Vertical Analysis

Vertical Analysis

A financial statement analysis technique that expresses each line item as a percentage of a base figure on the same statement, facilitating comparison of financial structure across companies regardless of size.

For instance, in an income statement vertical analysis, all items are expressed as percentages of revenue: a manufacturer might show cost of goods sold at 60%, operating expenses at 25%, and net income at 10% of total revenue, allowing easy comparison with competitors’ cost structures regardless of absolute size.

Also called common-size analysis, this approach uses total assets as the base (100%) for balance sheet analysis, revenue for income statement analysis, and sometimes total cash flows for cash flow statement analysis. Vertical analysis reveals the relative proportion of each financial component, highlights structural changes over time when comparing multiple periods, and facilitates benchmarking against industry standards. Unlike horizontal analysis (which examines trends across periods), vertical analysis focuses on composition within a single period, though comparing common-size statements from different periods adds temporal perspective to structural analysis.