5/29/24, 12:09 PM Vertical Analysis: Definition, How It Works, and Example

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CORPORATE FINANCE FINANCIAL STATEMENTS: BALANCE, INCOME, CASH FLOW,

AND EQUITY

Vertical Analysis: Definition, How It

Works, and Example
By MITCHELL GRANT Updated May 22, 2024
Reviewed by MARGARET JAMES
Fact checked by SUZANNE KVILHAUG

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 gross sales,
while line items on a balance sheet can be stated as a percentage of total assets
or total liabilities, and vertical analysis of a cash flow statement shows each
cash inflow or outflow as a percentage of the total cash inflows.

KEY TAKEAWAYS
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In financial statement analysis, vertical analysis looks at the
contributing percentage of each line item to the base figure.

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5/29/24, 12:09 PM Vertical Analysis: Definition, How It Works, and Example

Vertical analysis makes it easier to understand the correlation between

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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.

Vertical Analysis

Investopedia / Michela Buttignol

How Vertical Analysis Works

Vertical analysis makes it much easier to compare the financial statements of
one company with 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 performance metrics are improving or
deteriorating.

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For example, by showing the various expense line items in the income
statement as a percentage of sales, one can see how these are contributing to

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5/29/24, 12:09 PM Vertical Analysis: Definition, How It Works, and Example

profit margins and whether profitability is improving over time. It thus becomes
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easier to compare the profitability 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 common-size financial
statements and are used by many companies to provide greater detail on a
company’s financial position.

Common-size financial statements often incorporate comparative financial

statements that include columns comparing each line item to a previously
reported period.

Important: Vertical analysis is used in order 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 trend analysis. This is where ratios or line items in a company's
financial statements are compared over a certain 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 balance

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sheet on Dec. 31 of
2024, 2023, 2022, 2021, and 2020 will be expressed as a percentage of the Dec.

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5/29/24, 12:09 PM Vertical Analysis: Definition, How It Works, and Example

31, 2020, amount. Instead of dollar amounts, you might see 141, 135, 126, 118,
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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
relationship to the other items.

Example of Vertical Analysis

For example, suppose XYZ Corporation has gross sales of $5 million, cost of
goods sold of $1 million, general and administrative expenses of $2 million, and
a 25% tax rate. Its income statement will look like this if vertical analysis is used:

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?
Horizontal 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 analysis indicates long-term trends and highlights areas of strength

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and those that need improvement. Vertical analysis indicates the relative
importance of each line item in a certain period.

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5/29/24, 12:09 PM Vertical Analysis: Definition, How It Works, and Example

What Is an Example of Vertical Analysis? TRADE

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
(26,000 / 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 what metrics 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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Related Terms
Horizontal Analysis: What It Is vs. Vertical Analysis
Horizontal analysis is used in financial statement analysis to compare historical data,
such as ratios or line items, over a number of accounting periods. more

Account Analysis Definition: What it Means, Examples

Account analysis is a process in which detailed line items in a financial transaction or
statement are carefully examined for a given account. An account analysis can help
identify trends or give an indication of how an account is performing. more
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Common Size Income Statement Definition and Example

A common size income statement is an income statement in which each line item is
expressed as a percentage of the value of sales, to make analysis easier. more
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5/29/24, 12:09 PM Vertical Analysis: Definition, How It Works, and Example

Financial Statement Analysis: How It’s Done, by Statement

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Type
Financial statement analysis is the process of analyzing a company’s financial statements
for decision-making purposes. more

Common Size Financial Statement: Definition and Example

A common size financial statement allows for easy analysis between companies or
between periods for a company. It displays all items as percentages of a common base
figure rather than as absolute numerical figures. more

Common Size Balance Sheet: Definition, Formula, Example

A common size balance sheet displays the numeric value of all entries and the percentage
that each entry is relative to the total value of related entries. more

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