Vertical Analysis (Common-Size)
Express every line as a percentage of a base — so companies of any size speak the same language.
Why This Matters
Two coffee shops. One solo location pulls in $170,000 per year. The other is a regional chain with $17,000,000 in revenue. Can you compare them?
Dollar amounts
Incomparable — the scale difference washes out any insight.
Common-size %
Solo COGS 47% of revenue vs. chain 52% — now you can compare structure.
Vertical analysis strips away company size and lets you compare structure.
It reveals what percentage of every sales dollar goes to production costs, operating expenses, taxes, and profit. It shows how a company's asset mix is allocated. It makes a $1 billion company directly comparable to a $1 million company.
What Is Vertical Analysis?
Vertical analysis (also called common-size analysis) expresses every line item on a financial statement as a percentage of a base figure within the same period.
The comparison is "vertical" because you analyze relationships down a single column rather than across multiple periods.
Income Statement
Base = Total Revenue
Every line ÷ revenue
Balance Sheet
Base = Total Assets
Every line ÷ total assets
| Line Item | Dollar Amount | % of Revenue |
|---|---|---|
| Revenue | $170,000 | 100.0% |
| COGS | $80,000 | 47.1% |
| Gross Profit | $90,000 | 52.9% |
| Operating Expenses | $66,000 | 38.8% |
| Net Income | $24,000 | 14.1% |
Every percentage tells you: "Of every $1 in revenue, X cents goes here."
The Formula
VERTICAL ANALYSIS FORMULA
Line Item ÷ Base Figure × 100 = Common-Size %
Income Statement
COGS % = COGS ÷ Revenue × 100
Net Margin = Net Income ÷ Revenue × 100
Balance Sheet
Cash % = Cash ÷ Total Assets × 100
Current Liabilities % = Current Liabilities ÷ Total Assets × 100
Each percentage shows the proportion, not the amount.
Vertical Analysis: Income Statement
ABC Coffee Shop — Common-Size Income Statement for the year ended Dec 31, 2026
| Line Item | Amount | % of Revenue |
|---|---|---|
| REVENUE | ||
| Coffee Sales | $120,000 | 70.6% |
| Food Sales | $50,000 | 29.4% |
| Total Revenue← Base | $170,000 | 100.0% |
| Cost of Goods Sold | $80,000 | 47.1% |
| Gross Profit← Gross Margin | $90,000 | 52.9% |
| OPERATING EXPENSES | ||
| Salary Expense | $40,000 | 23.5% |
| Rent Expense | $12,000 | 7.1% |
| Utilities | $4,000 | 2.4% |
| Supplies | $3,000 | 1.8% |
| Depreciation | $2,000 | 1.2% |
| Marketing | $5,000 | 2.9% |
| Total Operating Expenses | $66,000 | 38.8% |
| Operating Income← Operating Margin | $24,000 | 14.1% |
| Interest Expense | ($2,000) | (1.2%) |
| Net Income← Net Profit Margin | $22,000 | 12.9% |
What Every Dollar of Revenue Buys
This is the cost structure of the business. An analyst looking at this immediately knows:
- • Salaries are the dominant controllable cost (23.5%)
- • Rent is fixed and moderate (7.1%)
- • After all costs, 12.9 cents of every revenue dollar becomes profit
- • Gross margin of 52.9% — strong for a food service business
Vertical Analysis: Balance Sheet
ABC Coffee Shop — Common-Size Balance Sheet as of Dec 31, 2026
| Line Item | Amount | % of Total Assets |
|---|---|---|
| ASSETS — Current | ||
| Cash | $45,000 | 40.7% |
| Accounts Receivable | $8,000 | 7.2% |
| Inventory | $12,000 | 10.8% |
| Prepaid Expenses | $1,100 | 1.0% |
| Total Current Assets | $66,100 | 59.7% |
| Equipment (net) | $44,583 | 40.3% |
| Total Assets← Base | $110,683 | 100.0% |
| LIABILITIES — Current | ||
| Accounts Payable | $10,000 | 9.0% |
| Wages Payable | $2,000 | 1.8% |
| Other Current Liab. | $5,720 | 5.2% |
| Total Current Liabilities | $17,720 | 16.0% |
| Bank Loan (LT) | $6,000 | 5.4% |
| Total Liabilities | $23,720 | 21.4% |
| EQUITY | ||
| Owner's Capital | $50,000 | 45.2% |
| Retained Earnings | $36,963 | 33.4% |
| Total Equity | $86,963 | 78.6% |
| Total Liab. & Equity | $110,683 | 100.0% |
Asset Mix and Financing Mix
Asset Composition
- 40.7% cash — very liquid, large cash position
- 40.3% equipment — significant fixed asset investment
- 10.8% inventory — moderate relative to assets
- 7.2% receivables — small; most customers pay quickly
Financing Mix
- 78.6% equity-financed — conservative, mostly owner-funded
- 21.4% liability-funded — low leverage
- 16.0% short-term — current obligations manageable
- 5.4% long-term — very little LT debt
A company that is 78.6% equity-financed is significantly less risky than one that is 70% debt-financed — and common-size percentages reveal that capital structure at a glance.
The Real Power: Cross-Company Comparison
Vertical analysis enables direct comparison between companies of different sizes. Here's where it becomes truly powerful.
