical and horizontal analyses provides a holistic understanding of a business’s financial position and performance. In vertical analysis, each line item in the financial statement is expressed as a percentage of a base figure in the same period (for example, the total assets or gross sales). However, in horizontal analysis, the relative change in a line item from one period to the next is calculated and typically presented as a percentage change. This approach aids the swift identification of correlations by showing the proportion of various account balances in the financial statements.

Vertical analysis looks at the contributing percentage of each line item to the total base figure. It can be used to compare different components of companies and the same company in different time periods. Here, we’ve chosen “Revenue” as the base figure for the common size income statement, followed by “Total Assets” for the common size balance sheet. To overcome these limitations, it’s a good idea to use vertical analysis in conjunction with other financial analysis techniques, such as horizontal analysis or ratio analysis, as well as other financial ratios.

What Is the Difference Between Horizontal Analysis and Vertical Analysis?

Let’s continue our analysis of ABC Manufacturing by applying vertical analysis to its balance sheet. In our case, half of the company’s asset base comprises PP&E, with the rest coming from its current assets. The assets section is informative with regard to understanding which assets belonging to the company constitute the greatest percentage. For each line item, we’ll divide the amount by the corresponding period’s revenue to arrive at our contribution percentages. Returning to our example above, a vertical analysis of Jackson Widget Company’s balance sheet would look like this.

Furthermore, vertical analysis streamlines the comparison of different companies operating within the same industry. This is done by portraying financial data in the form of percentages rather than absolute values. This makes it possible to assess companies with vertical analysis is also known as varying levels of sales or assets on a level playing field. Consequently, analysts can normalize items such as total income and net income across businesses of varying sizes. This reveals how these enterprises manage their assets, liabilities, income, expenses, and cash flow, despite of their overall scale. Vertical analysis is important because it helps stakeholders understand the relative proportions of accounts and performance in relation to each other.

1. Through accounting ratios, you can compare two-line items in your financial statement and point which items are bringing in more profit.
2. This helps in understanding the proportions and performance of various accounts related to one another.
3. In contrast, the process is practically the same for the balance sheet, but there is the added option of using “Total Liabilities” instead of “Total Assets”.
4. For each line item on the balance sheet, divide it by the Total Assets and multiply the result by 100.
5. The common-size percentage formula is calculated by dividing the analyzed item by the base amount of benchmark and multiplying it by 100.

Regardless of the placement, the more important factor is to ensure the analysis clearly shows which period it is reflecting. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

It gives business owners a more detailed view of their financial health compared to just knowing their total assets, liabilities and equity. By comparing the proportions of individual accounts from time period to period, companies can track fluctuations and use them to inform strategic decisions, assisting with financial forecasting. Vertical analysis can also be used to benchmark a company’s performance against industry averages.

While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item. For example, on an income statement, every line item is stated in terms of the percentage of gross sales. The balance sheet uses this presentation on individual items like cash or a group of items like current assets.