What is the aim of performing vertical analysis on financial statements?

The aim of performing vertical analysis on financial statements is to assess the relationship between line items within those statements. Vertical analysis expresses each line item as a percentage of a base amount, which allows for easy comparison and understanding of how individual components relate to each other in the context of the overall financial statement.

For example, in an income statement, each expense can be expressed as a percentage of total revenue. This helps stakeholders understand the proportion of expenses relative to sales, allowing them to see which costs take up more significant portions of revenue and to make comparisons across different periods or with industry standards.

This analytical technique is beneficial for internal and external users because it provides insights into the structure and efficiency of a company’s financial performance. It simplifies financial analysis, thereby enhancing decision-making and strategic planning by highlighting critical relationships and trends within financial data.