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 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 profit margins and whether profitability is improving over time it thus becomes 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 vertical analysis is used in order to gain a picture of whether performance metrics are improving or deteriorating vertical vs horizontal analysisanother 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 sheet on dec 31 of 2024 2023 2022 2021 and 2020 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 relationship to the other items example of vertical analysisfor 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 