Vertical analysis (also known as common-size analysis) is a popular method of financial statement analysis that shows each item on a statement as a percentage of a base figure within the statement. To conduct a vertical analysis of
balance sheet, the total of assets and the total of liabilities and stockholders’ equity are generally used as base figures. All individual assets (or groups of assets if condensed form balance sheet is used) are shown as a percentage of total assets. The current
liabilities, long term debts and equities are shown as a percentage of the total liabilities and stockholders’ equity. To conduct a vertical analysis of income statement, sales figure is generally used as the base and all other components of income statement like cost of sales, gross profit, operating expenses, income tax, and net income etc. are shown as a percentage of
sales. In a vertical analysis, the percentage is computed by using the following formula: Percentage of base = (Amount of individual item/Amount of base item) × 100 A basic vertical analysis needs an individual statement for a reporting period but comparative statements may be prepared to enhance the usefulness of analysis. An example of the vertical analysis of balance sheet and income statement is given below: *Current assets: 2018: (550,000/1,139,500) × 100 = 48.3% *Cost of goods sold: 2018: (1,043,000/1,498,000) × 100 = 69.6% Vertical analysis states financial statements in a comparable common-size format (i.e., percentage form). One of the advantages of common-size analysis is that it can be used for inter-company comparison of enterprises with different sizes because all items are expressed as a percentage of some common number. For example, suppose company A and
company B belong to same industry. A is a small company and B is a large company. Company A’s sales and gross profit are $100,000 and $30,000 respectively whereas company B’s sales and gross profit are $1,000,000 and $300,000 respectively. If vertical analysis is conducted and sales figure is used as base, it would show a gross profit percentage of 30% for both the companies as shown below: More from Financial statement analysis (explanations): 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. Table of Contents
How to Perform Vertical Analysis (Step-by-Step)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. The standard base figures for the income statement and balance sheet are as follows.
Common Size Analysis of Financial StatementsPerforming vertical analysis creates the so-called “common size” income statement and the “common size” balance sheet. The common size financials are denoted in percentage terms, which facilitates direct comparisons between the target company and its peer group of comparable companies, such as competitors operating in the same or an adjacent industry (i.e. an “apples-to-apples” comparison). 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 FormulaStarting from the revenue line item, each line item on the income statement – if deemed appropriate – is divided by revenue (or the applicable core metric). The formula to perform vertical analysis on the income statement, assuming the base figure is revenue, is as follows. Vertical Analysis, Income Statement = Income Statement Line Item ÷ Revenue 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”. But we’ll utilize the latter here, as that tends to be the more prevalent approach taken. Vertical Analysis, Balance Sheet = Balance Sheet Line Item ÷ Total Assets Vertical Analysis Calculator – Excel Model TemplateWe’ll now move to a modeling exercise, which you can access by filling out the form below. Step 1. Historical Income Statement and Balance Sheet DataSuppose we’ve been tasked with performing vertical analysis on a company’s financial performance in its latest fiscal year, 2021. To start, the table below shows the company’s historical financial statements – the income statement and balance sheet – of our hypothetical company, which we’ll be using throughout our two-part exercise.
Once the historical data from 2021 has been inputted into Excel, we must determine the base figure to use. Here, we’ve chosen “Revenue” as the base figure for the common size income statement, followed by “Total Assets” for the common size balance sheet. Step 2. Vertical Analysis of Income StatementPercentage of Revenue CalculationWith our financial data presented in Excel, we can start to calculate the contribution percentages on either the side or below the income statement. Regardless of the placement, the more important factor is to ensure the analysis clearly shows which period it is reflecting. The placement is not much of a concern in our simple exercise, however, the analysis can become rather “crowded” given numerous periods. 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. In order to keep a complex model more dynamic and intuitive to the reader(s), it is generally a “best practice” to avoid creating separate columns in between each period. Further, when working with large data sets, we recommend cleaning up the data to improve the overall visual representation of the analysis. For example, some minor adjustments could be to remove the “Revenue (% Revenue)” line item since it is not necessary and offers no practical insights. For each line item, we’ll divide the amount by the corresponding period’s revenue to arrive at our contribution percentages. Because we entered our costs and expenses as negatives, i.e. to reflect that those items are cash outflows, we must place a negative sign in front when applicable, so that the percentage shown is a positive figure. Of the takeaways from our common size income statement, the most important metrics are the following:
Step 3. Vertical Analysis of Balance SheetPercentage of Total Assets CalculationWe’ve now completed our vertical analysis for our company’s income statement and will move on to the balance sheet. The process is virtually identical to our common size income statement, however, the base figure is “Total Assets” as opposed to “Revenue”. Once we divide each balance sheet item by the “Total Assets” of $500 million, we are left with the following table. The assets section is informative with regard to understanding which assets belonging to the company constitute the greatest percentage. In our case, half of the company’s asset base is comprised of PP&E, with the rest coming from its current assets.
The sum of the current assets equals 50%, confirming our calculations thus far are correct. On the liabilities and shareholders equity side, we’ve chosen the base figure to be total assets. To reiterate from earlier, dividing by total assets is akin to dividing by the sum of liabilities and equity. Since liabilities and equity represent a company’s funding sources – i.e. how the company obtained the funds to purchase its assets – this part of the analysis can be insightful for understanding where the company’s financing stems from. For instance, we can see that our company’s long-term debt as a percentage of total assets is 17.0%. The metric we calculated is formally known as the “debt to asset ratio”, which is a ratio used to gauge a company’s solvency risk and the proportion of its resources (i.e. assets) funded by debt rather than equity.
Step-by-Step Online Course Everything You Need To Master Financial ModelingEnroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. The same training program used at top investment banks. Enroll Today What is the base for vertical analysis?Balance sheet vertical analysis uses total assets as a base and assigns a percentage to all line items. In this example of vertical analysis, you can see that you only need to use balance sheet items from a single accounting period.
Which of the following item is used as a base on performing a vertical analysis statement of financial performance?Answer and Explanation: When performing a vertical analysis, total liabilities is usually the base amount for accounts payable. Under vertical analysis of financial statements, a base amount is used to determine the percentages of the component accounts in relation to the base.
What is the base amount when performing vertical analysis of an income statement?The base account for a vertical analysis of a balance sheet is the total assets which in the income statement is the net sales. This base account is the account title which is assumed to be 100% and is used as a dividend in obtaining the percentage of the other accounts.
What is the vertical analysis?Vertical analysis is the comparison of financial statements by representing each line item on the statement as a percentage of another line item. This type of analysis is often combined with “horizontal analysis”.
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