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Vertical Analysis

Vertical analysis is a method of financial statement analysis where each line item in a financial statement is listed as a percentage of a base figure. For example, in an income statement, each item is expressed as a percentage of total revenue, allowing for easy comparison of financial performance over time or between companies of different sizes. Vertical analysis is commonly used to assess the relative importance of various components, such as expenses or revenues, within a financial statement.

Example

In a company’s income statement, vertical analysis may show that cost of goods sold (COGS) accounts for 50% of total revenue, helping the company identify trends in profitability over time.

Key points

• A financial analysis method that expresses each item on a statement as a percentage of a base figure.

• Used to compare financial performance over time or between companies.

• Helps identify trends and the relative significance of expenses, revenues, or other components.

Quick Answers to Curious Questions

It helps assess the relative importance of each line item in relation to a base figure, such as total revenue or assets, making it easier to compare performance over time.

Vertical analysis focuses on the relationship of each line item to a base figure in a single period, while horizontal analysis compares financial data over multiple periods.

It standardizes financial statements by expressing items as percentages, allowing for meaningful comparisons regardless of company size.