What Is Vertical Analysis? 

 

Key Takeaways

• Vertical analysis turns financial statement amounts into percentages. Each line item is compared with a selected base amount on the same statement.
• The base depends on the financial statement. Income statements typically use revenue or net sales, while balance sheets typically use total assets.
• Common-size analysis follows the same basic approach. The terms vertical analysis and common-size analysis are often used interchangeably.
• Vertical and horizontal analysis answer different questions. Vertical analysis explains statement composition, while horizontal analysis tracks changes across reporting periods.

Vertical analysis, also called common-size analysis, expresses each line item on a financial statement as a percentage of a base amount on that same statement. On an income statement, the base is usually revenue or net sales. On a balance sheet, it is usually total assets.

This percentage-based view makes cost structure, margins, and asset mix easier to read without relying on dollar amounts alone. For financial planning and analysis (FP&A) teams, it also provides a consistent way to review how the composition of a financial statement changes over time.

This guide explains what vertical analysis is, how the formula works, and how to choose the right base amount for an income statement or balance sheet. It also covers common-size financial statements, walks through a simple example, and explains how vertical analysis differs from horizontal analysis in FP&A reporting.

What is Vertical Analysis?

Vertical analysis is a financial statement analysis method that expresses each line item as a percentage of a common base amount on the same statement. On an income statement, the base is typically revenue or net sales, whereas on a balance sheet, it is usually total assets. This common-size format makes it easier to compare cost structure, profitability, and asset composition across periods or companies.

How Vertical Analysis Works

Vertical analysis treats one amount on the financial statement as the 100% reference point. Every other line item is then measured against that base.

The formula is:

Percentage = (Line Item ÷ Base Amount) × 100

For an income statement, the base is typically revenue or net sales. For a balance sheet, total assets is typically the base for asset accounts.

Common-size financial statements

A common-size financial statement presents its line items as percentages of a selected base amount rather than relying only on their dollar values.

In practice, common-size analysis and vertical analysis are often used to describe the same percentage-based method. A common-size income statement, for example, typically presents each line item as a percentage of net sales.

Vertical Analysis Example

Suppose ABC Manufacturing reports $1,000 in revenue, $600 in cost of goods sold, $400 in gross profit, and $130 in net income. If revenue is the 100% base, cost of goods sold represents 60% of revenue, gross profit represents 40%, and net income represents 13%.

The percentages make the relationship between each line item and revenue visible immediately, regardless of the underlying dollar amounts.

For the complete calculation process and additional income-statement and balance-sheet examples, see the vertical analysis guide.

Vertical vs. Horizontal Analysis

Vertical analysis focuses on the composition of a financial statement within a reporting period. Horizontal analysis focuses on how individual line items change between reporting periods.

Key differences at a glance

Using Vertical Analysis in FP&A Reporting

Vertical analysis often exists alongside budgeting, forecasting, and recurring financial reporting. Limelight is a modern FP&A platform that brings planning, forecasting, and reporting into a connected finance workspace.

For a step-by-step guide with full balance-sheet and income-statement examples, see our vertical analysis guide.

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Frequently Asked Questions

Can vertical analysis be used for cash flow statements?

Yes. Vertical analysis can also be applied to a cash flow statement, although the base is less standardized than it is for an income statement or balance sheet. One approach is to compare cash-flow items within the operating, investing, and financing sections against the relevant section total.

Should I use gross or net sales as the base?

Use the amount that best represents the revenue base of the income statement. Net sales is generally the clearer choice when returns, allowances, or discounts materially reduce gross sales because it reflects revenue after those reductions.

Why is it called vertical analysis?

It is called vertical analysis because the calculation runs down a single financial statement. Each relevant line item is compared with a common base amount on that same statement, rather than being compared primarily with the same line item from another reporting period.