What is Vertical Analysis of Financial Statements?
Vertical analysis is a financial statement analysis technique that expresses each line item as a percentage of a base figure (revenue for the income statement, total assets for the balance sheet), producing ‘common-size’ statements that facilitate cross-period and peer comparisons.
How It Works
- Income statement: each line as a percentage of revenue.
- Balance sheet: each line as a percentage of total assets.
- Reveals cost structure, margin trends, and capital composition.
- Complements horizontal analysis (period-over-period changes).
Saudi Context
Saudi investors and analysts use vertical analysis to compare Tadawul-listed peers within the same sector despite size differences. Saudi banks (SNB, Al Rajhi, Riyad) commonly present common-size income statements showing net interest margin, fee income, and operating cost ratios as percentages of total operating income.
Example
A Saudi retailer with revenue SAR 50,000,000 reports: COGS 60% (SAR 30,000,000), OpEx 25% (SAR 12,500,000), net profit 10% (SAR 5,000,000). Comparing across years shows margin compression or expansion.