When it comes to financial statement analysis, vertical analysis is one of the most important techniques that you can use. This type of analysis allows you to compare specific items on a statement over a period of time. By doing this, you can better understand how the company is performing financially. In this guide, we will provide examples of how to do vertical analysis on an income statement and cash flow statement. We will also discuss some of the benefits of using this technique. Let's get started!
What is vertical analysis, and why should you use it for stock analysis?
Vertical analysis is a way to analyze financial statements over time by looking at each line item as a percentage of an item's total, like revenue. This allows you to compare items on different statements more efficiently in order to identify trends or changes in performance. It also helps you assess how individual expenses affect the company's overall success. Furthermore, it can help you identify areas of improvement and pinpoint potential opportunities for the company.
Below you will find 2 examples of vertical analysis.
How to perform a vertical analysis on a company's income statement?
To perform a vertical analysis of a company's income statement, you must divide each item by the total revenue or net sales. This will give you the percentage of that particular item as it relates to the total. You can then compare this information over time to track changes in performance.
Before that, though, the first step is to get the company's income statement. For this, the best tool to use is Wisesheets which allows you to get historical financials, key metrics, and growth metrics on your spreadsheet in one click.
With the data already on your spreadsheet, you are ready to perform your analysis. For example, Apple's income statement for the 2020 fiscal year showed total revenue of $274.517 billion and a cost of goods sold (COGS) of $169.529 billion. In order to do a vertical analysis, we would divide the COGS by the total revenue, which comes out to 61.8%. This means that Apple's cost of goods sold was 61.8% of its total revenue for the year.
Comparing this number with the previous year's figure of 62.2% can help us gain insight into how the company manages its expenses. We can see that the cost of goods sold as a percentage of revenue decreased slightly from the previous year, which is a positive sign, and more research can be performed to figure it the cause.
You can do the same for the other items on the income statement to get a comprehensive view of the company's income and expenses.
How to perform a vertical analysis on a company's cash flow statement?
In order to do a vertical analysis of a company's cash flow statement, you will need to divide each item by the total net cash from operating activities. This will give you the percentage of that particular item as it relates to the total. You can then compare this information over time to track changes in performance.
You can also use Wisesheets to get the cash flow statement data instantly on your spreadsheet.
For example, Apple's cash flow statement for the 2020 fiscal year showed total net cash from operating activities of $80.674 billion and capital expenditures of $7.309 billion. In order to do a vertical analysis, we would divide the capital expenditures by the total net cash from operating activities, which comes out to 9.1%. This means that Apple's capital expenditures were 9.1% of its total net cash from operating activities for the year.
Comparing this number with the previous year's figure of 15.1% can help us gain insight into how the company is managing its capital expenditures. We can see that the capital expenditures decreased as a percentage of operating cash flow slightly from the previous year, which may indicate a decrease in investments.
You can perform the same calculation for the other cash flow statement items for a more comprehensive view of the company's cash flow.
Vertical analysis template
If you are looking to perform this type of analysis on your spreadsheet for either the income statement or cash flow statement. Check out this free template which automatically provides you with all the calculations by simply changing the stock ticker, as shown in the vertical analysis examples.
The only thing to remember is that you need to download the Wisesheets add-on and log in with your account. You can get your Wisesheets free trial here.
How to interpret the results
After you have crunched the numbers, it is important to take a step back and interpret your results. Look for any trends or changes in the ratios that may indicate a shift in performance. This could indicate potential opportunities or threats that may arise in the future.
It is also helpful to compare your findings with industry averages or competitors to get an idea of how well the company performs relative to its peers. For example, if you notice that the company's cost of goods sold is higher than the industry average, this could be a sign that they are not managing their expenses as efficiently as other companies.
By leveraging the power of vertical analysis, you can gain valuable insight into the stocks you are analyzing and make more informed decisions.
Benefits of vertical analysis
The most obvious benefit of vertical analysis is that it provides an easy way to compare financial data over time. This can help you identify trends and spot potential opportunities or risks for a company.
Additionally, performing a vertical analysis of a company's income and cash flow statements allows you to gain insight into how the company utilizes its resources, which can be helpful when making investment decisions.
Finally, since the calculations are relatively simple, it is a great way for beginners to understand financial statements and start their own analysis.
Vertical analysis is a valuable tool for investors who are looking to gain insight into a company's performance over time. By comparing different items on the income and cash flow statements, you can get an idea of how the company manages its resources and identify potential opportunities or risks.
Additionally, since the calculations are relatively simple, it is a great way for beginners to understand financial statements and start their own analysis.
We hope that these examples of vertical analysis have helped provide you with a clear example of how to perform vertical analysis on your spreadsheet.