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.
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.
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.
