Vertical analysis: a deep dive into financial statement evaluation

how to calculate vertical analysis

Vertical analysis is typically used for a single accounting period, whether that’s monthly, quarterly, or annually, and can be particularly helpful when used to compare data for several accounting periods. You can compare the ratios of marketing expenses or net profit with industry averages to determine how well/poorly you are doing and identify trends in the sector. A vertical analysis is a quantitative analytical tool to measure the relative proportions of the components in financial statements like costs, net income, expenses, and liabilities to its total sales. A vertical analysis enables you to decipher your company’s financial statement and understand the contribution of each component to its success. Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis. Vertical analysis is an invaluable tool for simplifying financial statements and gaining valuable insights into a company’s financial performance.

Vertical Analysis – Formula and Advantages

how to calculate vertical analysis

It can provide information on what metrics are improving and which are worsening. It can be used to compare different components of companies and the same company in different time periods. Analysis of the balance sheet can take many forms, with vertical analysis just one of them.

  • The following compares the performance of two companies using a vertical analysis on their income statements for 2019.
  • Checking a company’s balance sheet, you’ll likely see the entire assets or liabilities listed as the initial amount.
  • Common-size financial statements often incorporate comparative financial statements that include columns comparing each line item to a previously reported period.
  • It helps identify the impact of changes in asset or liability categories on the overall financial health of the organization.
  • Before conducting vertical analysis, having all the data needed for the calculation is critical.
  • Tools like Google Sheets or Excel allow you to automate calculations, so you can focus on analysis.
  • Vertical Analysis is a proportional evaluation of a financial statement in which each line item is given as a percentage of another line item.

Common-size Balance Sheet

Browse hundreds of articles, containing an amazing number of useful tools, techniques, and best practices. Many readers tell us they would have paid consultants for the advice in these articles. Non-current liabilities, X Ltd. and Y Ltd (33.33% and 40%, respectively), are less than the shareholder’s funds (50% and 53.33%, respectively). Comparing the exact numbers of organizations of various sizes does not yield helpful information about their financial position.

Calculate Line Items as % of Total

Converting the raw numbers into percentages provides a clearer picture of the proportion of the asset or liability in the context of the company’s total financial resources. The following examples demonstrate how to do a vertical analysis using these free balance sheet template and income statement template. The calculations are performed in Google Sheets, but you can easily do the same in Excel. A Horizontal Analysis allows you to analyze financial statements to identify historical trends. By looking that the balance sheet above, you can see that while your current asset total went down in accounts receivable, your fixed asset total went up.

Horizontal analysis method looks at the financial performance over a horizon of many years. Under horizontal analysis, one shows the amounts of past financial statements as a percentage of the amount from the base year. For instance, year one is taken as the base over five years, and the amount of all other years is expressed as a percentage of the base year. On the other hand in vertical analysis, either the sales/revenue or total asset/total liabilities of the same year is taken as the base parameter to express the performance in terms of percentage. First, gather the balance sheet figures for each line item, such as cash, accounts receivable, fixed assets, etc. You can likely export the company’s financial statements from your accounting software to an Excel spreadsheet for easy analysis.

how to calculate vertical analysis

Vertical analysis: a deep dive into financial statement evaluation

You have to set your own benchmarks, targets, and expectations when adopting this method. On both financial statements, percentages are presented for two consecutive years in order for the percent changes over time to be evaluated. how to calculate vertical analysis In ABC Company’s case, we can clearly see that costs are a big reason profits are declining despite the company’s robust sales growth. What we don’t know, and what we can’t know from the vertical analysis, is why that is happening.

how to calculate vertical analysis

Vertical Analysis: Overview, calculations, examples and primary purpose

But we’ll utilize the latter here, as that tends to be the more prevalent approach taken. There are advantages and disadvantages to everything, including using vertical analysis. Before you can begin to use vertical analysis, there are a couple of steps you must follow. A capitalization table, commonly referred to as a cap table, is a detailed spreadsheet or ledger that tracks the equity ownership of a company. If you know your base number, you have something to compare everything else to it, and if you compare each budget item to the base number, you can see where your approach could be weak or strong. The various accounting records will use a broad range of suitable starting amounts.

Learning Outcome

Relying rigidly on a single method of financial analysis can lead to narrow-mindedness and poor decision-making. Instead, using a variety of analysis techniques and financial analysis software as ‘tools in the toolbox’ can provide a comprehensive view of the company, leading to more informed and effective decisions. It can be used in the same way, identifying whether the current balance matches the strategy of the business, as well as looking at multiple years to identify trends and anomalies. For example, it can be an easy way to track how much of the balance sheet is held in illiquid assets, or to assess how the debt structure has been changing over time. Vertical analysis makes it much easier to compare the financial statements of one company with another and across industries. For instance, we can see that our company’s long-term debt as a percentage of total assets is 17.0%.

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