Vertical Analysis

Vertical Analysis

 A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business.

For example, suppose XYZ Corp. has three assets: cash and cash equivalents (worth $3 million), inventory (worth $8 million), and property (worth $9 million). If vertical analysis is used, the asset column will look like:

Cash and cash equivalents: 15%
Inventory: 40%
Property: 45%

This method of analysis contrasts with horizontal analysis, which uses one year's worth of entries as a baseline while every other year represents differences in terms of changes to that baseline.

Vertical analysis reports each amount on a financial statement as a percentage of another item. For example, the vertical analysis of the balance sheet means every amount on the balance sheet is restated to be a percentage of total assets.

The restated amounts from the vertical analysis of the balance sheet will be presented as a common-size balance sheet. A common-size balance sheet allows you to compare your company’s balance sheet to another company’s balance sheet or to the average for its industry.

Vertical analysis of an income statement results in every income statement amount being presented as a percentage of sales.

The restated amounts are known as a common-size income statement. A common-size income statement allows you to compare your company’s income statement to another company’s or to the industry average.

Common Size Balance Sheet

A company balance sheet that displays all items as percentages of a common base figure.

The image above illustrates the difference between a regular balance sheet and a common size balance sheet. In the normal balance sheet, account values are expressed in dollar terms, while in the common size one, each value is listed as a percentage of total assets. This is also done for liabilities, where each liability account is a percentage of total liabilities.