Vertical Analysis

Learning Outcome

  • Perform a vertical analysis of a company’s financial statements

A vertical analysis 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 (intracompany) or between different companies (intercompany).

Intracompany Analysis

On the comparative income statement, the amount of each line item is divided by the sales number, which is called the “base”.

Jonick Company
Comparative Income Statement
For the Years Ended December 31, 2019 and 2018
Description 2019 2019 (%) 2018 2018 (%)
Sales $994,000 100.00% $828,000 100.00%
Cost of merchandise sold 414,000 41.6% 393,000 47.5%
Gross Profit Single Line$580,000 58.4% Single Line$435,000 52.5%
Subcategory, Operating Expenses:
      Salaries expense $77,000 7.7% $64,000 7.7%
      Rent expense 63,000 6.3% 52,000 6.3%
      Insurance expense 56,000 5.6% 46,000 5.6%
      Supplies expense 49,000 4.9% 41,000 5.0%
      Advertising expense 42,000 4.2% 35,000 4.2%
      Depreciation expense 35,000 3.5% 29,000 3.5%
      Utilities expense 28,000 2.8% 23,000 2.8%
Total operating expense Single Line348,000 35.0% Single Line290,000 35.0%
Net income from operations $232,000 23.3% $145,000 17.5%
Subcategory, Other revenue and expenses
      Gain on sale of investments $137,000 13.8% $186,000 22.5%
      Interest expense (55,000) 5.5% (50,000) 6.0%
Income before income tax $314,000 31.6% $281,000 33.9%
Income tax expense 66,000 6.6% 50,000 6.0%
Net income Single Line$248,000 Double Line 24.9% Single Line$231,000 Double Line 27.9%

On the comparative balance sheet, the amount of each line item is divided by total assets.

Jonick Company
Comparative Balance Sheet
December 31, 2019 and 2018
2019 2019 (%) 2018 2018 (%)
Assets
Subcategory, Current assets:
Cash $373,000 9.4% $331,000 9.2%
Marketable securities 248,000 6.3% 215,000 6.0%
Accounts receivable 108,000 2.7% 91,000 2.5%
Merchandise Inventory 55,000 1.4% 48,000 1.3%
Prepaid insurance 127,000 3.2% 115,000 3.2%
      Total current assets Single Line$911,000 23.1% Single Line$800,000 22.2%
Subcategory, Long-term investments:
Investment in equity securities $1,946,000 49.3% $1,822,000 50.5%
Subcategory, Property, plant and equipment:
Equipment (net of accumulated depreciation) $87,000 2.2% $42,000 1.2%
Building (net of accumulated depreciation) 645,000 16.3% 581,000 16.1%
Land 361,000 9.1% 361,000 10.0%
      Total property, plant and equipment $1,093,000 27.7% $984,000 27.3%
         Total assets Single Line$3,950,000Double Line 100.00% Single Line$3,606,000Double Line 100.00%
Liabilities
Subcategory, Current liabilities:
Accounts payable $120,000 3.0% $109,000 3.0%
Salaries payable 244,000 6.2% 222,000 6.2%
      Total current liabilities Single Line$364,000 9.2% Single Line$331,000 9.2%
Subcategory, Long-term liabilities
Mortgage note payable $83,000 2.1% $83,000 2.3%
Bonds payable 828,000 21.0% 745,000 20.7%
      Total long-term liabilities Single Line$911,000 23.1% Single Line$828,000 23.0%
         Total liabilities $1,275,000Double Line 32.3% $1,159,000Double Line 32.1%
Stockholders’ Equity
Preferred $1.50 stock, $20 par $166,000 2.1% $166,000 2.3%
Common stock, $10 par 83,000 4.2% 83,000 4.6%
Retained earnings 2,426,000 61.4% 2,198,000 61.0%
      Total stockholders’ equity Single Line$2,675,000 67.7% Single Line$2,447,000 67.9%
Total liabilities and stockholders’ equity $3,950,000Double Line 100.00% $3,606,000Double Line 100.00%

On both financial statements, percentages are presented for two consecutive years in order for the percent changes over time to be evaluated.

Intercompany Analysis

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.

Common-size statements include only the percentages that appear in either a horizontal or vertical analysis. They often are used to compare one company to another or to compare a company to other standards, such as industry averages.

The following compares the performance of two companies using a vertical analysis on their income statements for 2019.

Jonick Company
Comparative Income Statement
For the Years Ended December 31, 2019
Description Jonick Schneider
Sales 100% 100%
Cost of merchandise sold 41.6% 47.5%
Gross Profit 58.4% 52.5%
Total operating expense 35.0% 35.0%
Net income from operations 23.3% 17.5%
Subcategory, Other revenue and expenses
      Gain on sale of investments 13.8% 22.5%
      Interest expense 5.5% 6.0%
Income before income tax 31.6% 33.9%
Income tax expense 6.6% 6.0%
Net income 24.9% 27.9%

The common-size income statements for Jonick Corporation and Schneider Corporation show that Schneider has lower gross profit and net income from operations percentages to sales. Yet Schneider has a higher overall net income due to much greater gains on the sale of investments.

From an investor’s standpoint, Jonick is better at making money from operations. Schneider may or may not be able to sustain profits from sales of investments. Normally, if you were comparing retail or manufacturing companies, you would be more interested in profits from operations, since that is the core business function. This analysis might lead you back to more a horizontal analysis of Schneider and Jonick in order to determine why so much income is being generated from the sale of investments.

Now, take what you’ve learned and practice your knowledge.

PRACTICE QUESTION