Horizontal and vertical analysis Accounting and Accountability

This type of analysis enables businesses to view the relative proportions of account balances, compare internal changes over time, and identify trends. By analyzing these profitability ratios using vertical analysis, you can gauge a company’s financial performance unearned revenue and compare it to industry benchmarks or previous periods. Likewise, all the items in the balance sheet are stated as a percentage of the total assets. The opposite of the vertical analysis of financial statements is the Horizontal analysis always looks at the amount from the financial statement over the horizon of many years.

• This combination of insights can prompt a deeper investigation into the company’s financial strategy and risk management practices.
• While horizontal analysis remains valuable for assessing changes over time, vertical analysis offers unique perspectives and granularity in financial analysis.
• For example, a gradual increase in the percentage of net income relative to total sales might indicate improving profitability and cost control.
• Want to learn how Cube can help you conduct vertical analysis effectively (and in less time)?
• This is particularly useful for investors and analysts who need to benchmark a company’s performance against its peers.

Example of the Vertical Analysis Formula

When we carry out vertical analysis on the income statement, it shows the top-line sales figure as 100% and every other item is shown as percentage of the total sales for that year. Each item in the income statement is divided by the company’s total sales for that year (which gives us a common size income statement). In vertical analysis, each line item in the financial statement is expressed as a percentage of a base figure in the same period (for example, the total assets or gross sales). However, in horizontal analysis, the relative change in a line item from one period to the next is calculated and typically presented as a percentage change.

Vertical analysis in action: income statement insights

The company will need to further examine this difference before deciding on a course of action. Another method of analysis vertical analysis formula MT might consider before making a decision is vertical analysis. Horizontal and vertical analysis are two types of analysis you can do that use simple mathematical formulas.

Example of Vertical Analysis Formula

This is in order to get a clear picture of whether your performance metrics are improving or declining. This shows each cash outflow or inflow as a percentage of the total cash inflows of the business. Previously, Stefan served as the Corporate Controller for Kodiak Cakes, a private equity owned, leading consumer packaged food company, and as a Controller for Skullcandy, a multinational headphone CPG. Interpreting the results of vertical analysis requires a keen eye for detail and an understanding of the broader financial context.

With Acterys, FP&A professionals can conduct thorough vertical analysis and make well-informed decisions thanks to its https://www.bookstime.com/ scenario planning and collaboration features. This empowers organizations to drive business growth by unlocking the true potential of their financial data and harnessing the advantages of vertical analysis for strategic decision-making. In the above vertical analysis example, we can see that the income decreases from 1st year to 2nd year, and the income increases to 18% in the 3rd year. So by using this method, it is easy to understand the net profit as it is easy to compare between the years.