What is vertical analysis?
Vertical analysis is a method of financial statement analysis that expresses each line item as a percentage of a chosen base figure within the same period. It is called "vertical" because the analysis runs down a single column of the financial statement — one period at a time.
The result is a common-size financial statement — every line becomes a percentage, making it possible to compare companies with very different revenue scales, or to track how the internal structure of a business changes over time even as absolute dollar amounts grow.
Vertical analysis
Each line as a % of the base within one period. Answers: "What proportion of revenue is COGS?" Enables size-independent comparison.
Horizontal analysis
Each line as a % change between two periods. Answers: "How much did COGS grow year-over-year?" Reveals trends over time.
The two methods are complementary. Vertical analysis shows the structure of a statement at a point in time. Horizontal analysis shows the direction of change between periods. Many financial analysts use both together.
Vertical analysis formula
Base figure by statement type
Quick example — income statement
Quick example — balance sheet
How to calculate vertical analysis step by step
- Identify the financial statement you are analysing. Income statement, balance sheet, or cash flow statement — each uses a different base figure.
- Confirm the base figure. For the income statement, use net revenue. For the balance sheet, use total assets. The base figure is always 100%.
- Divide each line item by the base figure. Apply the same base to every row in the statement.
- Multiply by 100. Convert the decimal ratio to a percentage.
- Verify the subtotals add up correctly. On a common-size income statement, COGS% + Gross profit% must equal 100%. On the balance sheet, total assets% must equal total liabilities + equity%.
- Interpret relative to benchmarks. A single period's vertical analysis is most useful when compared against the prior year, industry peers, or your own targets.
Worked examples
Example 1 — Gross margin check
Revenue: $500,000 · COGS: $300,000
40 cents gross profit per revenue dollar
Example 2 — SG&A ratio
Revenue: $500,000 · SG&A: $95,000
SG&A consumes 19% of every revenue dollar
Example 3 — Balance sheet: cash ratio
Total assets: $2,000,000 · Cash: $300,000
15% of assets are held as cash
Example 4 — Debt structure check
Total assets: $2,000,000 · Total debt: $800,000
40% of assets are financed by debt
Full common-size income statement
This shows a complete vertical analysis for a manufacturing company. Every line is expressed as a percentage of net revenue ($800,000).
| Line item | Amount | % of Revenue | Note |
|---|---|---|---|
| Net revenue | $800,000 | 100.0% | Base figure |
| Cost of goods sold | $480,000 | 60.0% | Product cost |
| Gross profit | $320,000 | 40.0% | Margin |
| Selling expenses | $85,000 | 10.6% | Period cost |
| G&A expenses | $95,000 | 11.9% | Period cost |
| Total SG&A | $180,000 | 22.5% | Sum of period costs |
| Operating income | $140,000 | 17.5% | Operating margin |
| Interest expense | $12,000 | 1.5% | — |
| Net income before tax | $128,000 | 16.0% | Pre-tax margin |
| Income tax (25%) | $32,000 | 4.0% | — |
| Net income | $96,000 | 12.0% | Net margin |
Reading down the % column reveals the cost structure at a glance: COGS consumes 60% of revenue, SG&A 22.5%, and the business keeps 12 cents of every revenue dollar as net income.
Balance sheet vertical analysis example
On the balance sheet, every line is expressed as a percentage of total assets ($1,200,000 in this example).
| Line item | Amount | % of Total Assets |
|---|---|---|
| ASSETS | ||
| Cash & equivalents | $180,000 | 15.0% |
| Accounts receivable | $220,000 | 18.3% |
| Inventory | $150,000 | 12.5% |
| Total current assets | $550,000 | 45.8% |
| Property, plant & equipment (net) | $650,000 | 54.2% |
| Total assets | $1,200,000 | 100.0% |
| LIABILITIES & EQUITY | ||
| Accounts payable | $90,000 | 7.5% |
| Short-term debt | $110,000 | 9.2% |
| Total current liabilities | $200,000 | 16.7% |
| Long-term debt | $400,000 | 33.3% |
| Total liabilities | $600,000 | 50.0% |
| Total equity | $600,000 | 50.0% |
| Total liabilities + equity | $1,200,000 | 100.0% |
The balance sheet tells a clear capital structure story: 45.8% of assets are current (liquid), 54.2% are fixed (PP&E). The business is exactly 50% debt-financed and 50% equity-financed — a moderate leverage position.
