Balance Sheet Vertical Analysis: What It Is and How It Works

In this FAQ we will discuss what vertical analysis is, how it relates to horizontal analysis, and provide a simple example of how to apply it. 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. 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.

This allows users to work vertical analysis is also known as in the comfort of Microsoft Excel with the support of a much more sophisticated data management system at their disposal. The sum of the current assets equals 50%, confirming our calculations thus far are correct. For example, some minor adjustments could be to remove the “Revenue (% Revenue)” line item since it is not necessary and offers no practical insights.

Vertical common size analysis provides a valuable tool for FP&A professionals to gain insights into the composition, trends, and relationships within a company’s financial statements. Through FP&A tools, you can simplify vertical analysis by conducting faster calculations, incorporating the values into visually appealing charts, forecasting your company’s future through analysing historical data. Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis. The technique can be used to analyze the three primary financial statements, i.e., balance sheet, income statement, and cash flow statement. In the balance sheet, the common base item to which other line items are expressed is total assets, while in the income statement, it is total revenues.

1. Vertical analysis offers a unique lens to view and interpret financial statements, focusing on relative proportions rather than absolute numbers.
2. Datarails is an enhanced data management tool that can help your team create and monitor cash flow against budgets faster and more accurately than ever before.
3. In the balance sheet, the common base item to which other line items are expressed is total assets, while in the income statement, it is total revenues.
4. Through vertical percentage analysis, you can also forecast future financial performance.
5. By converting financial statement entries into percentages of a base figure, it allows for a more standardized form of comparison.

Resources

Indeed, sometimes companies change the way they break down their business segments to make the horizontal analysis of growth and profitability trends more difficult to detect. Horizontal analysis allows investors and analysts to see what has been driving a company’s financial performance over several years and to spot trends and growth patterns. This type of analysis enables analysts to assess relative changes in different line items over time and project them into the future. Brixx can facilitate both horizontal and vertical analyses, empowering users to gain a comprehensive understanding of their financial statements. With Brixx, businesses have access to powerful tools to help them in analyzing trends, setting benchmarks, and understanding their financial position in the context of their industry standards. In this example, total assets are taken as the base figure (100%), and each asset is then calculated as a percentage of total assets.

Also known as the vertical percentage analysis, you can then use this to evaluate company performance and compare it with previous results to understand the direction of your company. A) When all the figures in a balance sheet are stated as percentage of the total, it is termed as horizontal analysis. B) When financial statements of several years are analyzed, it is termed as vertical analysis. To perform a horizontal analysis, you must first gather financial information of a single entity across periods of time.

AI in FP&A: The Future of Financial Decision-Making

Further, when working with large data sets, we recommend cleaning up the data to improve the overall visual representation of the analysis. Regardless of the placement, the more important factor is to ensure the analysis clearly shows which period it is reflecting. We’ll now move to a modeling exercise, which you can access by filling out the form below. 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. Thousands of people have transformed the way they plan their business through our ground-breaking financial forecasting software.

For example, it can help identify if a company’s accounts receivable has steadily increased over the past three years, which could indicate a problem with credit and collection policies. The primary purpose of vertical analysis is to provide a proportional representation of each line item, allowing for easier comparisons across periods and against industry benchmarks. Income statement analysis can help you analyze the distribution of costs and expenses relative to revenue. This helps in evaluating the efficiency of cost management which thus identifies areas of improvement. For example, if a specific expense item is consistently increasing as a percentage of revenue, it may indicate a need to optimize costs or explore opportunities for expense reduction. Instead of determining the percentage of each line number against the base figure over a particular year, you can establish the change of each line number over a period of years.

Drive Business Performance With Datarails

Try it with your next financial analysis and see if it provides useful insights or helps you track progress toward goals. Do you want to take your financial analysis skills to the next level and get more detailed insight into your financial statements? Learning how to perform a vertical balance sheet analysis can equip you with the skills to extract actionable insights into your company’s current financial health. By converting financial statement numbers into percentages, vertical analysis offers a consistent basis for comparison.

What is Common Size Analysis?

This analysis can be particularly useful when performing scenario analysis to assess the potential impact of different strategies or market conditions on the company’s financials. Vertical analysis is the critical tool in FP&A that provides valuable insights into the relative importance of different items within the financial statements and their impact on overall performance. You can use vertical page analysis on income statement (income statement analysis) or balance sheet (balance sheet analysis). In this vertical analysis, we express each item on the balance sheet as a percentage of the total assets (for assets) or total liabilities and equity (for liabilities and equity).

This consistency is beneficial when comparing a company’s financials over multiple periods or against other companies, irrespective of their size. Horizontal analysis looks at certain line items, ratios, or factors over several periods to determine the extent of changes and their trends. Therefore, horizontal analysis looks at changes over time based on different data from the financial statements. So if a company’s balance sheet had a total of $400,000, and $100,000 of it was accounts receivable, then by using vertical analysis, AR would be 25% of the total assets on the balance sheet.

1. The balance sheet common size analysis mostly uses the total assets value as the base value.
2. By converting financial statement numbers into percentages, vertical analysis offers a consistent basis for comparison.
3. While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item.
4. This financial analysis can help you build a solid financial report by comparing the percentages to the budgeted expectations.
5. This type of analysis enables businesses to view the relative proportions of account balances, compare internal changes over time, and identify trends.

Step 1. Historical Income Statement and Balance Sheet Data

For example, some companies may sacrifice margins to gain a large market share, which increases revenues at the expense of profit margin. Datarails is an enhanced data management tool that can help your team create and monitor cash flow against budgets faster and more accurately than ever before. This would mean that the ratio of years 1, 2, and 3 to year one would be 100%, 97%, and 94%. In this example, the business’s variable expenses have trended downward over the three-year period. It is used to assess a business’s ability to grow its revenue while managing its expenses and to get an idea of how efficient the business is at using its assets, liabilities, and various sources of cash.

The balance sheet common size analysis mostly uses the total assets value as the base value. A financial manager or investor can use the common size analysis to see how a firm’s capital structure compares to rivals. They can make important observations by analyzing specific line items in relation to the total assets. The primary difference between vertical analysis and horizontal analysis is that vertical analysis is focused on the relationships between the numbers in a single reporting period, or one moment in time. Common size analysis is used to calculate net profit margin, as well as gross and operating margins. Common size analysis, also referred to as vertical analysis, is a tool that financial managers use to analyze financial statements.