 # Vertical analysis

Vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement lists as a percentage of another item. It is also useful for trend analysis, to see relative changes in accounts over time, such as on a comparative basis over five years. For example, if the cost of goods sold has a history of being 40% of sales in each of the past four years, then a new percentage of 48% would be a cause for alarm.

#### When is Vertical Analysis Used?

Vertical analysis is most common within a financial statement for a single reporting period, e.g., quarterly. The accountants can ascertain the relative proportions of the balances of each account.

It is exceptionally useful while charting a regression analysis or a ratio trend analysis. It enables the accountant to see relative changes in company accounts over a given period. The analysis is especially convenient to do so on a comparative basis.

#### Vertical Analysis – Formula

To calculate the percentage,  concerning the income statement and the balance sheet, the formulas are:

#### Vertical Analysis

-(Income Statement) = Item in Income Statement/Total Sales * 100

– (Balance Sheet Statement) = Item in Balance Sheet/Total Assets * 100

Deeper composition insights: the analysis enables the analyst to delve deeper into a financial statement and better comprehend its composition. To perform such analysis, one needs to create a common size financial statement (for example, a common size income statement).