After accounting for interest and taxes, the net income is 21% of the total revenue, providing a clear picture of the company’s profitability. 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. However, investors should combine horizontal analysis with vertical analysis and other techniques to get a true picture of a company’s financial health and trajectory. Numerous websites offer financial data, analysis tools, and educational materials to enhance your understanding of vertical analysis. Similarly, the interest coverage ratio, derived from the income statement, measures a company’s ability to cover its interest expenses with its operating income.

Understanding the Basics of Balance Sheets

Repeat this process for all the line items on your income statement, such as gross profit, operating expenses, operating income, interest expense, income tax expense, and net income. This allows you to compare your financial performance with industry benchmarks and standards, as well as with your own historical data. You can also use vertical analysis to evaluate the impact of external factors, such as economic conditions, regulatory changes, or technological innovations, on your financial performance. Vertical analysis helps you to compare your financial performance with industry benchmarks and standards.

Assume sales or total assets as 100%. As a financial statement, balance sheet is concerned with summarizing assert owned by the firm and sources of borrowing and owned funds in acquiring these assets. This simplifies the process of comparing the financial statement of the company against another or to even do it across the industry.

This allows for comparison of profitability and cost structure across different periods or against competitors. An improper base figure can lead to distorted results and inaccurate conclusions. It provides the context for understanding the relative size and importance of each line item.

Vertical analysis is most commonly used within a financial statement for a single reporting period, e.g., quarterly. The proportional analysis of financial data You may learn more about financial statement analysis from the following articles –

This type of analysis allows you to compare specific items on a statement over a period of time. When it comes to financial statement analysis, vertical analysis is one of the most important techniques that you can use. For example, if you find that your cost of goods sold is higher than the industry average using vertical analysis, you might not know the reasons behind it. To address this issue, you should adjust your financial statements for inflation using a suitable price index or use constant dollars instead of nominal dollars. Vertical analysis is a useful technique to compare your financial performance with industry benchmarks and standards.

• Provide context and analysis.
• Trend analysis allows you to extrapolate past patterns into the future.
• For example, if cost of goods sold is 83.9% of net sales, it indicates that a significant portion of revenue is allocated to production costs.
• When conducting vertical analysis, individuals often rely on specific financial statements such as balance sheets, income statements, and cash flow statements.
• Financial statements that include vertical analysis clearly show line item percentages in a separate column.
• Here, analysts and FP&A teams can get a clear view of the company asset allocation, look at how liabilities compare to company assets, and review the equity structure of the business.
• You should also make sure that the benchmarks and standards are based on the same accounting methods and reporting periods as your financial statements.

Strategic Communication Tool

The formula to perform vertical analysis on the income statement, assuming the base figure is revenue, is as follows. In practice, vertical analysis is commonly used by accountants, financial analysts, and business managers to evaluate financial statements. While vertical analysis focuses on the relationship of each line item to a base figure within a single period, horizontal analysis examines the changes in financial data over multiple periods.

How ChatGPT is Transforming Accounting: 8 Ways to Benefit in 2026

Your debt-to-equity mix reveals financial risk. Low Current Assets (20-30% of total) suggest capital-intensive operations typical in manufacturing or real estate. High Current Assets (50-70% of total) indicate a liquid, flexible position common in service businesses. Divide each asset line item by Total Assets and multiply by 100. Verify your balance sheet balances before starting. Start with a complete, accurate balance sheet.

You’ll expand your understanding of vertical analysis and equip yourself for more informed and strategic financial decision-making. This section provides a curated list of software, databases, and educational materials that will equip you to perform in-depth vertical analyses, improving your financial insights. Management can use vertical analysis to gain valuable insights into internal performance and identify areas for improvement.

Step 1: Choose the Appropriate Financial Statement

By seamlessly integrating data from multiple sources, converting it into a suitable format, and offering dynamic reporting and visualization options, Acterys streamlines the vertical analysis process. 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. Through accounting ratios, you can compare two-line items in your financial statement and point which items are bringing in more profit. Finally, the net income margin is 40%, indicating that 40% of the company’s net sales translates into net income.

• 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.
• Vertical financial analysis goes hand in hand with horizontal financial analysis, and they have to be used together, but they serve different purposes.
• This method involves calculating ratios that allow you to evaluate the financial health of a company by comparing different items on the balance sheet.
• It’s also great for comparing different periods, making it easier to see if performance is getting better or worse over time.
• By expressing each line item as a percentage of a base amount, it allows for easy comparison and interpretation of financial data.
• In vertical analysis, each line item on a financial statement is expressed as a percentage of a chosen base figure from that statement.

If a company’s net sales were $2 million, they will be presented as 100% ($2 million divided by $2 million). Give it a try on your company’s financials – or even a public company you admire. For instance, a sudden rise in the percentage of cost of goods sold could indicate efficiency problems or increased input costs. It helps you understand the relative importance of different expenses or assets, and how the company allocates its resources. Platforms like Investopedia, Corporate Finance Institute (CFI), and university websites offer courses, articles, and tutorials on financial analysis techniques.

CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. A well rounded financial analyst possesses all of the above skills! As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. Below is a break down of subject weightings in the FMVA® financial analyst program. The analysis is especially convenient to do so on a comparative basis. Vertical analysis is exceptionally useful while charting a regression analysis or a ratio trend analysis.

By using vertical analysis, you can present your royalty disbursement or suspense account definition financial information in a clear, concise, and consistent manner. Vertical analysis helps you to communicate your financial performance to various stakeholders, such as investors, creditors, customers, suppliers, employees, and regulators. This way, vertical analysis allows you to compare the relative proportions of different financial elements within a single period or across multiple periods.

The main objectives of financial analysis are to gain an insight into the profitability of business operations and financial positions so as to judge whether progress is adequate or the position has improved. Based on the above analysis we see that the sales has increased resulting in increase in retained earning and dividend payout. Let us take an example for vertical analysis.