Vertical analysis is a way of expressing the figures of financial statements in proportion to a total amount such that the total of each individual portion/item comes to 1 or 100{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c}. This type of analysis can be done for balance sheet as well as for income statement. In balance sheet analysis, we divide the individual assets balances by the total asset figure while for equity, long-term obligations and short-term liabilities, we divide the individual balances by the sum of equity, long-term obligation, and short-term liabilities. To conduct the vertical analysis of income statement, we present all the items as a percentage of revenue.
Example
Alpha has the following income statement for the year ended 30th June 2015:
| $m | |
| Revenue | 1500 |
| Cost of goods sold | (1100) |
| Gross profit | 400 |
| Distribution expenses | 175 |
| Admin & Selling expenses | 140 |
| Profit before tax | 85 |
Required:
Conduct a vertical analysis for the income statement of Alpha.
Solution
| $m | {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} | |
| Revenue | 1500 | 100 |
| Cost of goods sold | (1100) | (73) |
| Gross profit | 400 | 27 |
| Distribution expenses | (175) | (11.7) |
| Admin & Selling expenses | (140) | (9.3) |
| Profit before tax | 85 | 5.7 |