Difference Between Horizontal and Vertical Analysis with Comparison Chart

Difference Between Horizontal and Vertical Analysis with Comparison Chart

vertical analysis formula balance sheet

Trend percentages are similar to horizontal analysis except that comparisons are made to a selected base year or period. Trend percentages are useful for comparing financial statements over several years because they disclose changes and trends occurring through time. While vertical analysis focuses on line items as a percentage of total revenue or total assets, horizontal analysis looks at changes in line items from one period to the next. To conduct a vertical analysis of balance sheet, the total of assets and the total of liabilities and stockholders’ equity are generally used as base figures. All individual assets (or groups of assets if condensed form balance sheet is used) are shown as a percentage of total assets. The current liabilities, long term debts and equities are shown as a percentage of the total liabilities and stockholders’ equity.

vertical analysis formula balance sheet

While performing a vertical analysis, every line item on a financial statement is entered as a percentage of another item. For example, on an income statement, every line item is stated in terms of the percentage of gross sales. Financial statements that include vertical analysis clearly show line item percentages in a separate column.

Advantages and Disadvantages of Vertical Analysis of Income Statement

A Horizontal Analysis allows you to analyze financial statements to identify historical trends. In addition to the data for your company, collect the same data for similar companies in your industry. You can calculate the proportion of each line item from the total based on publicly available financial data.

To find the vertical analysis, you simply divide each line of the balance sheet by your base figure. This is in order to get a clear picture of whether your performance metrics are improving or declining. Vertical analysis is exceptionally useful while charting a regression analysis or a ratio trend analysis. It enables the accountant to see relative changes in company accounts over a given period of time. Enter the statement line item and the total base figure into the calculator to calculate the vertical analysis. This calculator can also evaluate the statement line item or total base figure given the other variables.

Vertical Analysis Calculator

Vertical analysis can provide business owners and CFOs with valuable information, particularly when used with additional financial ratio analysis. While vertical analysis cannot answer why changes have taken place, it’s a useful tool for trend analysis along with pinpointing areas that need further investigation. Balance sheet vertical analysis uses total assets as a base and assigns a percentage to all line items. For instance, we can see that our company’s long-term debt as a percentage of total assets is 17.0%. The metric we calculated is formally known as the “debt to asset ratio”, which is a ratio used to gauge a company’s solvency risk and the proportion of its resources (i.e. assets) funded by debt rather than equity.

Regardless of the placement, the more important factor is to ensure the analysis clearly shows which period it is reflecting.


Let me shrink my screen in just a little bit – I’m in cell B20, this is going to simply equal V6 divided by B6 and once again I’m gonna press the F4 function key. If you were to draw it out, it would look like a vertical line with each line item as a point on that line. This type of analysis can be very helpful in understanding a company’s financials. The same process applied to ABC Company’s balance sheet would likely reveal further insights into how the company is structured and how that structure is changing over time. For this example, the analysis will be carried out on the data reported for 2021.

  • It can be used to compare the company’s performance within one year, year on year, against budgeted expectations, or against competitors.
  • The vertical analysis also shows that in years one and two, the company’s product cost 30% and 29% of sales, respectively, to produce.
  • Cash in the current year is $110,000 and total assets equal $250,000, giving a common-size percentage of 44%.
  • The vertical analysis of financial statements is concerned with the proportion of the total amount that each line item represents.
  • However, these expenses don’t, at first glance, appear large enough to account for the decline in net income.
  • To calculate a vertical analysis percentage, divide the statement line item by the total base figure amount.
  • Vertical analysis makes it much easier to compare the financial statements of one company with another, and across industries.

Using actual dollar amounts would be ineffective when analyzing an entire industry, but the common-sized percentages of the vertical analysis solve that problem and make industry comparison possible. Vertical analysis (also known as common-size analysis) is a popular method law firm bookkeeping of financial statement analysis that shows each item on a statement as a percentage of a base figure within the statement. The business will need to determine which line item they are comparing all items to within that statement and then calculate the percentage makeup.

It is composed of assets, liabilities, and stockholders’ equity and demonstrates the accounting equation is in balance. Liabilities are amounts a company owes like accounts payable and long-term debt. Stockholders’ equity is the amount of capital owned by the investors after the liabilities are accounted for. The income statement is the financial statement that gives readers the company’s bottom line, profit or loss, for the reported accounting period. Revenue is the money that comes into the firm for the sale of goods or services.

  • Thus accountants using this type of software can focus more on analyzing common-size information than on preparing it.
  • Vertical analysis can also be used to spot trends over a specific period of time.
  • It is called vertical analysis because, as the name suggests, it operates up and down the data of one accounting period.
  • That result, 24%, will appear on the vertical analysis table beside Salaries for year one.
  • Plus, LiveFlow’s flexible reports make it easy to see different aspects of your business at a glance.
  • What we don’t know, and what we can’t know from the vertical analysis, is why that is happening.
  • When used with your company’s balance sheet, total assets or total liabilities would be used as the baseline figure, with all subsequent line items shown as a percentage of that total.

Because we entered our costs and expenses as negatives, i.e. to reflect that those items are cash outflows, we must place a negative sign in front when applicable, so that the percentage shown is a positive figure. Suppose we’ve been tasked with performing vertical analysis on a company’s financial performance in its latest fiscal year, 2021. Finance professionals conduct horizontal analysis within a company or business to help evaluate the trend of an item over the past many consecutive years. In fact, some sources of industry data present the information exclusively in a common-size format, and most of the accounting software available today has been engineered to facilitate this type of analysis. To calculate the percentage of COGS to total revenue, we would divide $40,000 by $100,000 and multiply by 100.

Vertical Analysis of the Income Statement

Here, we’ve chosen “Revenue” as the base figure for the common size income statement, followed by “Total Assets” for the common size balance sheet. To start, the table below shows the company’s historical financial statements – the income statement and balance sheet – of our hypothetical company, which we’ll be using throughout our two-part exercise. Proper analysis does not stop with the calculation of increases and decreases in amounts or percentages over several years. Such changes generally indicate areas worthy of further investigation and are merely clues that may lead to significant findings.

vertical analysis formula balance sheet

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