Vertical Analysis

Vertical analysis is a financial statement analysis technique in which each line item of a financial statement, usually balance sheet and income statement, is stated as percentage of the base figure of the financial statement. Vertical analysis may also be performed on a cash flow statement. The base figure is total assets in case of balance sheet, total revenue in case of income statement and total net cash flow in case of a cash flow statement.

To perform vertical analysis of a financial statement, each item is divided by the base figure as stated above and the resulting percentages are used to create common-sized financial statements. An example of a vertically analyzed income statement is given below:

Cost of Sales328,50056.0
Gross Profit258,50044.0
Selling Expenses61,20010.4
Administrative Expenses84,00014.3
Operating Income113,30019.3
Income Tax40,0006.8
Net Income73,30012.5

Vertical analysis helps in comparing the performance and financial position of two businesses of different size. A vertically analyzed financial statement may be visually presented in a pie chart. Such a pie chart of a balance sheet may show items such as current and non-current assets and liabilities and owners' equity. Usually, vertical analysis is performed for single period but occasionally it may be performed for two or more consecutive periods to understand how items changed over time as percent of base figure.

Written by Irfanullah Jan