You can identify trends, analyze the impact of specific expenses or revenue sources, and evaluate profitability ratios using vertical analysis. Brixx can facilitate both horizontal and vertical analyses, empowering users to gain a comprehensive understanding of their financial statements. With Brixx, businesses have access to powerful tools to help them in analyzing trends, setting benchmarks, and understanding their financial position in the context of their industry standards.

Common Size Financial Statements

• This strategy can save a significant amount of time, as it shifts the focus to the areas of the company’s financials that need the most attention.
• Here, we have divided each item by the company’s total sales and shown each category as a percentage of total sales for year 1-3 respectively.
• Seeing the ratio of current assets to fixed assets shows the company’s investment in liquidity versus long-term productivity.
• Additionally, this fundamental analysis method helps businesses identify trends and patterns in their financial statements.
• This normalization using percentages is the key benefit of vertical analysis, rather than just comparing the absolute rupee amounts.
• Given the consistent sales growth from year 1 to year 3, it is not surprising that salaries and the marketing expenses of the company have also risen as personnel and marketing spend generally supports sales growth.

By expressing line items as percentages of a base figure, you can identify trends, assess proportions, and gain valuable insights into a company’s financial performance. On the balance sheet, vertical analysis displays the financing structure in terms of percentages of assets. Seeing the ratio of current assets to fixed assets shows the company’s investment in liquidity versus long-term productivity. And analyzing liabilities and equity as a percentage of total assets illustrates the degree of financial leverage being used.

The Income Statement

If total assets were Rs. 500 crores, current assets were Rs. 150 crores, and fixed assets were Rs. 300 crores, the common size balance sheet would state as below. The key components of vertical analysis are base figure, percentage calculation, common size financial statements, trend analysis, comparative analysis, structural composition, and key ratios. This type of analysis enables businesses to view the relative proportions of account balances, compare internal changes over time, and identify trends.

Vertical Analysis Vs Horizontal Analysis

Vertical Analysis using the Balance Sheet can thus provide insights into the company’s operational efficiency. A research conducted by the Indian School of Business (ISB) found that Indian companies using vertical analysis were better able to manage their resources. This allows you to see the proportional makeup of revenue and expenses over time or compare across companies. Common size balance sheet expresses each line item as Accounting For Architects a percentage of total assets.

By grasping the purpose, importance, and various components of vertical analysis, you can harness its full potential in financial analysis and decision-making. We can discern through vertical analysis that the main problem area vis-à-vis the decline in net income in year 3 is the cost of goods sold. This rose sharply to 52% of sales in year 3 (from 41% and 44% in year 2 and year 1 respectively). Given the consistent sales growth from year 1 to year 3, it is not surprising that salaries and the marketing expenses of the company have also risen as personnel and marketing spend generally supports sales growth.

Vertical analysis allows you to benchmark a company’s financial performance against industry averages or leading competitors. By comparing the percentages of line items, you can identify areas of strength or weakness and gain insights into competitive positioning. By analyzing these profitability ratios using vertical analysis, you can gauge a company’s financial performance and compare it to industry benchmarks or previous periods. The purpose of vertical analysis is to provide insights into the distribution and significance of various components within a financial statement.

We’ve now completed our vertical analysis for our company’s income statement and will move on to the balance sheet. Vertical analysis, often referred to as common-size analysis, is a crucial financial tool used in the world of business and finance to assess the relative proportions of different financial statement items. Adaptability, a proactive approach, and a willingness to embrace change are essential. Relying rigidly on a single method of financial analysis can lead to narrow-mindedness and poor decision-making. Instead, using a variety of analysis techniques and financial analysis software as ‘tools in the toolbox’ can provide a comprehensive view of the company, leading to more informed and effective decisions. Vertical analysis makes it much easier to compare and contrast the financial statements of different companies.