Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula
What is Vertical Analysis Formula?
Vertical analysis is a kind of financial statement analysis wherein each item in the financial statement is shown in percentage of the base figure. This is one of the popular methods of financial statements used as it is simple and also called a common size analysis. Here all the items in the income statement are stated as a percentage of gross sales. All the items in the balance sheet are stated as a percentage of the total assets. Whereas the opposite of the vertical analysis of financial statement is the Horizontal analysis always looks at the amount from the financial statement over the horizon of many years.
Vertical Analysis formula
In the vertical analysis of financial statements, the percentage is calculated by using the below formula:
Vertical Analysis formula = Individual Item / Base Amount *100
Vertical analysis formula for the Income Statement and Balance Sheet are given below –
- Vertical Analysis Formula (Income Statement) = Income Statement Item / Total Sales * 100
- Vertical Analysis Formula (Balance Sheet) = Balance Sheet Item / Total Assets (Liabilities) * 100
To increase the effectiveness of vertical analysis multiple year’s statement or reports can be compared and comparative analysis of statements can be done. This analysis makes easier to compare the financial statements of one company with another and across the companies as one can see the relative proportion of accounts.
Example of Vertical Analysis Formula
Example of the vertical analysis of financial statement which shows the total in amount and in percentage.
Where the total sales of company A are $1000000 and the cost of goods sold is $400000. Salary paid to the workers of the company is $300000 office rent paid is $30000 utilities worth $40000 and other expenses are $60000.
Vertical Analysis Formula = Individual Item / Total Sales * 100
The above vertical analysis example shows the net profit of the company where we can see the net profit in both amount and percentage. Where the same report can be used to compare with other industry. Where the income statement can be compared with previous years and the net income can be compared where it helps to compare and understand the percentage of rising or loss of income percentage.
The below vertical analysis example helps to understand the comparison.
In the above vertical analysis example, we can see that the income decreases from 1st year to 2nd year and the income increases to 18% in the 3rd year. So by using this method, it is easy to understand the net profit as it is easy to compare between the years. In that, we can easily understand that the total expenses gradually increased from 43% to 52% and the net income got reduced from 1st year to 2nd year. In the 3rd year, the COGS got decreased when compared to the previous years and the income got increased.
Let us now calculate the Vertical Analysis of the Balance Sheet with the help of another example.
Vertical Analysis Formula = Individual Item / Total Assets (Liabilities) * 100
The information provided in the balance sheet provides the change in working capital, fixed income over a period of time. where the altered business that requires a different amount on the ongoing fund. The same can be done like the income statement where the previous years can be compared and find out the change in the working capital and fixed assets over time.
Advantages of the Vertical Analysis Formula
- It is one of the easiest methods of financial analysis.
- Vertical analysis of financial statement provides a comparable percentage which can be used to compare with the previous years.
- Different organization statements can be compared as the comparison is made in percentage.
- Vertical analysis is also very useful to compare the financial statements with the previous year’s statement and analyze the profit or loss of the period.
- Where it helps to understand the percentage/share of the individual items.
- Where it helps to understand the structural composition of the various components like cost, expenses, assets, and liabilities
Disadvantages of the Vertical Analysis Formula
- The vertical analysis of financial statement does not help to take a firm decision as there is no standard percentage or ratio regarding the change in the components of the income statement or the balance sheet.
- The accounting concepts and conventions are not followed vigilantly in the vertical analysis.
- Liquidity of the organization cannot be measured exactly by using the analysis.
- Quality analysis is not done by using vertical analysis of financial statements. As there is no consistency in the ratio of the elements.
This method is one of the easiest methods of analyzing the financial statement. This method is easy to compare with the previous reports and easy to prepare. But this method is not useful to make firm decision and measurement of the company value cannot be defined.
Guide to Vertical Analysis Formula. Here we discuss how to do Vertical analysis of Financial Statements (Balance Sheet, Income Statement) using its formula along with practical examples and applications. You may learn more about financial statement analysis from the following articles –
- Definition of Structural Unemployment
- List of Other Expenses
- What is the Cost of Goods Manufactured (COGM)?
- Vertical Analysis of Income Statement
- What is Common Size Income Statement Analysis?
- What is Common Size Balance Sheet?
- How to do Trend Analysis?
- Statement of Financial Position Meaning
- Quality of Earnings Meaning
- Interim Reporting Meaning