# Vertical Analysis of Financial Statements

## Overview

Viewing raw data in financial statements can be relatively pointless without some yardstick against which to compare the numbers. Vertical analysis solves this problem by linking all items in the financial report to one item, forming a so-called common size financial statement.

Vertical analysis of financial reports, by definition, is a comparative analysis that examines the selected indicator as a percentage of the base indicator within the same reporting period. This means that all elements of the report for a certain period are divided by this element. The items that are most commonly used as the baseline by which other items are divided are total assets and revenue. Essentially, vertical analysis creates a ratio between each item and the baseline item.

This transformation of financial statements simplifies the comparison of financial information about a company for different reporting periods, and also allows to compare it with similar financial information about other companies. In addition, the use of vertical analysis allows to identify trends that are not always obvious when analyzing financial statements in a traditional presentation.

Vertical analysis is done within a single reporting period. The vertical analysis allows you to determine the structure of the main elements of assets and liabilities of the organization, the influence of individual factors on the financial result, liquidity indicators.

## Formula

For calculations, you can use the universal formula:

(Statement line item / Total base figure) X 100

During analysis of the Balance sheet, the total for Assets as well as the total of both Equity and Liabilities are selected as the base values. Consequently, all individual positions in the Assets section are presented as a percentage of its total. Similar calculations are carried out for the Equity and Liabilities section.

In Profit and loss statement’s vertical analysis, Sales revenue generally serves as the base value. All other items in this report (COGS, Operating costs, Interest expense, Wages, Utilities) are calculated as a percentage of it.

When analyzing Cash flows statement, the amount of total cash inflows is used as the base value. This makes it possible to get an idea attraction and repayment of loans and borrowings and other elements. By presenting these items in relative terms, it is possible to assess the extent to which they affect the generation of sales revenue.