Vertical Analysis
Common-Size Financial Statements
Vertical analysis expresses each financial statement item as a percentage of a base figure. On the income statement, items are usually expressed as a percentage of net sales. On the balance sheet, items are expressed as a percentage of total assets.
- Facilitates comparisons between companies of different sizes.
- Highlights changes in cost structure.
- Simplifies trend analysis.
- Identifies unusual expense or asset proportions.
Tip
Common-size statements are especially useful when comparing competitors with significantly different revenue levels.
Summary
Vertical analysis focuses on financial statement composition rather than absolute dollar amounts.