Income Statement Analysis: How to Read an Income Statement

vertical analysis

Layer is an add-on that equips finance teams with the tools to increase efficiency and data quality in their FP&A processes on top of Google Sheets. Share parts of your Google Sheets, monitor, review and approve changes, and sync data from different sources – all within seconds. For this example, the analysis will be carried out on the data reported for 2021. However, you can do this quickly for multiple years, particularly if you use a balance sheet template. Liquidity is a company’s ability to pay off its debts when they come due or even if they come due early. It is an important part of assessing the financial condition of a company.

Notice that the column presenting the ratio of each line item to gross sales is to the right of the actual values. Sometimes, financial statements are prepared in this way by the provider but often FP&A analysts will utilize their own basis depending on what information they are trying to understand. The use of percentages converts a company’s dollar amounts on its financial statements into values that can be compared to other companies whose dollar amounts may be different. When using vertical analysis in a financial statement, the base figures will be shown, and then the percentages for each line item will be displayed in a separate column. Management sets a base amount or benchmark goal to judge the success of the business.

Data Tables

Stockholders’ equity is the amount of capital owned by the investors after the liabilities are accounted for. The income statement is the financial statement that gives readers the company’s bottom line, profit or loss, for the reported accounting period. Revenue is the money that comes into the firm for the sale of goods or services. This statement reveals the firm’s level of profitability during a specific time period. Conducting a vertical analysis of the balance sheet, an analyst may compare the firm’s capital structure to its rivals, and analyze debt levels, cash holdings, inventory, and goodwill. Vertical analysis of the income statement can provide the analyst with the net profit margin, gross margin, and operating margin and a means to analyze expenses. Vertical analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement.

The vertical analysis of a balance sheet results in every balance sheet amount being restated as a percent of total assets. Vertical analysis makes it easy to identify the relative size of the components of a financial statement and their total size. As a result, a company could use this information to establish minimum and maximum limits for individual line items. Vertical analysis identifies each line item in a financial statement with a base figure. To find the vertical analysis, you simply divide each line of the balance sheet by your base figure. It analyzes financial statements by listing each individual item as a standard percentage.

What Is an Income Statement?

This can be paired with horizontal analysis to help you recognise trends and maximise profits through efficient, data-based strategies. A of financial statements often reports the percentage of each line item to a total amount. Vertical analysis can be used to compare and identify trends within a company from year to year or between different companies . When you use total assets in the denominator, look at each balance sheet item as a percentage of total assets. For example, if total assets equal $500,000 and receivables are $75,000, receivables are 15 percent of total assets.

  • Management sets a base amount or benchmark goal to judge the success of the business.
  • It does this by using one line item on the statement as a base against which to evaluate all other items in the same statement.
  • First, we can see that the company’s marketing expenses increased not just in dollar terms, but also as a percentage of sales.
  • This type of analysis makes it simple to compare financial statements across periods and industries, and between companies, because you can see relative proportions.
  • One of the advantages of common-size analysis is that it can be used for inter-company comparison of enterprises with different sizes because all items are expressed as a percentage of some common number.

But we’ll utilize the latter here, as that tends to be the more prevalent approach taken. Get started with one of our top business credit card picks of 2022 today. FREE INVESTMENT BANKING COURSELearn the foundation of Investment banking, financial modeling, valuations and more. The content on is for educational and informational purposes only and should not be construed as professional financial advice. Finmasters is not a financial institution and does not provide any financial products or services. We strive to provide up-to-date information but make no warranties regarding the accuracy of our information.

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