Vertical analysis

 Vertical analysis, also known as common-size analysis, is a financial analysis technique that compares different items on a financial statement as a percentage of a common base. In vertical analysis, each line item on the financial statement is expressed as a percentage of another item, usually the total assets or total revenue, depending on the statement being analyzed.

For example, in the vertical analysis of an income statement, each line item is expressed as a percentage of the total revenue. This allows for easy comparison of the relative size and importance of each expense or revenue item to the total revenue.

The formula for vertical analysis is as follows:

Vertical Analysis = (Item Amount / Base Amount) x 100

Where:

• Item Amount is the amount of a specific line item on the financial statement.
• Base Amount is the amount of the common base used for comparison, such as total assets or total revenue.

Vertical analysis is used to identify trends and patterns in a company's financial statements and to compare the performance of a company over time or against its peers. It can help to identify areas where a company is doing well or where there may be room for improvement.

One potential limitation of vertical analysis is that it does not provide information about the absolute size of each item on the financial statement. Therefore, it should be used in conjunction with other financial analysis techniques, such as horizontal analysis or ratio analysis, to gain a comprehensive understanding of a company's financial performance.