Vertical Analysis
Vertical analysis is a technique used in financial statement analysis to show the relative size of each account compared to the total amount. Vertical analysis expresses each item on a financial statement as a percentage of the total. Vertical analysis makes it easier to compare companies with different levels of sales or assets by expressing them as percentages rather than absolute amounts. This method can be used for balance sheets, income statements and cash flow statements.
To perform vertical analysis, all items are expressed as a percentage of one base figure from the same year-end financial statement. For example, vertical analysis might express an asset, liability or equity account as a percentage of total assets, liabilities or equity respectively.
Definition: Vertical analysis is a technique used in financial statement analysis to show the relative size of each account compared to the total amount. Vertical analysis expresses each item on the financial statement as a percentage of the total amount. By expressing items as percentages rather than absolute amounts, vertical analysis makes it easier to compare companies with different sales or asset levels. This method can be used for balance sheets, income statements, and cash flow statements.
When performing vertical analysis, all items are expressed as a percentage of a base figure in the same year's financial statement. For example, vertical analysis might express asset, liability, or equity accounts as a percentage of total assets, total liabilities, or total equity.
Origin: The concept of vertical analysis originated in the early 20th century, evolving as financial statement analysis techniques developed. Its earliest applications can be traced back to a time when corporate managers and investors needed a more intuitive understanding of a company's financial condition. Over time, vertical analysis has become a standard tool in financial analysis.
Categories and Characteristics: Vertical analysis is mainly divided into three categories: balance sheet vertical analysis, income statement vertical analysis, and cash flow statement vertical analysis.
- Balance Sheet Vertical Analysis: Expresses each asset, liability, and equity item as a percentage of total assets, helping to analyze the company's asset structure and financial stability.
- Income Statement Vertical Analysis: Expresses each revenue and expense item as a percentage of total revenue, helping to analyze the company's profitability and cost structure.
- Cash Flow Statement Vertical Analysis: Expresses each cash flow item as a percentage of total cash flow, helping to analyze the company's cash liquidity and fund usage efficiency.
Specific Cases:
- Case One: A company performing vertical analysis on its balance sheet finds that current assets account for 60% of total assets, while fixed assets account for 40%. This analysis helps the management better understand the liquidity of assets and the proportion of long-term investments.
- Case Two: In performing vertical analysis on its income statement, a company finds that the cost of goods sold accounts for 70% of total revenue, while administrative expenses account for 10%. This analysis helps the company identify major cost sources and develop corresponding cost control strategies.
Common Questions:
- Question One: Is vertical analysis applicable to all companies?
Answer: Vertical analysis is applicable to most companies, but for companies with very unique financial structures, it may need to be combined with other analysis methods for a comprehensive evaluation. - Question Two: Are the results of vertical analysis absolutely accurate?
Answer: Vertical analysis provides relative proportions, and the accuracy of the results depends on the accuracy of the financial statement data. Therefore, the analysis results should be interpreted in conjunction with other financial indicators and background information.
