A research conducted by the Indian Institute of Management (IIM) found that Indian companies using vertical analysis were better able to manage their operational costs. The main benefit of vertical analysis is that it helps businesses determine whether certain items consistently increase or decrease over time. Additionally, this fundamental analysis method helps businesses identify trends and patterns in their financial statements. These insights can then be used to make informed decisions regarding their financial strategy. According to a report by Deloitte, businesses that regularly use vertical analysis have a 20% higher chance of identifying financial anomalies early. Another form of financial statement analysis used in ratio analysis is horizontal analysis or trend analysis.
Vertical analysis is a powerful tool for financial statement analysis that allows for a deeper understanding of a company’s financial composition. This method helps in identifying significant impacts on profitability and enables a consistent approach to measure cost areas of the business over time. Vertical analysis proves to be an essential technique for evaluating the structural composition of financial statements and making informed financial decisions. Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement.
This analysis can uncover whether a company allocates an excessive portion of its revenue to certain costs, such as operating expenses or debt servicing, which can signal inefficiencies or financial risks. Brixx can facilitate both horizontal and vertical analyses, empowering users to gain a comprehensive understanding of their financial statements. With Brixx, businesses have access unearned revenue to powerful tools to help them in analyzing trends, setting benchmarks, and understanding their financial position in the context of their industry standards.
So far, we’ve focused on using vertical analysis as a way to analyze income statements. The same process applies, except the most commonly used denominator is total assets. Since every company is different, it can be difficult to compare financial performance or strategic resource allocation, even to direct competitors. Vertical analysis can account for businesses of different sizes or those with multiple departments and product lines, making cohort analysis and the process of comparing profitability much easier. What makes vertical analysis stand out from other financial and profitability analysis methods is its emphasis on relative relationships.
So by using this method, it is easy to understand the net profit as it is easy to compare between the years. We can easily understand that the total expenses gradually increased from 43% to 52%, and the net income get reduced from 1st year to 2nd year. In the 3rd year, the COGS decreased compared to the previous years, and the income Insurance Accounting increased. This example shows a vertical analysis of an income statement with the right hand column showing each line item as a percentage of revenue. One of the major benefits of vertical analysis is that it makes it simple to report to and communicate with stakeholders. A ratio-based approach makes it easy to provide a clear picture of financial health, with very little need for background information or detailed notes.
Suppose we compare these data with those of other companies in the industry, and the results indicate that X has a higher structural value—we can conclude that company X is competitive. When we convert data into percentages, we gain a clearer view of the proportion of the company's overall financial assets and liabilities. For instance, we can observe that the cost of goods sold represents 40% of net vertical analysis sales, indicating that the production or procurement of goods consumes 40% of the revenue. The gross profit margin is 60%, suggesting that the company retains 60% of its revenue after deducting the cost of goods sold. Input the percentage against the line items calculated to see a concise view of each item’s contribution to the gross amount.
Vertical analysis streamlines financial analysis, offering a clear and concise view of the most significant financial metrics. For finance and FP&A leaders, it's a great way to quickly spot any problem areas or parts that need a bit more attention, making their job a bit simpler and more focused. When compared to one another, the balance sheets of companies with values of one billion and half a million dollars might be difficult to interpret. The solution to this problem is to use percentages based on standard sizes, which also makes it simpler to compare different types of businesses. Let's imagine that Company Y has a cost of products sold of $100,000 while having a gross sales amount of $700,000.
Vertical analysis indicates the relative importance of each line item in a certain period. For example, the amount of cash reported on the balance sheet on Dec. 31 of 2024, 2023, 2022, 2021, and 2020 will be expressed as a percentage of the Dec. 31, 2020, amount. For each line item, we’ll divide the amount by the corresponding period’s revenue to arrive at our contribution percentages. These methods ensure your data is properly aligned and ready for advanced analysis, forming the foundation for accurate and efficient data processing. It could align with a corporate strategy, like an expansion into a new region that's still gaining momentum. Or, it might indicate an excess in company headcount, necessitating a thorough review.