Vertical Analysis: Definition, Formula & Examples

This strategy can save a significant amount of time, as it shifts the focus to the areas of the company’s financials that need the most attention. This isn’t about hiding information or presenting an unrealistic picture; it’s quite the opposite. It’s about allowing executives and decision makers to drill down to the vital information quickly—without needing to sift through hundreds of pages of financial data. Taking a look at this example, we can see how well it provides a snapshot of the business. While there was a big increase in revenue across the company as a whole in 2023, the majority of this has come from the Asian region. While the US market performance improved, it underperformed the other regions for the year.

She is in the top ten percent of her class and has been chosen to work for the largest accounting firm in the state as a summer intern. We must also consider that there may be another factor responsible for the significant rise in total sales in year 3 – such as a robust economy driving significantly higher sales in this year. This may be due to higher demand or some other factor that needs to be investigated.

How to do vertical analysis?

So, in a vertical analysis of a balance sheet, every line item — cash, accounts receivable, fixed assets, accounts payable, stockholders equity, etc. — is shown as a percentage of total assets. In a vertical analysis of an income statement, every line item is shown as a percentage of gross sales. Brixx can facilitate both horizontal and vertical analyses, empowering users to gain a comprehensive understanding of their financial statements. With Brixx, businesses have access to powerful tools to help them in analyzing trends, setting benchmarks, and understanding their financial position in the context of their industry standards. Vertical analysis, also known as common-size analysis, is used to evaluate a firm’s financial statement data within an accounting period.

Investors, managers, and analysts use vertical analysis to identify trends in operational performance, make intra-firm comparisons, and gauge financial health against industry standards. Cash in the current year is $110,000 and total assets equal $250,000, giving a common-size percentage of 44%. If the company had an expected cash balance of 40% of total assets, they would be exceeding vertical analysis formula expectations. The figure below shows the common-size calculations on the comparative income statements and comparative balance sheets for Mistborn Trading. The highlighted part of the figure shows the number used as the base to create the common-sizing. Vertical analysis shows a comparison of a line item within a statement to another line item within that same statement.

Limitations and Considerations of Vertical Analysis

Performing vertical analysis creates the so-called “common size” income statement and the “common size” balance sheet. Conceptually, vertical analysis can be thought of as reading a single column of financial data and determining the relationships among each item to reflect the relative size of the various cost and profit metrics. When completing a vertical analysis, you will use revenue or assets as a base.

• But we’ll utilize the latter here, as that tends to be the more prevalent approach taken.
• The formula to perform vertical analysis on the income statement, assuming the base figure is revenue, is as follows.
• Take, for example, applying vertical analysis to compare employee salaries with revenue.
• It is called a vertical analysis because you analyze the percentage numbers in a vertical fashion.
• Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis.
• Using actual dollar amounts would be ineffective when analyzing an entire industry, but the common-sized percentages of the vertical analysis solve that problem and make industry comparison possible.