How to Calculate Vertical Analysis Step-by-Step

Vertical analysis is a useful financial statement analysis technique that shows each line item on the income statement or balance sheet as a percentage of a base figure. This converts the raw financial data into standardized percentages allowing for an “apples-to-apples” comparison between different companies even if they have very different revenue figures or asset sizes. In this comprehensive guide, we will walk through the vertical analysis process with examples to show you exactly how to calculate vertical analysis for the income statement and balance sheet.

Overview of Vertical Analysis

Vertical analysis, also called common-size analysis, is all about looking at financial statements as percentages rather than absolute dollar amounts. This enables the user to quickly judge the relative size and importance of each line item. For example, on the income statement, expressing revenue as 100% and every expense item as a percentage of total revenue immediately shows which costs are highest and lowest relative to the company’s sales.

The key advantage of vertical analysis is improving comparability between companies. For a $10 million revenue company $1 million of R&D costs is clearly more significant than for a $1 billion revenue company. But expressing R&D as 10% of revenue for both companies immediately shows they devote the same portion of sales to R&D on a relative basis.

Below are some key things to keep in mind about vertical analysis

• Works for both income statements and balance sheets
• Shows relative size of line items, not absolute dollar amounts
• Improves comparability between different sized companies
• Relies on choosing an appropriate “base” figure to serve as the denominator

Now let’s look at how to actually calculate vertical analysis in practice.

How to Calculate Vertical Analysis of the Income Statement

For the income statement, the most common “base” figure used in vertical analysis is total net revenue or net sales. Some analysts may also use total expenses or operating expenses, but revenue is the most prevalent approach.

Here are the step-by-step instructions to calculate vertical analysis of the income statement:

1. Obtain the income statement you want to analyze – This should show at least revenue, expenses, operating profit, interest, taxes, and net income.

2. Identify the base figure – For the income statement this is almost always total revenue or net sales.

3. Divide each line item by the base figure – For revenue this will be 100%. For expenses, take the absolute dollar amount and divide it by total revenue, then express as a percentage.

4. Format the percentages neatly – Display them to 1 decimal place alongside the raw dollar amounts.

5. Analyze the results – Look for the relative size of expenses and profit margins like gross margin, operating margin, and net margin. Compare across periods or vs. competitors.

Let’s look at an example income statement vertical analysis:

Income Statement Example Co.  Year 1Revenue        $100,000   100.0%COGS           (50,000)   -50.0%  Gross Profit   $50,000    50.0%SG&A           (20,000)   -20.0%EBIT           $30,000    30.0%Interest       (5,000)    -5.0%Pretax Income  $25,000    25.0%  Taxes          (8,000)    -8.0%Net Income     $17,000    17.0%

This shows revenue is obviously 100% of itself. COGS of $50,000 divided by revenue of $100,000 is 50%, and so on. The vertical analysis has converted the original dollar amounts into handy percentages expressing how significant each line item is relative to total sales.

How to Calculate Vertical Analysis of the Balance Sheet

The process is much the same for the balance sheet, except total assets is generally the most widely used base figure. Total liabilities is also an option if specifically wanting to analyze how debt relates to assets.

Here are the steps for balance sheet vertical analysis:

1. Obtain the balance sheet to analyze – This should have assets, liabilities, and shareholders’ equity.

2. Choose the base figure – Almost always total assets, but total liabilities also has uses.

3. Divide each line item by the base – For assets this will show the % breakdown between cash, inventory, PP&E, etc.

4. Format the percentages cleanly – Display to 1 decimal place alongside the original dollar figures.

5. Analyze the results – Determine the asset composition % and how debt relates to assets. Compare between periods or companies.

Below is an example balance sheet vertical analysis with total assets as the base:

Balance Sheet Example Co.Year 1Cash            $20,000     20.0%Accounts Receivable   $10,000     10.0%Inventory       $15,000     15.0%        Total Current Assets   $45,000     45.0%         Net PP&E       $30,000     30.0%Total Assets      $75,000    100.0%Accounts Payable    $10,000     13.3% Short-term Debt     $15,000     20.0%        Total Current Liabilities   $25,000     33.3%Long-term Debt    $20,000     26.7%        Total Liabilities    $45,000     60.0%Common Stock   $20,000     26.7% Retained Earnings   $10,000     13.3%        Total Equity       $30,000     40.0%Total Liabilities & Equity  $75,000    100.0%

This format expresses each asset as a percentage of total assets, showing the relative composition. The same applies on the liabilities and equity side. Companies can be quickly compared by looking at metrics like the percentage of assets tied up in inventory or receivables, or how much total debt relates to total assets.

Vertical Analysis Formula

The general formula for vertical analysis is straightforward:

Vertical Analysis % = (Line Item) / (Base Figure) 

On the income statement with revenue as the base figure:

Vertical Analysis % = (Income Statement Line Item) / (Total Revenue)

On the balance sheet with total assets as the base figure:

Vertical Analysis % = (Balance Sheet Line Item) / (Total Assets) 

Plugging in the actual dollar amounts from the financial statements and calculating will yield the vertical analysis percentages.

Vertical Analysis Calculator

Doing the vertical analysis math manually can get tedious. A handy tip is to set up a simple Excel template to serve as an automated vertical analysis calculator.

Follow these steps to create your own vertical analysis calculator in Excel:

1. Input the income statement and balance sheet line items – Create separate tables for each. Include the dollar amounts for each line item.

2. Add the base figure – Input total revenue at the top of the income statement. Input total assets for the balance sheet.

3. Create formulas to divide each line item by the base figure – The formulas will look like =(B2/B1) for COGS divided by revenue.

4. Format the results as percentages – Set the number format to percentage with 1 decimal place.

5. Link this output to charts – Create column or pie charts linked to the data to easily visualize results.

With this spreadsheet set up, simply update the raw dollar amounts each period and the vertical analysis will instantly recalculate, creating an automated tool to monitor trends and comparisons over time.

Vertical Analysis Example

Let’s walk through a detailed vertical analysis example to see these concepts in action using real income statement and balance sheet figures.

Below are the financial statements for Superstore Inc over two years:

Superstore Inc Income Statement  Year 1      Year 2Revenue      $120,000   $200,000COGS         (75,000)   (125,000)Gross Profit   45,000     75,000  SG&A         (15,000)   (35,000) Other         (5,000)    (10,000)EBIT          25,000     30,000Interest      (2,000)    (5,000)Pretax Income   23,000     25,000Taxes         (6,900)    (7,500)  Net Income      16,100     17,500

Superstore Inc Balance SheetYear 1      Year 2  Cash          20,000     60,000Inventory     25,000     50,000Other Current Assets 10,000     20,000        Total Current Assets 55,000    130,000        Net PP&E     50,000     75,000        Total Assets  105,000    205,000        Accounts Payable  15,000     25,000Short