Vertical Financial Statement Analysis
A vertical financial statement analysis helps an investor, a corporate senior manager or a regulator identify operating trends within a company and evaluates business performance over a period of time. A vertical analysis also documents a corporation's competitive standing in an industry or sector. Vertical analysis may be performed on all financial statements.
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Function
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A vertical financial statement analysis helps gauge a corporation's economic progress and operating activities. Economic progress may relate to competitive standing, market share or strategic importance in an industry, sector or country (e.g., a utility company supplying electricity to an entire country). Operating activities may relate to business performance indicators, such as profit margin or return on equity ratios.
Significance
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A vertical financial statement analysis offers valuable information in an easily accessible format. Because an investor or company management typically does not have resources and/or time to review a large volume of operating data and compare various companies, they use the data compiled in a vertical analysis. This financial statement computes an item as a percentage of a total amount, which helps investors and managers easily evaluate two or more companies operating in similar or different industries.
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What Is a Financial Statement?
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A financial statement is a summarized accounting report that informs a reader about the economic picture of a company, a governmental agency or a nonprofit at a given point in time. There are four types of financial statements---balance sheet (also known as statement of financial position), statement of income, cash flows statement and statement of retained earnings.
Balance Sheet
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A balance sheet vertical analysis can help a company's top management or an investor gauge a corporation's monetary health. For example, a company has total assets of $100 million, $20 million cash available and $15 million in accounts receivable. A vertical balance sheet will show total assets 100 percent, cash available 20 percent and accounts receivable 15 percent.
Income Statement
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An income statement vertical analysis can inform an investor or a regulator about a company's profitability levels. Building on the prior example, if the company has total revenues of $50 million in a year, $1 million salaries expense and $20 million in cost of goods sold, a vertical income statement will show total revenues 100 percent, salaries expense 2 percent and cost of goods sold 40 percent.
Cash Flows Statement
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A cash flows statement vertical analysis helps management understand various sources of cash used in operations. Assuming the company has total cash activities at $100 million in a year, $10 million operating cash and $20 million in investments, a vertical cash flows statement will show total cash activities 100 percent, operating cash 10 percent and investments 20 percent.
Retained Earnings
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A retained earnings vertical analysis can help a regulator become familiar with owners' investments in a company. For example, the sample company has total retained earnings (company funds) of $200 million and $20 million dividends paid during the year. A vertical retained earnings statement will display total retained earnings 100 percent and dividends paid 10 percent.
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References
- Photo Credit pen showing diagram on financial report/magazine image by Anton Gvozdikov from Fotolia.com
