As a business owner or financial analyst, understanding a company’s financial statements is crucial for making informed investment decisions and managing finances. One of the most effective methods for analyzing financial statements is a vertical analysis that allows you to determine the proportional relationship of each line item to a base figure. This article will explain how to perform a vertical analysis balance sheet step-by-step and provide examples of its benefits.

A vertical analysis balance sheet is a financial statement analysis method that expresses each line item on a company’s balance sheet as a percentage of the total assets. This document allows you to determine the relative proportions of each balance sheet item, which can be useful for:

• Analyzing trends over time,

• Comparing a company’s financial position to its competitors,

• Identifying areas for improvement.

Vertical and horizontal analysis are two common methods used to analyze a company’s financial statements, including the balance sheet. Here is an overview of the differences between vertical and horizontal analysis of a balance sheet:

Vertical Analysis:

• A vertical analysis expresses each item in the balance sheet as a percentage of the total assets or liabilities.

• This analysis focuses on the proportional relationship between each item and the total assets or liabilities.

• It helps to identify the relative importance of each item in the balance sheet.

• This method is useful for comparing different companies' financial data or accounting periods, even if they have different sizes or scales.

Horizontal Analysis:

• Horizontal analysis compares the financial data of a company over different accounting periods, typically multiple years.

• This analysis focuses on the absolute changes in the dollar value or percentage of each item in the balance sheet over time.

• It helps to identify the key trends in a company’s financial performance over time.

• This method is useful for identifying areas of improvement or concern, such as increasing liabilities or decreasing cash balances.

In summary, The vertical analysis provides insights into the proportional relationship of each item in the balance sheet. In contrast, horizontal analysis offers insights into the changes in a company’s financial data over time. Both methods are essential for analyzing a company’s financial position and can be used together to provide a comprehensive understanding of a company’s financial performance.

Financial statements provide information about a company’s financial performance, including its income, cash flow, net income, and balance sheet.

Financial statements are essential for investors and analysts who want to evaluate a company’s financial performance, profitability, liquidity, and financial position. By analyzing these financial statements, investors and analysts can make informed decisions about investing in a company and, if so, how much to invest.

Here’s an overview of each type of financial statement:

Income Statement

This financial statement shows a company’s revenue, expenses, and net income (profit or loss) for a certain period, typically a year or a quarter. It helps investors and analysts understand the company’s profitability and efficiency in generating revenue and controlling expenses.

Cash Flow Statement

This financial statement shows a company's cash inflows and outflows during a specific period, typically a year or a quarter. It helps investors and analysts understand the company’s liquidity or ability to meet its short-term financial obligations.

Balance Sheet

This financial statement shows a company’s assets, liabilities, and equity at a specific point in time. It helps investors and analysts understand the company’s financial position and ability to meet its long-term financial obligations.

Net Income

This financial statement shows the amount of money a company has left over after deducting all expenses from revenue. It represents the company’s profitability and is calculated by subtracting expenses from revenue.

Company’s Financial Statement

This financial statement is a collection of all a company's financial statements, including the income statement, cash flow statement, and balance sheet. It provides a comprehensive view of a company’s financial performance and is helpful for investors and analysts who want to understand its overall health.

Whether you’re a business owner, investor, or financial analyst, understanding how to analyze financial statements is crucial. We will walk you through each stage of the process. By the end you’ll have the skills to conduct a thorough vertical analysis, enabling you to assess the proportionate relationship of each item in the balance sheet and gain valuable insights into a company’s financial position.

Step 1: Gather Financial Data

The first step in performing a vertical analysis balance sheet is to gather the necessary financial data. This includes the company’s balance sheets for the current and previous accounting periods.

Step 2: Choose a Base Figure

The next step is to choose a base figure to use as the denominator for each line item on the balance sheet. The most common base figure is the total assets.

Step 3: Calculate the Percentages

To calculate the percentage of each line item, divide the individual item by the base figure and multiply by 100. For example, if a company’s total assets are $1,000 and its accounts receivable are $100, the percentage for accounts receivable could be calculated as follows:

Accounts Receivable = ($100 / $1,000) x 100 = 10%

Step 4: Prepare a Table

Prepare a table that shows the balance sheet items expressed as a percentage of the total assets. This will allow you to compare the line items and identify key trends easily.

Step 5: Analyze the Results

Analyze the results to identify key trends and insights. Look for areas with significant changes over time, and consider whether these changes are positive or negative. For example, if a company’s accounts receivable have increased significantly over the past year, it may be having trouble collecting customer payments.

To simplify the process, we offer comprehensive Vertical Analysis Templates that can be easily used. With these templates, you can streamline your financial analysis and gain valuable insights into your company’s financial position.

Please note that you will need Microsoft Office to open and customize the templates. If you don’t have it, you can get a Microsoft Office activation key at RoyalCDKeys, which offers affordable options. Once you can access Microsoft Office, you can easily customize the templates to fit your unique needs and preferences, making your vertical analysis process even more efficient and effective.

Download

This template helps conduct the financial analysis of businesses. Accounting professionals, individual investors, and auditors evaluate the change in the Revenue/Income Statement figure over some time.

Download

This is a Balance Sheet Vertical Analysis Template with predefined formulas. It consists of different Assets, Liabilities, and Shareholder’s Equity categories. It is free to use, and you can customize it as needed.

Download

With both Vertical and Horizontal analysis you’ll be able to compare the evolution of financial statements between different years of the current and noncurrent assets and liabilities.

There are several benefits of performing a vertical analysis of a balance sheet for a company. Here are some of the most important ones:

Identifying Trends

A vertical analysis can help a company identify trends in its financial data over time. By comparing the proportion of each item in the balance sheet to the total assets or liabilities, a company can determine whether there has been an increase or decrease in a certain item over time. This information can help make decisions about future investments or cost-cutting measures.

Comparing with Industry Standards

A vertical analysis can help a company reach its financial performance with other companies in the same industry. By analyzing the proportion of each item in the balance sheet to the total assets or liabilities, a company can determine whether it is performing better or worse than its competitors. This information can be used to set goals and improve the company’s financial position.

Proportional Analysis

The vertical analysis of each item in the balance sheet. This helps determine the relative importance of each item in the balance sheet and can help the company focus on areas that require improvement or investment.

Common Size Analysis

The vertical analysis is also known as the common side analysis. This is because it expresses each item in the balance sheet as a percentage of the total assets or liabilities. This makes it easier to compare different companies' financial data or accounting periods, even if they have different sizes or scales.

Insightful Decision-Making

The insights gained from a vertical analysis can be used to make informed decisions about the company’s financial position. For example, if a company’s cash balance decreases as a percentage of total assets, it may indicate that it needs to take corrective action to improve its cash flow.

A vertical balance sheet analysis can provide a company with valuable insights into its financial position. This analysis can identify trends, compare performance with industry standards, conduct proportional and common size analyses, and make informed decisions about the company’s financial future.

In conclusion, conducting a thorough analysis of financial statements, including using historical data and performing a vertical analysis, can provide valuable insights into a company’s economic performance.  By examining key metrics such as gross sales, net profit, and profit margins, trend analysis becomes possible, enabling businesses to identify patterns and make informed decisions.

Using the formula mentioned earlier, vertical analysis allows for a consistent evaluation of line items in income statements, ultimately aiding in the analysis of financial statements as a whole. Historical data serves as a crucial reference point for understanding past performance and identifying areas for improvement.

By incorporating these analytical techniques into the decision-making process, businesses can gain a deeper understanding of their financial health, drive strategic initiatives, and work towards achieving long-term success.