The Term ‘Vertical’ in a Business, Financial, Trading, and an Accounting Context Explained

What is the meaning of the term vertical?

The term ‘vertical’ can be defined in numerous ways as indicated in the definitions below.

• ‘Standing or pointing straight up or at an angle of 90° to a horizontal surface or line.’ (Cambridge English Dictionary)
• ‘A vertical is an alignment in which the top is always above the bottom.’ (SplashLearn)
• SplashLearn also explains that ‘movement can also be vertical. If we say that the motion is vertical, it means the direction of movement is top-down or bottom-up.’
• ‘Standing, pointing, or moving straight up. Something that is horizontal is parallel to the ground or its base.’ (Macmillan Dictionary)
• Merriam Webster describes the essential meaning of vertical as:

‘positioned up and down rather than from side to side: going straight up,’ and

‘having a structure in which there are top, middle, and bottom levels.’

For the purpose of this article, the focus will be on the following terms in a business, financial, trading, and accounting context in which the term ‘vertical’ features prominently:

• Vertical analysis
• Vertical equity
• Vertical integration
• Vertical line charting
• Vertical management
• Vertical merger
• Vertical spread

What is vertical analysis?

In accounting, vertical analysis is a method to analyse financial statements in which every line item is stated as a percentage of a base figure in the particular financial statement.

For example:

• On an income statement, every line item is listed as a percentage of gross sales or gross revenue.
• In a balance sheet, every line entry is stated as a percentage of total assets.
• Every line of a cash flow statement represents every particular cash inflow or outflow as a percentage of total cash flows.

The vertical analysis formula = (Line item in statement/Total base figure in the statement) x 100

Vertical analysis is most commonly utilised for a single financial period, such as a quarter or a financial year. The analysis is done in order to enable accountants to determine the relative proportions of the totals of every account.

Comparative financial statements are also used in the vertical analysis, comparing line items to those in previously reported financial periods.

Advantages of vertical analysis:

• By indicating expense line items in the income statement as a percentage of revenue (sales), an accountant can see how these expenses are affecting profit margins. Analysing the comparisons, managers of a business are allowed to identify weaknesses and to take action to fix the problems.
• It enables a business to determine whether profitability is improving from one accounting period to another accounting period.
• It makes it easier to compare the profitability of a business with competitors.
• Vertical analysis streamlines the correlation between single balance sheet items and the particular bottom line because they are expressed as a percentage. This allows the management of a company to identify goals and set threshold limits.

Examples of vertical analysis

• Comparative balance sheet

The base figure for assets is ‘Total assets’ and ‘Total liabilities’ is the base figure for liabilities.

The vertical analysis of the balance sheets of 2025 and 2025 indicate, amongst other observations, the following:

• Current assets increased as a percentage of total assets, from 74.23% in 2025 to 77.72% in 2025. An increase of 3.49 percentage points or 4.7%.
• Intangible assets drop from 10.72% (2020) to 7.25% (2025) – a decline of 3.47 percentage points or 32.37%.
• Although current liabilities have decreased from R360 000 in 2025 to R310 000 in 2025, they have increased as a percentage of total liabilities from 59.02% (2020) to 67.39% (2025), which is an increase of 14.18% (8.37 percentage points).

• Comparative income statement

The base figure is ‘Sales.’

Observations:

• Net income, as a percentage of sales improved from 27.36% (2020) to 31.53% (2025), an improvement of 15.24% or 4.17 percentage points.
• Although the cost of goods sold (COGS) jumped by R28 460 in monetary terms, it decreased in terms of a percentage of sales – 8.29% or 4.69 percentage points.

What is vertical equity?

Vertical equity is a method applied by tax authorities of a country wherein taxes paid by taxpayers increase in relation to increases in their income.

It is based on the principle that individuals who earn more money and with more economic resources and assets should be taxed at higher rates than others.

Vertical equities comprise three types: proportional taxation, regressive taxation, and progressive taxation.

• Proportional taxation is a tax system where all taxpayers pay the same percentage of their income as income tax. When the wealth of an individual increase, the absolute amount of his or her tax liability increases comparatively. The opposite is also true.
• Regressive taxation is a tax system where low-income earners pay a higher percentage of their income to the tax authorities of a country compared to those with higher incomes. However, this type of taxation no longer exists in modern capitalist societies.
• Progressive taxation is a tax system where the income tax rate increases when the income of an individual increase, and vice versa.

In this tax system, there are multiple income tax brackets. Taxpayers are classified into different tax brackets according to their taxable income.

In South Africa, the South African Revenue Service (SARS) applies progressive taxation. SARS refers to tax brackets as tax tables. Below are SARS’s tax brackets for the 2025 tax year (1 March 2025 – 28 February 2025).

The tax brackets show that the top income earners have the highest effective tax rates. This means that a chief executive officer (CEO) of a large company pays a higher share of his or her income as taxes as opposed to a middle-class electrician.

SARS’s tax brackets for the 2025 tax year (1 March 2025 – 28 February 2025).

What is vertical integration?

Vertical integration is a strategy executed by a business to bring previously outsourced operations, such as manufacturing and supply of goods, under its own management.

Vertical integration implies that a company streamlines its operations by establishing and/or acquiring its own manufacturers, distributors, and suppliers instead of using external contractors and suppliers.

Types of vertical integration

• Backward integration, also called upstream integration, occurs when a business at the end of the supply chain takes ownership and control of operations with regard to its products and/or services that are upstream (further back) in the supply chain.

