What Are the Best Tips for Vertical Analysis of an Income Statement?

As the name suggests, vertical analysis is an analytical method that can be used in the analysis of financial information. In a financial statement, the data of each item in the table is compared with the population (or the report total) to get the position, importance and change of the item in the population.

Vertical analysis

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As the name suggests, vertical analysis is an analytical method that can be used in the analysis of financial information. In a financial statement, the data of each item in the table is compared with the population (or the report total) to get the position, importance and change of the item in the population.

The vertical analysis method is also called the common ratio analysis method, which corresponds to the horizontal analysis method. The horizontal analysis focuses on the comparison of key projects in different years, and the vertical analysis method pays more attention to the internal structure analysis of each item in the report. It only performs vertical analysis on the current income statement or balance sheet: all items in the income statement are expressed as percentages of operating income, and items in the balance sheet are expressed as percentages of total assets.

Direct comparison and analysis of financial statements between companies of different sizes can be misleading due to differences in size. For example, if Company A has 15 million liabilities and Company B has 150 million liabilities, it may be wrong to assume that B's leverage is higher than A's. Therefore, when comparing companies of different sizes, it is necessary to control the size difference. One of the ways to control the difference in scale is to prepare common financial statements.