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Mitchell Grant is a self-taught investor with over 5 years of experience as a financial trader. He is a financial content strategist and creative content editor.
Updated May 22, 2024 Fact checked by Fact checked by Suzanne KvilhaugSuzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. Thus, line items on an income statement can be stated as a percentage of gross sales, while line items on a balance sheet can be stated as a percentage of total assets or total liabilities, and vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total cash inflows.
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.
Another 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.
For 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:
| Sales | $5,000,000 | 100% |
| Cost of goods sold | $1,000,000 | 20% |
| Gross profit | $4,000,000 | 80% |
| General and administrative expenses | $2,000,000 | 40% |
| Operating Income | $2,000,000 | 40% |
| Taxes (%25) | $500,000 | 10% |
| Net income | $1,500,000 | 30% |
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.
Horizontal analysis indicates long-term trends and highlights areas of strength and those that need improvement. Vertical analysis indicates the relative importance of each line item in a certain period.
A company sold 40,000 units of products, 14,000 of which were sneakers and 26,000 of which were boxing gloves. Vertical analysis would show that sneakers made up 35% of sales (14,000 / 40,000) and boxing gloves made up 65% of sales (26,000 / 40,000).
One of the pros of vertical analysis is that it allows for the comparison of financial statements from one accounting period to the next as well as for comparisons among different companies. One of its cons is that it doesn't take into consideration absolute numbers; so if you are comparing two companies, looking at percentages will give a different result than absolute numbers.
Vertical analysis looks at the contributing percentage of each line item to the total base figure. It can provide information on what metrics are improving and which are worsening. It can be used to compare different components of companies and the same company in different time periods.
