What is Vertical Analysis?
Vertical Analysis
Unlike the horizontal analysis, which compares the line items on different figureheads using percentages, the vertical review uses each figure as a percentage of the total items in the statement. There are two critical things in the spotlight, i.e., the totals and the percentages of the total assets or liabilities.
How to Calculate the Figures
The vertical analysis makes use of very simple arithmetic as one only needs to subtract the past and the present figures. Suppose that you are using a balance sheet and an income statement. We use the assets, liabilities, and equities are represented as proportions of the total figures.
Example of Calculating Using Vertical Analysis
Suppose you have a company XYZ, which 15% on the far end of the cash and cash equivalents, 40% for the inventory and 45% for the property. Let say the total assets are $20 million; then, we are assuming that the cash and cash equivalents are worth $3million, $8 million for the inventory and $9 million for the property.
What Does it Tell Us?
Well, using a company in a trading period, we look at how much it generated from every sale is made. If administrative costs are high, the EBITDA margin would be lower —highlighting the importance of understanding EBT EBITDA PAT in finance course discussions, especially when analyzing operational efficiency.
To compare the items, we shall require additional details from the previous periods to allow comparison. Consequently, we will need a comparative column to show the percentages. In this scenario, we will use one year’s worth as the baseline for the entries made, unlike the horizontal analysis. It also uses he subsequent years to represent the percentage changes to show the changes in the baseline, allowing us to compare financial data using horizontal analysis effectively.
From the above, one can see that vertical analysis is an essential tool for the investors and the shareholders as they would be interested in knowing what changes have occurred in the income statements and the balance sheet. If the figures are not favorable, then they would seek answers on what is being done to improve the data for better returns on their investments. This is one of the essential tools that a financial analyst would use to analyze a firm, and it’s often emphasized in the best online courses for professionals aiming to strengthen their analytical and financial decision-making skills.
Applying Vertical Analysis with Singapore Industry Averages:
Establish a detailed guide which would show how Singaporean businesses can use vertical analysis to not only carry out trend analysis within the business, but also in comparison to industry average within Singapore. This may include some benchmarking of common-size financial statements across some major industries in Singapore (e.g., F&B, retail, manufacturing, tech), with the percentages of COGS, operating expenses, gross profit margins, and assets within each line to indicate what other players in the industry average. The contrast between the financial structure of the firms and their local market peers that you will help the businesses make will be a very practical and usable piece of information in their strategic planning and performance enhancement. Additionally, this guide can touch on how to value inventory for financial reporting, helping businesses align their reporting with prevailing practices. Complementary resources, such as interactive corporate training solutions -based companies can use, may further enhance implementation and staff readiness.
Interactive Vertical Analysis Calculator for Singaporean Financial Statements:
Design a web-based, interactive package, such that the user can enter data of her company (e.g., a company income statement or balance sheet) and solve (online) a common-size statement automatically. Each line item should be listed in the calculator in percentage of the base (e.g. total revenue on the calculator and income statement, and total assets on the calculator and on the balance sheet). To make it more applicable to Singapore, you may add small descriptions or tricks on how to understand the percentage of certain line items within the scope of common Singapore businesses business operation or taxation, in order to make it an interesting and applicable tool to our local accountants and business owners looking to learn financial modeling for beginners or seeking clarity on how to read a balance sheet effectively in the local context.