Vertical analysis vs horizontal analysis
Both are forms of comparative financial statement analysis but they answer completely different questions.
A powerful combined approach: run vertical analysis on two consecutive years to get common-size statements for both periods, then compare the percentages. If COGS was 58% last year and 62% this year, you can see the margin erosion immediately — even if revenue grew and raw dollar COGS looks fine.
See the companion guide: How to Calculate Horizontal Analysis →
How to interpret vertical analysis results
A percentage on its own is not informative. Vertical analysis becomes useful when you compare the result against:
- Prior periods for the same company. If selling expenses rose from 8% to 14% of revenue, the business is spending more to generate each dollar of revenue — which may or may not be justified by growth.
- Industry benchmarks. A 45% gross margin is excellent for manufacturing but below average for SaaS. Context determines whether a ratio is healthy.
- Competitor common-size statements. Two retailers with very different revenue scales can still be compared directly once vertical analysis converts both to percentages.
- Management targets and budgets. If the operating model targets a 15% net margin and vertical analysis shows 8%, the gap signals where to look — too high COGS, too high SG&A, or both.
Red flags to watch for
- COGS% rising over time → cost structure worsening or pricing power eroding
- SG&A% rising without revenue growth → overhead becoming a drag
- Inventory% on balance sheet rising → potential slow-moving stock or overproduction
- Debt% of total assets rising → increasing leverage and financial risk
- Cash% falling sharply → liquidity risk building up
Common mistakes to avoid
- Using the wrong base figure. On the income statement, the base is always net revenue — not gross revenue, not total expenses. On the balance sheet, use total assets for both sides. Using the wrong base makes all percentages meaningless.
- Comparing companies in different industries. A 20% net margin is unremarkable for software but exceptional for grocery. Vertical analysis ratios only make sense within the same industry context.
- Treating vertical analysis as a standalone conclusion. A 60% COGS ratio is neither good nor bad without context. Always pair with prior-period data, competitor benchmarks, or management targets before drawing conclusions.
- Confusing vertical with horizontal analysis. Vertical analysis compares line items within one period. Horizontal analysis compares the same line item across periods. They are not interchangeable.
- Forgetting to verify that percentages sum correctly. On a common-size income statement, COGS% + gross profit% must equal 100%. Total assets% must equal total liabilities + equity%. If they do not, there is a calculation error.
Frequently asked questions
What is vertical analysis?
Vertical analysis expresses each line item on a financial statement as a percentage of a single base figure — net revenue on the income statement, total assets on the balance sheet. The result is a common-size statement where every line is a proportion of the whole.
What is the formula for vertical analysis?
Vertical Analysis % = (Line Item ÷ Base Figure) × 100. The base figure is net revenue for income statement analysis, or total assets for balance sheet analysis. The base always equals 100%.
What is the base for balance sheet vertical analysis?
Total assets. Every asset, liability, and equity line is expressed as a percentage of total assets. Since total assets equal total liabilities plus equity, the percentages on both sides of the balance sheet sum to 100%.
What is the difference between vertical and horizontal analysis?
Vertical analysis compares line items within a single period as percentages of a base figure. Horizontal analysis compares the same line item across two or more periods, showing percentage change over time. Vertical shows cost structure; horizontal shows trend direction.
Can vertical analysis be used to compare two companies?
Yes — this is one of its main uses. By converting both companies' statements to common-size percentages, you can compare cost structures, margin profiles, and capital allocation directly regardless of the difference in revenue or asset scale.
What does it mean if COGS % increases year over year?
Rising COGS as a percentage of revenue means gross margin is compressing — the company is retaining fewer cents of profit per revenue dollar. Possible causes include rising input costs, pricing pressure, product mix shifts toward lower-margin lines, or inefficiencies in production.