What does vertical analysis involve?

Vertical analysis involves analyzing items from the same financial statement for a specific period, typically expressed as a percentage of a base figure within that statement. For instance, in an income statement, each item can be expressed as a percentage of total revenue, allowing for an easy comparison of each expense item against sales. This approach helps stakeholders understand the relative size of each component in the context of the whole statement for that particular year.

This method is particularly useful in assessing how various components of a financial statement relate to one another and enables a straightforward analysis of a company's operational efficiency or profitability for that specific time frame. By concentrating on a single year's data, vertical analysis provides insights that are more straightforward than those derived from data spanning multiple years or different statements.