The formula to perform vertical analysis on the income statement, assuming the base figure is revenue, is as follows. Unlike the unadjusted income statement and balance sheet, the common size variations can be used for peer-to-peer comparisons between different companies. Vertical analysis can help identify trends in specific expense categories or asset allocations over time. For instance, if the percentage of research and development expenses to total revenue is increasing year over year, it might indicate a strategic focus on innovation. Vertical analysis makes it much easier to compare the financial statements of one company with another and across industries. Horizontal analysis is a financial analysis technique used to evaluate a company’s performance over time.

With Acterys, FP&A professionals can conduct thorough vertical analysis and make well-informed decisions thanks to its scenario planning and collaboration features. This empowers organizations to drive business growth by unlocking the true potential of their financial data and harnessing the advantages of vertical analysis for strategic decision-making. This allows analyzing the composition of the income statement and understand the relative significance of each item in relation to the company’s revenue. This information will provide a better understanding of which areas of your company are generating high and low revenue. This analysis helps see the proportion of each item compared to the net profit, providing insights into where the money is coming from and where it is being spent. In the context of vertical analysis, consider an instance where you aim to comprehend the contribution of each line within your financial statement towards generating revenue.

How Horizontal Analysis Works

1. Net income represents 10% of total revenues, and this margin can be compared to the previous year’s margin to see the company’s year-over-year performance.
2. 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”.
3. If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million).
4. 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.
5. So if we had multiple years of historical data, it is recommended to organize the percentage calculations into a single section on the far right or below the financials with the timing of the periods aligned.
6. It helps identify the impact of changes in asset or liability categories on the overall financial health of the organization.

Each line item’s common-size ratio can then be used to conduct comparative analysis across different fiscal periods or companies, allowing for a standardized approach to analyzing financial statements. In the realm of financial analysis, understanding the relative significance of each line item in a financial statement is crucial. Vertical analysis, also known as common-size analysis, provides a method to evaluate financial statements in a way that removes the absolute dollar amounts and focuses on the relative proportions of each item. This article delves deep into the concept, benefits, and application of vertical analysis, offering insights for CFOs and CEOs to harness its potential. One of the pros of vertical analysis is that it allows for the comparison of financial statements from one accounting period to the next as well as for comparisons among different companies. One of its cons is that it doesn’t take into consideration absolute numbers; so if you are comparing two companies, looking at percentages will give a different result than absolute numbers.

If the cost of goods sold amount is $1 million, it will be presented as 50% ($1 million divided by sales of $2 million). The issue with only performing horizontal analysis is that it presents one line item as it pertains to itself. Therefore, it is important to see the total picture by combining horizontal and vertical analysis. Horizontal analysis might be comparing the ratio of variable expenses over a period of three years. That means the variable expenses in the balance sheet of year 2 and 3 are shown as a percentage of variable expenses of year 1. By showing each line item as a percentage of an important total this allows FP&A analysts to quickly identify correlations, while at the same time making it easier to compare various companies across the same sector.

Drive Business Performance With Datarails

Furthermore, by accessing up-to-date data, you can make informed decisions based on a comprehensive understanding of your financial performance. The ability to create charts, graphs, and visual representations of financial data simplifies the planning process and enhances decision-making capabilities. This shows that the amount of cash at the end of 2024 is 141% of the amount it was at the end of 2020. By doing the same analysis for each item on the balance sheet and income statement, one can see how each item has changed in relationship to the other items.

Everything You Need To Master Financial Modeling

1. By showing each line item as a percentage of an important total this allows FP&A analysts to quickly identify correlations, while at the same time making it easier to compare various companies across the same sector.
2. This vertical analysis provides insights into the company’s financial structure and the proportion of financing coming from debt versus equity.
3. This information will provide a better understanding of which areas of your company are generating high and low revenue.
4. Vertical analysis can also be used to compare the companies numbers to competitors or the industry averages.
5. With different bits of calculated information now embedded into the financial statements, it’s time to analyze the results.
6. Most horizontal analysis entail pulling quarterly or annual financial statements, though specific account balances can be pulled if you’re looking for a specific type of analysis.

This type of analysis enables businesses to view the relative proportions of account balances, compare internal changes over time, and identify trends. By converting financial statement entries into percentages of a base figure, it allows for a more standardized form of comparison. Investors, managers, and analysts use vertical analysis to identify trends in operational performance, make intra-firm comparisons, and gauge financial health against industry standards.

For the income statement, this base is typically total revenue or sales, while for the balance sheet, it’s total assets (for the asset side) and total liabilities plus equity (for the liabilities and equity side). On the other hand, horizontal analysis refers to the analysis of specific line items and comparing them to a similar line item in the previous or subsequent financial period. Although common size analysis is not as detailed as trend analysis using ratios, it does provide a simple way for financial managers to analyze financial statements.

Vertical analysis (or common-size analysis) and horizontal analysis (also known as trend analysis) are two of the most commonly used tools in financial statement analysis. This helps to determine whether a company’s performance has been improving or declining over time due to various factors, such as competitive pressure and new product launches. By using both vertical and horizontal analyses, businesses can gain a better understanding of their financial position and performance.

Vertical Analysis is a form of financial analysis where the line items on a company’s income statement or balance sheet is expressed as a percentage of a base figure. 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. Through vertical percentage analysis, you can also forecast future financial performance. Understanding the relationship between different line items within the financial statements can provide FP&A professionals to make assumptions about the future composition and allocate resources accordingly.

On the other hand, horizontal analysis looks at amounts from the financial statements over a horizon of many years. Second, a variance analysis determines not only the dollar amount but the direction of change for a given general ledger account. Generally accepted accounting principles (GAAP) are based on the consistency and comparability of financial statements. Using consistent accounting principles like GAAP ensures consistency and the ability to accurately review a company’s financial statements over time. Comparability is the ability to review two or more different companies‘ financials as a benchmarking exercise.

Acterys takes the effectiveness of vertical analysis to the next level with its advanced features and capabilities. By seamlessly integrating data from multiple sources, converting it into a suitable format, and offering dynamic reporting and visualization options, Acterys streamlines the vertical analysis process. Horizontal analysis, also known as trend analysis, compares historical data on a financial statement over different accounting periods. There is a baseline period and numbers from succeeding periods are calculated as a percentage of the base period. Vertical analysis looks at numbers in financial statements in the same period and calculates each line item as a percentage of the base figure in that section. One of the benefits of using common size analysis is that it allows investors to identify large changes in a company’s financial statements.

It’s a vertical analysis is also known as technique used in financial statement analysis and is often combined with horizontal analysis. On the liabilities and shareholders equity side, we’ve chosen the base figure to be total assets. Vertical analysis is most commonly used within a financial statement for a single reporting period, e.g., quarterly. It is done so that accountants can ascertain the relative proportions of the balances of each account.

Formula for Common Size Analysis

To reiterate from earlier, dividing by total assets is akin to dividing by the sum of liabilities and equity. Look for items with a significant percentage of Total Assets, as these could represent areas of vulnerability or strength. When evaluating potential acquisition targets or merger partners, vertical analysis can offer insights into the financial structure and priorities of other companies, aiding in the decision-making process. Vertical analysis results can be used in annual reports, investor presentations, and stakeholder communications to provide a clear picture of the company’s financial health and strategic priorities.