Net sales typically serve as the base amount when conducting vertical analysis on an income statement. Let’s see some examples of vertical analysis of an income statement to understand it better. Input the percentage against the line items calculated to see a concise view of each item’s contribution to the gross amount.

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When performing vertical analysis each of the primary statements that make up the financial statements is typically viewed exclusive of the other. This means it is atypical to compare line items on the income statement as a percentage of gross income. Vertical analysis is the critical tool in FP&A that provides valuable insights into the relative importance of different items within the financial statements and their impact on overall performance. You can use vertical page analysis on income statement (income statement analysis) or balance sheet (balance sheet analysis). It is also beneficial to prepare a vertical analysis of the income statement for investors or any other stakeholders who are interested in the company’s performance. It is also essential for the management from the point of view of growth and performance analysis.

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For example, on the income statement if the base chosen is revenue, then each line item would be shown as a percentage of revenue. The base may also be net income, total gross income, or any other detail of income that you would want to compare. Vertical analysis is a type of ratio analysis that presents each line on the financial statements as a percentage of another item.

You know how to do a vertical analysis with Excel and Google Sheets, using both an income statement and a balance sheet. You can analyze multiple periods separately, then do a horizontal analysis to look for trends. If you already use templates for your financial statements, it’s easy to include the formulas for vertical analysis by adding columns or a new section. To increase the effectiveness of vertical analysis, multiple year’s statements or reports can be compared, and comparative analysis of statements can be done. This analysis makes it easier to compare the financial statements of one company with another and across the companies as one can see the relative proportion of accounts.

Balance Sheet Vertical Analysis: What It Is and How It Works

This is calculated by dividing the value for each line item by the total and multiplying by 100. The company’s sales have grown over this time period, but net income is down sharply in year three. Salaries and marketing expenses have risen, which is logical, given the increased sales. However, these expenses don’t, at first glance, appear large enough to account for the decline in net income. The above vertical analysis example shows the company’s net profit where we can see the net profit in both amount and percentage. The income statement can be compared with previous years, and the net income can be compared where it helps to vertical analysis formula compare and understand the percentage of rising or loss of income.

Hence, it determines the relative importance of various elements in financial statements and to find trends and patterns (further use to make financial decisions). When you apply vertical analysis to the balance sheet, you can understand the relative composition of assets, liabilities, and equity. Through accounting ratios, you can compare two-line items in your financial statement and point which items are bringing in more profit. By examining the proportional changes in these components, you can evaluate the company’s financial structure, liquidity, and leverage. It helps identify the impact of changes in asset or liability categories on the overall financial health of the organization. In vertical analysis, each line item in the financial statement is expressed as a percentage of a base figure in the same period (for example, the total assets or gross sales).

• Vertical analysis breaks down your financial statements line-by-line to give you a clear picture of the day-to-day activity on your company accounts.
• By looking at the balance sheet, you can see that the majority of your company’s assets are current, with only 25% of assets considered fixed, or long-term assets.
• For example, if a specific expense item is consistently increasing as a percentage of revenue, it may indicate a need to optimize costs or explore opportunities for expense reduction.
• This allows analyzing the composition of the income statement and understand the relative significance of each item in relation to the company’s revenue.
• Income statement analysis can help you analyze the distribution of costs and expenses relative to revenue.
• Notably, it is determined by dividing total sales by gross profit and expressing the result as a percentage.

How to Perform a Vertical Analysis on Your Balance Sheet

• In this scenario, revenue serves as the fundamental component, and the percentages will unveil the proportion of revenue generated by each specific item.
• We can easily understand that the total expenses gradually increased from 43% to 52%, and the net income get reduced from 1st year to 2nd year.
• For example, many businesses use vertical analysis to compare their financial results to those of other businesses in their industry.
• That is because this approach quickly reveals the proportion of various account balances reflected in the financial statements.

Vertical analysis is a powerful tool for financial statement analysis that allows for a deeper understanding of a company’s financial composition. This method helps in identifying significant impacts on profitability and enables a consistent approach to measure cost areas of the payroll business over time. Vertical analysis proves to be an essential technique for evaluating the structural composition of financial statements and making informed financial decisions.

You can likely export the company’s financial statements from your accounting software to an Excel spreadsheet for easy 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. Through vertical percentage analysis, you can also forecast future financial performance.