Vertical Analysis

Vertical analysis reads a financial statement from top to bottom. On the income statement, each line is shown as a percentage of revenue. On the balance sheet, each line is shown as a percentage of total assets.

For example, if a company's revenue is 2 million and its cost of goods sold is 1.2 million, vertical analysis shows cost of goods sold at 60% of revenue. If its total assets are 1.5 million and inventory is 300,000, inventory represents 20% of total assets.

This helps answer questions such as: what share of each sale is left as profit? How much of the company's assets are tied up in property? How much of its funding comes from debt rather than equity?

Vertical analysis is essentially the same as common-size analysis, and the terms are often used interchangeably. Its main value comes from comparisons: with the same company in previous years, to see how its structure is changing, or with competitors, to see how its costs and assets differ.

It is often combined with horizontal analysis, which tracks how each line changes from period to period, to give a more complete picture.