Vertical Analysis in Accounting Explained for Dummies

What is vertical analysis?

Vertical analysis also referred to as common-size analysis, is an accounting tool used in the financial analysis of a company’s financial statements. Put in other words, vertical analysis is the proportional analysis of a financial statement such as the income statement, balance sheet, or statement of cash flows. Every line item on a financial statement is expressed as a percentage of another item - the base figure. For instance, every line item on the income statement is indicated as a percentage of gross sales (revenue). Likewise, line items on a balance sheet can be stated as a percentage of total assets, total liabilities, or equity. In addition, each particular type of cash inflow or outflow on a cash flow statement can be expressed as a percentage of the total cash inflows. Financial statements that comprise vertical analysis indicate the percentages of the line items in a separate column. These types of financial statements are also called common-size financial statements.  

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Examples of vertical analysis

Vertical analysis is especially useful to compare a company’s financial performance over different accounting periods. The analysis enables accountants to find relative changes (for better or worse) in a company’s expenses, income, profits, and losses over a given accounting period. Therefore, it is purposeful to compare the percentages of vertical analysis of one accounting period (a quarter of a financial year) with the percentages of another period - preferably two consecutive periods.  

Vertical analysis of a comparative balance sheet

The following example is a section from a company’s balance in which its assets and liabilities are reported. All the line items under ‘Assets’, are stated as percentages of ‘Total assets’, while all the line items under ‘Liabilities’ are expressed as percentages of ‘Total liabilities’.   The example above shows, inter alia, the following:

• Current assets have increased in monetary value (from R455 000 to R475 000), but as a percentage of the total assets, the current assets have decreased from 49.19% to 48.23%.
• Current liabilities have increased as a percentage of total liabilities (60.85% to 62.74%), while long-term liabilities represent 37.26% of total liabilities in 2026 - down from 39.15% in 2026.

Vertical analysis of an income statement

The following example is a vertical analysis of a condensed income statement. All the line items below the line item ‘Sales’ are expressed as a percentage of ‘Sales’.   Comments on the figures in the example above:

• Gross profit has increased in monetary value in 2026, but due to a higher percentage COGS, it has decreased as a percentage of sales (47.98% to 45.45%), compared to 2026.
• In 2026, net profit has slightly improved (2.3%) from R56 376 to R57 672. However, the vertical analysis of the income statement shows that as a percentage of sales, the net profit has decreased (28.47% to 26.21%).

 

Advantages of vertical analysis

• Vertical analysis enables management to find deviations in important line items on the financial statements, such as current assets or gross profit.
• The percentages can be used to set goals for a business. For example, to monitor the efficiency of a certain unit or division of a business.
• Vertical analysis is especially useful to compare, inter alia:
• a company’s financial figures to the average trends in the industry in which the company is operating,
• the financial statements of two or more companies operating in the same industry but differing in size (small and large), and
• companies that use different currencies.
• It is helpful for trend analysis, identifying relative changes in the accounts of a business over a given period of time. For instance, comparing line items on the financial statements over a three-year period.

For example, if a company’s gross profit has an average percentage of 45% of sales during the past three years, a new percentage of 55% would be an alarming signal. The new percentage could be an indication of declining sales or an increase in the cost of goods sold (COGS).  

Vertical analysis versus horisontal analysis

Horisontal analysis also referred to as trend analysis, is another type of financial statement analysis. This is an analysis where line items in a company’s financial statements are compared over a specific time period. Typically, the line items of the financial statements of successive financial years are expressed as percentages of a specific financial year (the base year or baseline), indicating percentage differences. For instance: A company decides to take the 2017 financial year as its base year, meaning every line item on the financial statements of 2017 is stated as 100%. Comparing the closing balances of the total assets of the three consecutive years, provided the following percentages:

• 2018 - 120%
• 2019 - 95%
• 2020 - 110%

This indicates that the total assets at the end of the 2018 financial year were 120% of the amount of total assets at the end of 2017. At the end of 2019, it was 95%, showing a decrease in the amount of total assets.

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