• Forward integration, also referred to as downstream integration, takes place when a company at the beginning of the supply chain takes control of stages, such as distribution and sales of products, farther down the supply chain.

Advantages of vertical integration

• A vertically integrated business can reduce (avoid) disruptions and problems concerning quality from suppliers.
• Lower transportation costs and turnaround times.
• Enables a business to generate more profits.
• Allows a company to avoid suppliers with market power.
• Gives a company a better economy of scale, meaning producing more at reduced costs.
• Consumers benefit from lower pricing strategies.

Disadvantages of vertical integration

• Significant initial capital expenditure, causing increased debt.
• A business can underestimate the difficulty and cost of the overall process.
• Management of the process is complex.

What is vertical line charting?

Vertical line charting is a method in technical analysis that is used by traders to track price movements of securities and currencies.

The price action of a security or currency pair over a given time period is summarised by a vertical bar.

The high and low prices for the period are respectively indicated by the top and bottom of the vertical line, while the opening prices are denoted by short horizontal bars to the left of the vertical line and the closing prices to the right of the vertical bar. See illustration below.

A vertical line chart is usually called a bar chart or an OHLC (open, high, low, close) chart.

What does a vertical line chart signal?

Example of a vertical line chart

Vertical line charts allow traders to observe the price range of each trading period. The bottom of the vertical bar indicates the lowest trading price for the specific trading period, while the top of the bar shows the highest price paid for a security or currency.

If the vertical line (bar) becomes long, it signals strong price movements and the price fluctuations become increasingly volatile. This implies there is a significant difference between the high and low prices.

Conversely, as the price fluctuations start to diminish, the lines (bars) become shorter. A short bar can be an indication of little interest in the particular security or currency, or that buyers and sellers were evenly matched and not prepared to take an aggressive trading position.

Bars may strengthen or weaken in size from one bar to the next, or over a series of bars.

Some vertical line charts indicate the vertical bars in green when prices increase during the trading period, and in red when prices decrease.

What is the difference between a vertical line chart and a line chart?

A line chart, also known as a close-only chart, only depicts a security’s closing price over time. The series of closing prices are connected with a continuous line, showing the price moving up and down over a given trading period.

A line chart is the most basic type of chart used in trading and can be used for any trading period.

What is vertical management?

Vertical management, also known as top-down management, refers to the various levels of management within a business or organisation.

Express differently, an entity that applies a pyramidal top-down structure is considered a vertical business or organisation.

The top-down management of a vertical organisation consists of the following levels of management: top-level managers, middle managers, and first-line managers.

Regular employees are at the bottom of the vertical structure and have normally not a say in management processes and decisions.

• Top-level managers (top managers) of an entity include, inter alia, chief executive officer (CEO), chief operations officer (COO), and chief financial officer (CFO).

Top managers are primarily responsible for the long-term achievements of the organisation. They set long-term objectives and define strategies (short-term and long-term).

• Middle managers are the links between the top managers and the first-line managers. They fill positions such as chief supervisor and head of the department.

One of the main functions of middle managers is to implement directives and strategies of top managers.

• First-line managers are at the introductory level of management and have direct contact with regular employees. They have to verify that employees effectively implement the plans and objectives of an organisation.

Nowadays, vertical management becomes less popular with numerous entities replacing it or have already replaced it with a horizontal organisational structure in which decision-making and innovation are encouraged at all operating levels.

What is a vertical merger?

A vertical merger occurs when two or more companies that manufacture different products or provide different services along with the same supply chain merge (combine).

In a vertical merger, the companies involved agree to integrate their operations, managerial expertise, and skills of workers together on a co-equal basis.

Contrarily, a horizontal merger takes place when one company acquires another company that is a direct competitor, reducing its competition in the marketplace.

Why do companies get involved in vertical mergers?

There are a number of reasons for a company to execute a vertical merger. Some of the reasons are:

• Generate higher profits
• Improve the flow of information and control of operations along the supply chain
• Enable tighter control
• Reduce operating costs
• Create and increase synergies, such as:

Financial synergy – reducing financial constraints by making use of surplus free cash flow

Managerial synergy – increasing managerial efficiency by employing effective and skilled managers

Operating synergy – facilitating improved coordination and administration along the supply chain

Reasons why vertical mergers fail

Not all vertical mergers are a success. Mergers can fail because of reasons such as:

• Contrasting corporate cultures
• Increasing costs – bureaucratic costs may outweigh the benefits realised from the merger
• Loss of key personnel

What is vertical spread?

A vertical spread, sometimes referred to as a money spread, is a strategy utilised in options trading that involves the simultaneous buying and selling of options of the same type (either puts or calls) with identical expiration dates, but different strike prices also called exercise prices.

In contrast, a horizontal spread, also known as a calendar spread, occurs when options of the same type with the same strike price, but with different expiry dates, are purchased and sold.

A vertical spread is the most basic option spread.

Types of vertical spreads

• Bullish traders will utilise bull call spreads (buying) and bull put spreads (selling). Executing both strategies, the trader buys the option with the lower strike price and sells the option with the higher strike price.

Bull vertical spreads rise in value when the underlying asset increases.

• Bearish traders use bear call spreads (buying) or bear put spreads (selling) where a trader sells the option with the lower strike price and purchases the option with the higher strike price.

Bear vertical spreads generate profits from decreasing prices.

Vertical spreads limit traders’ downside risk but also the potential for return.