ABC Coffee Shop vs. Horizon Café — Common-Size Income Statement (2026)
| Line Item | ABC | Horizon | Insight |
|---|---|---|---|
| Revenue | 100.0% | 100.0% | |
| COGS | 47.1% | 52.4% | |
| Gross Margin | 52.9% | 47.6% | ABC better |
| Salary Expense | 23.5% | 18.2% | Horizon leaner? |
| Rent Expense | 7.1% | 10.3% | Horizon pays more |
| Marketing | 2.9% | 4.5% | Horizon spends more |
| Total Op. Expenses | 38.8% | 37.5% | Similar |
| Operating Margin | 14.1% | 10.1% | ABC significantly better |
| Interest Expense | (1.2%) | (3.8%) | Horizon more leveraged |
| Net Profit Margin | 12.9% | 6.3% | ABC nearly 2× Horizon |
What this reveals:
- • ABC has a materially better gross margin (52.9% vs. 47.6%) — better production cost control or pricing
- • Horizon pays significantly more rent relative to revenue (10.3% vs. 7.1%)
- • Horizon carries much more debt (interest 3.8% vs. 1.2% of revenue)
- • Result: ABC converts nearly twice as much of each revenue dollar to profit (12.9% vs. 6.3%)
This comparison is impossible from dollar amounts alone — Horizon might have $5M in revenue while ABC has $170K. Common-size makes them directly comparable.
Combined Analysis: Vertical + Horizontal Together
The most complete picture comes from combining both techniques — tracking common-size percentages across multiple years.
ABC Coffee Shop — Common-Size Income Statement: 2025 vs. 2026
| Line Item | 2025 % Rev | 2026 % Rev | Change |
|---|---|---|---|
| Revenue | 100.0% | 100.0% | — |
| COGS | 48.9% | 47.1% | −1.8 pts ✓ |
| Gross Margin | 51.1% | 52.9% | +1.8 pts ✓ |
| Salary Expense | 24.1% | 23.5% | −0.6 pts ✓ |
| Rent Expense | 9.0% | 7.1% | −1.9 pts ✓ |
| Marketing | 3.2% | 2.9% | −0.3 pts ✓ |
| Total Op Expenses | 42.3% | 38.8% | −3.5 pts ✓ |
| Operating Margin | 8.8% | 14.1% | +5.3 pts ✓ |
| Net Profit Margin | 7.0% | 12.9% | +5.9 pts ✓ |
The combined insight: Dollar amounts grew (horizontal) AND the profit percentages improved (vertical). Growing bigger and becoming more efficient simultaneously — the 5.9 percentage point expansion in net margin is exceptional.
Industry Common-Size Benchmarks
Vertical analysis only means something when compared to a benchmark. Representative benchmarks for coffee/food service:
| Metric | ABC 2026 | Industry Avg | Assessment |
|---|---|---|---|
| COGS | 47.1% | 50–55% | ✓ Better than avg |
| Gross Margin | 52.9% | 45–50% | ✓ Above avg |
| Labor Costs | 23.5% | 28–35% | ✓ Well-controlled |
| Rent | 7.1% | 8–12% | ✓ Reasonable |
| Operating Margin | 14.1% | 5–10% | ✓✓ Excellent |
| Net Margin | 12.9% | 3–7% | ✓✓ Exceptional |
Common Mistakes
Mistake 1: Using the Wrong Base
❌ Wrong
Using Revenue as the balance sheet base (Cash ÷ Revenue) — mixing statements is meaningless.
✅ Right
Income Statement base = Total Revenue. Balance Sheet base = Total Assets.
Mistake 2: Confusing Common-Size % with the Ratio
❌ Wrong
Assuming every common-size % is the same as its named financial ratio.
✅ Right
Net margin common-size % is the Net Profit Margin ratio — but Current Liabilities at 16% of assets is not the Current Ratio (CA ÷ CL = 3.73). Related tools, different calculations.
Mistake 3: Ignoring Dollar Amounts Entirely
❌ Wrong
"Marketing dropped from 3.2% to 2.9% — great!"
✅ Right
Marketing dollars may have increased while the % fell because revenue grew faster. Common-size shows structure; dollars show scale. Use vertical and horizontal together.
Key Takeaway
Vertical analysis expresses every financial statement line item as a percentage of a base figure — revenue for the income statement, total assets for the balance sheet. Common-size statements eliminate company size, enabling direct comparisons across companies and over time. On the income statement, percentages show what portion of each revenue dollar goes to each cost and to profit. On the balance sheet, they reveal asset composition and financing mix. Vertical analysis is most powerful when combined with horizontal analysis and industry benchmarks.
Test Your Understanding
See if you've got the basics down. Click each option and check your answer.
Question 1: On a common-size income statement, the base figure is:
Question 2: ABC Corp has COGS of $60,000 and Revenue of $150,000. What is COGS as a common-size percentage?
Question 3: Company A has revenue of $2,000,000 and net income of $100,000. Company B has revenue of $500,000 and net income of $75,000. Which company is more profitable per dollar of revenue?
Question 4: On a common-size balance sheet, Cash represents 40% of total assets. Total assets are $110,000. What is the cash balance?
Question 5: A company's salary expense common-size percentage drops from 30% to 25% of revenue, while salary dollars increased by $50,000. What best explains this?
Ready to Practice?
Build common-size statements for ABC Coffee Shop and Horizon Café. Compare their cost structures, identify which company is more efficient, and combine with horizontal analysis for the complete picture.
Try the Practice LabWhat's Next?
You've now mastered the two foundational analysis techniques. Next up: Liquidity Ratios — Current Ratio, Quick Ratio, and Working Capital.
Liquidity Ratios Overview
Can the company pay its short-term obligations?
Horizontal Analysis
Year-over-year trend analysis