What is Vertical Financial Analysis?
Vertical analysis, also known as common-size analysis, is a financial statement analysis technique that expresses each line item as a percentage of a base figure within the same statement. For the income statement, the base is usually total revenue; for the balance sheet, total assets. It helps compare structure across periods and companies.
How It Works
- Choose the base figure: total revenue (income statement) or total assets (balance sheet).
- Divide each line item by the base and multiply by 100 to get the percentage.
- Compare the resulting percentages across periods or against industry benchmarks.
- Investigate notable changes in structure and identify trends.
Saudi Context
Saudi analysts use vertical analysis to compare Tadawul-listed companies across the same sector regardless of absolute size. CMA-required prospectuses and credit rating reports include common-size income statements and balance sheets for multi-year comparison.
Example
A Saudi retailer’s gross margin (gross profit / revenue) is 35% in 2024 versus 38% in 2023. Vertical analysis shows the margin compressed by 3 percentage points, prompting a deeper investigation into cost of sales drivers.