Question

I want answer for this question please with typing and from your understanding and experience not from the internet.

How do we use vertical analysis to analyze a business? Prepare detail structure and explain.

Answer 1

Vertical analysis is one the analytical tools of the decision making.It is a technique of expressing financial statement in terms of percentage.This method is a comparison of different items to a single item in the balance sheet.The advantage related is that balance sheet of different companies can be compared with each other.

This type of comparative analysis helps in finding out the outperformers of the industry.This can be used through the the technique of past performance and mean reversion . For example , A profit margin of 30% in an industry may have been normal but if a company posts an exceptional 70% profit margin, that would redefine the comparative analysis standard for the whole industry.Vertical analysis reveals the relationship of each statement items to its base amount. For the income statement,net sales is the base and For the balanced sheet,total assets is the base.Common size statements are financial statements that reports only percentages,the same percentages that appear in vertical analysis so it can be said to be reflection of vertical analysis process.It can be done through benchmarking, which is the practice of comparing a company with other leading companies.

This type of analysis is helpful in better competetion and matching the performance of the company to that of the best in the industry.This helps in the betterment of not only the company, but the overall industry.