The placement is not much of a concern in our simple exercise, however, the analysis can become rather “crowded” given numerous periods. 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. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Non-current liabilities, X Ltd. and Y Ltd (33.33% and 40%, respectively), are less than the shareholder’s funds (50% and 53.33%, respectively). Comparing the exact numbers of organizations of various sizes does not yield helpful information about their financial position.

When comparing any two common size ratios, it is important to make sure that they are computed by using the same base figure. The ratios tell investors and finance managers how the company is doing in terms of revenues, and can be used to make predictions of future revenues and expenses. Companies can also use this vertical analysis formula tool to analyze competitors to know the proportion of revenues that goes to advertising, research and development, and other essential expenses. When completing a vertical analysis, you will use revenue or assets as a base. Remember, interpreting the results are just as important as calculating the numbers.

Applying vertical analysis to the balance sheet

It does this by using one line item on the statement as a base against which to evaluate all other items in the same statement. In this example, we have expressed each line item as a percentage of the total assets, which serves as the base figure. This allows us to assess the proportions and relationships between different components of the balance sheet.

This approach uses one line item on the statement as a base against which to evaluate all other items in the same statement. Armed with the knowledge and understanding gained from this guide, you can confidently apply vertical analysis in your financial analysis endeavors. Remember to choose appropriate base figures, maintain consistency, and consider industry-specific factors to enhance the accuracy and relevance of your analysis. In this guide, we explored the methodology of vertical analysis, walked through the steps to perform vertical analysis on income statements, balance sheets, and cash flow statements. We discussed how to interpret the results, considered limitations, and highlighted practical applications.

Balance Sheet Common Size Analysis

So, in a vertical analysis of a balance sheet, every line item — cash, accounts receivable, fixed assets, accounts payable, stockholders equity, etc. — is shown as a percentage of total assets. In a vertical analysis of an income statement, every line item is shown as a percentage of gross sales. Vertical analysis, also known as common-size analysis, is used to evaluate a firm’s financial statement data within an accounting period. This tool uses one line item on the statement as a base against which to evaluate all other items in the same statement. This kind of analysis can be performed on many types of financial statements including the balance sheet and the income statement. Vertical analysis is an invaluable tool for simplifying financial statements and gaining valuable insights into a company’s financial performance.

The sum of the current assets equals 50%, confirming our calculations thus far are correct. The assets section is informative with regard to understanding which assets belonging to the company constitute the greatest percentage. For each line item, we’ll divide the amount by the corresponding period’s revenue to arrive at our contribution percentages. Starting from the revenue line item, each line item on the income statement – if deemed appropriate – is divided by revenue (or the applicable core metric). We must also consider that there may be another factor responsible for the significant rise in total sales in year 3 – such as a robust economy driving significantly higher sales in this year.

Financial Accounting

You can calculate the proportion of each line item from the total based on publicly available financial data. Vertical analysis is most commonly used within a financial statement for a single reporting period, e.g., quarterly. It is done so that accountants can ascertain the relative proportions of the balances of each account. This shows that the amount of cash at the end of 2018 is 141% of the amount it was at the end of 2014.

• By comparing other companies’ percentages against your own, you can understand the strengths, weaknesses, and changes you will need to make.
• On the liabilities and shareholders equity side, we’ve chosen the base figure to be total assets.
• Creating visually appealing charts such as bar graphs or data tables will make it easier to understand.
• 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.
• Vertical analysis is exceptionally useful while charting a regression analysis or a ratio trend analysis.
• By analyzing these ratios using vertical analysis, you can evaluate a company’s financial position, leverage, and liquidity.

In order to use the vertical analysis equation, you need to figure out your base figure. On a business’s balance sheet, you can find the relevant base figure as the company’s total assets or liabilities. Though this is dependent on what you are attempting to measure as different financial documents will have different base figures. When we carry out vertical analysis on the income statement, it shows the top-line sales figure as 100%, and every other item is shown as a percentage of the total sales for that year. Each item in the income statement is divided by the company’s total sales for that year (which gives us a common size income statement). Vertical analysis makes it much easier to compare the financial statements of one company with another, and across industries.