Short definition: Vertical analysis is a financial analysis technique that expresses each line item in a financial statement as a percentage of a base amount within the same statement.
Explanation: It allows for a more meaningful comparison of financial data within a single period, highlighting the relative proportions of different items within the statement. For the income statement, the base amount is usually total revenue, while for the balance sheet, it’s typically total assets.
Example: In a vertical analysis of an income statement, each expense item (like cost of goods sold, operating expenses, etc.) is shown as a percentage of total revenue. This helps identify which expenses are the largest relative to sales and how they have changed over time.
Additional information (optional): Vertical analysis can be used to identify trends and anomalies in a company’s financial statements, compare companies of different sizes, and assess the efficiency of its operations. It is a valuable tool for understanding the composition of a company’s financial statements and identifying areas for improvement.