Table of Contents

Vertical Analysis: Definition, How It Works, and Example

By

澳洲幸运5官方开奖结果体彩网:Mitchell Grant

Updated April 02, 2025

Reviewed by Margaret James

Fact checked by

Suzanne Kvilhaug

Definition

Vertical analysis is a method of financial statement analysis that examines line items converted to percentages of a base figure in the statement.

What Is Vertical Analysis?

Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. Thus, line items on an income statement can be stated as a percentage of 澳洲幸运5官方开奖结果体彩网:gross sales, while line items on a balance sheet can be stated as a percentage of totaꦑl assets or total liabilities, and vertical analysis of a cash flow statement shows each cash inflow or out💙flow as a percentage of the total cash inflows.

Key Takeaways

In financial statement analysis, vertical analysis looks at the contributing percentage of each line item to the base figure.
Vertical analysis makes it easier to understand the correlation between single items on a balance sheet and the bottom line, expressed in a percentage.
Vertical analysis can become a more potent tool when used in conjunction with horizontal analysis, which considers the finances of a certain period of time.

How Vertical Analysis Works

Vertical analysis makes it much easier to compare the 澳洲幸运5官方开奖结果体彩网:financial statements of one company wඣith another and across industries. This is because one can see the relative proportions of account balances.

It also makes it easier to compare previous periods for time series analysis, in which quarterly and annual figures are compared over a number of years, in order to gain a picture of whether per🔴formance metrics are improving or deteriorating.

For example, by showing the various expense line items in the 澳洲幸运5官方开奖结果体彩网:income statement as a percentage of sales, one can see how these are contributing to 澳洲幸运5官方开奖结果体彩网:profit margins and whether profitability is i🐓mproving over time. It thus becomes easier to compare the profitabilit🀅y of a company with its peers.

Financial statements that include vertical analysis clearly show line item percentages in a separate column. These types of financial statements, including detailed vertical analysis, are also known as 澳洲幸运5官方开奖结果体彩网:common-size financial statements and are used by many companies to pr🗹ovide greater detail on a company’s financial position.

Common-sizeꦓ financial statements often incorporate comparative financial statements that include columns comparing each line item to a previously reported period.

Important

Vertical ana൲lysis is used to gain a picture of whether performance metrics are improving or deteriorating.

Vertical vs. Horizontal Analysis

Another form of financial statement analysis used in ratio analysis is horizontal analysis or 澳洲幸运5官方开奖结果体彩网:trend analysis. This is where ratios or line items i𒀰n a company’s financial statements are compared over a cerꦡtain period of time by choosing one year’s worth of entries as a baseline, while every other year represents percentage differences in terms of changes to that baseline.

For example, the amount of cash reported on the 澳洲幸运5官方开奖结果体彩网:balance sheet on Dec. 31 💧of 2024, 2023, 2022, 2021, and 202🌱0 will be expressed as a percentage of the Dec. 31, 2020, amount. Instead of dollar amounts, you might see 141, 135, 126, 118, and 100.

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 relation to the other items.

Example of Vertical Analysis

For example, suppose XYZ Corporation has gross sales of $5 million, 澳洲幸运5官方开奖结果体彩网:cost of goods sold of $1 million, 澳洲幸运5官方开奖结果体彩网:general and administrative ಌexpenses of $2 million, and a 25% tax rate. Its income statement will look like this if 🅘vertical analysis is u🔯sed:

Sales	$5,000,000	100%
Cost of goods sold	$1,000,000	20%
Gross profit	$4,000,000	80%
General and administrative expenses	$2,000,000	40%
Operating income	$2,000,000	40%
Taxes (%25)	$500,000	10%
Net income	$1,500,000	30%

What Is the Difference Between Horizontal Analysis and Vertical Analysis?

Horizont🅠al 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.

Horizontal analysဣis indicates long-term trends and highlights areas of strength and those that need improvement. Vertical analysis indicates the relative importance of each line item i♕n a certain period.

What Is an Example of Vertical Analysis?

A company sold 40,000 units of products, 14,000 of which were sneakers and 26,000 of which were boxing gloves. Vertical analysis would show that sneakers made up 35% of sales (14,000 / 40,000) and boxing gloves made up 65% of sales (26,ౠ000 / 40,000).

What Are the Pros and Cons of Vertical Analysis?

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.

The Bottom Line

Vertical analysis looks at the contributing percentage of each line item to the total base figure. It can provide information on which metr�𝓀�ics are improving and which are worsening. It can be used to compare different components of companies and the same company in different time periods.

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