Vertical Analysis

It’s your favorite document: income statements for firms.

Income statements list items and services by cost in a given year, expressed as a percentage of gross sales. Maybe your dog poop cleanup business spends 70% of its gross sales on gas last year.

At the end of the income statement are aggregated assets and liabilities. Your assets are what you've got...like, incoming cash from sales, and long-term assets, like your car and pooper scooper: the gift that keeps on giving.

The liabilities include what you owe: loan payments on your car, and the money to pay yourself, a.k.a. owner’s equity.

Your assets and liabilities will each total 100%, with your assets equaling your liabilities.

And...that’s it. That’s vertical analysis: the method of listing each line item for both assets and liabilities as percentages on a financial statement.

Vertical analysis is most useful in comparing year-to-year costs. For instance, you might find that you paid 70% of your gross sales on gas last year, but 78% of your gross sales on gas this year. That will lead you to think: "Hmm, why is that happening?" Maybe your biggest client, a Newfoundland, passed away. You found replacement business, but it requires you to drive farther. Or maybe gas prices rose. If this trend continues, you may consider switching out your current car for a more fuel efficient one so you can save more on gas.