Question

Give two examples of where a vertical analysis would be useful to investors.

Answer 1

First of all let's understand what a vertical analysis means : Vertical analysis is basically a method of analyzing the financial statements wherein all the figures are expressed as a % of a base figure which can be Sales figure for Income statement items and Total assets/liabilities for balance sheet items.

It is very useful for the investors as it helps them in easier financial analysis of the performance of the company. Here are two examples on how it can be useful to the investors :

1. Vertical analysis makes it much easier for the investors to make a comparision among companies in the same industry. This is because one can easily compare the percentage figures with the industry standards. Consider the given data :

Particulars	Industry Standard	Apple	Microsoft
Gross Profit expressed as % of sales	20%	18%	25%

Now an investor can use the above data to easily compare that Microsoft has a better performance than Apple by comparing them amongst themselves and also to the industry standard.

2. Also one of the most useful advantages of vertical analysis is that by showing the various expense line items in the income statement as a percentage of sales, one can see how these are contributing to profit margins and whether profitability is improving over time. It thus becomes easier to compare the profitability of a company with its peers. Also it helps to establish a trend of expenses v/s sales which is especially helpful in a cost plus mark up company.