Recommendation Vertical Common Size Analysis

In this video on Vertical Analysis Common Size here we discuss its definition and advantages.

Vertical common size analysis. Vertical analysis also known as common-size analysis is a popular method of financial statement analysis that shows each item on a statement as a percentage of a base figure within the statement. Common size analysis also referred as vertical analysis is a tool that financial managers use to analyze income statements. It evaluates financial statements by expressing each line item as a percentage of the base amount for that period.

The vertical analysis of the balance sheet will result in a common-size balance sheet. Common size vertical analysis lets you see how certain figures in your business compare with a selected figure in one given time period. An example of this is an analysis of your expenses as a percentage of income.

Each method provides different information and can be used for different purposes but both are highly effective tools to give you insight on your businesss health and performance. The percentages on a common-size balance sheet allow you to compare a small companys balance sheets to that of a very large companys balance sheet. Vertical Analysis Method In vertical analysis financial statements are converted into common size by taking a figure as base and then showing all figures as the percentage of that figure in vertical direction see example below.

We also discuss common size of balance sheet and income stat. Common size analysis can be done either vertically or horizontally. For vertical analysis of income statement revenue is considered as a base and for balance sheet total assets is considered as a base.

A common-size balance sheet can also be compared to the average percentages for the industry. A vertical common-size analysis expresses inventory liabilities and equity as a percentage of total assets. It evaluates financial statements by expressing each line item as a percentage of the base amount for that period.

Vertical analysis is a technique used to express line items of financial statements in relation to a single item or base. To conduct a vertical analysis of balance sheet the total of assets and the total of liabilities and stockholders equity are generally used as base. The key benefit of a common size analysis is it allows for a vertical analysis by line item over a single time period such as a quarterly or annual period and also from a horizontal perspective.