Vertical analysis is one of the tools used in financial analysis. This method examines the proportions (ratios) of different items in financial statements.
What is Vertical Analysis – Definition
Vertical analysis (also called common-size analysis) provides insight into the structure of financial statements. The principle of this method is to express individual items in the statements (for example, the balance sheet or income statement) as a percentage of a certain reference value.
This allows analysts to quickly identify what share a particular item represents in the total structure of assets/liabilities or within individual categories of financial statements. These ratios can then be compared with similar companies (benchmarking), evaluated over a specific period (in combination with horizontal analysis => identifying increasing/decreasing trends over time), and more. 1
The Importance of Vertical Analysis in Financial Analysis
Vertical analysis generally provides the following benefits:
- Identification of structural changes: This method makes it possible to identify changes in the structure of financial statement items between different periods. For example, if the share of production costs relative to total costs increases significantly, it may indicate structural changes in the production process or rising input prices.
- Comparison with a benchmark: This refers to comparing the company’s structure with its competitors. It helps determine whether the company has a similar cost structure or differs in some way, allowing it to better focus on improving its indicators to strengthen its market position.
- Risks and opportunities: We can identify risks and opportunities based on changes in the proportions of different items. For example, if the share of debt increases, it may indicate higher financial risk – we then pay closer attention to cash flow analysis and liquidity ratios (e.g. current ratio, quick ratio). 2
Additional examples:
- Balance sheet: We can identify the share of individual items (e.g. fixed assets, current assets, liabilities) in the company’s total assets. This helps assess how efficiently the assets are utilized.
- Income statement: In the income statement, we examine the structure of costs and revenues. This allows us to determine whether operating expenses are stable or increasing and what share of profit or revenue is generated by various profit components – for example, the operating margin as operating profit/revenue.
- Cash flow statement: Vertical analysis can also be applied to the cash flow statement. It shows what proportion of cash flow generated from operating, investing, and financing activities each component represents.
Reference
- Managementmania.com, Vertical Analysis [online]. [cit. 2025-10-29]. Available at: https://managementmania.com/cs/vertikalni-analyza
- accountingtools.com, Vertical analysis definition [online]. [cit. 2025-10-29]. Available at: https://www.accountingtools.com/articles/vertical-analysis