Vertical Analysis
According to Investopedia, a vertical analysis is defined as,
“A method of financial statement analysis in which each entry of the three major categories of accounts (assets, liabilities, and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business.”
Unless a person understands how a vertical analysis works, one can easily slip into a horizontal analysis. What is important to remember is how each line item fits into the overall picture. For example, ...view middle of the document...
This could indicate that CBI has taken on additional, unnecessary debt given its cash and cash equivalents on hand. A review of this debt increase is needed to determine whether some of it should be paid down using the excess cash on hand.
The long-term liabilities are being reduced each year. Overall, the total long-term liabilities from year 7 to year 8 have been reduced by 2.4%. This is a good trend that should continue.
In reviewing the stockholders equity, the overall performance has remained steady. The retained earnings have increased each year and the total stockholders’ equity percentage held by stockholders has increased while the total liabilities have decreased. Even though the percentage increase has been minimal (.5% from year 6 to year 7, and .8% from year 7 to year 8), the trajectory is positive for the stockholders.
The income statement for years 6 through 8 is also provided. The gross profit for each year has remained very close at 26.6% for year 6, 27.4% for year 7 and 27.0% for year 8. Even with the downturn in overall sales for year 8, CBI has consistently kept its cost of goods sold in line with its net sales. It is important to note here that CBI’s ordering methods, which will be addressed later, are based on projected sales. Based on these figures, it appears that CBI may have been expecting the downturn in sales for year 8, and ordered parts and materials accordingly.
The operating expenses are of concern as there was an increase in Net Operating Expenses in year 8 by 3%, despite decreased sales. The selling expenses remained static with years 6 and 7 at 6.7% of total expenses. The increase in expenses comes from the General and Administrative category. The line item variations are covered in the horizontal analysis section.
Operating Income is defined as “Operating income is required to calculate operating margin, which describes a company's operating efficiency.” (Investopedia, n.d.). Following is the operating income for each year.
Year 6
Gross Profit Total Operating Expenses
Operating Income Percentage of Gross Profit
$1,191,000 - $1,066,895 = $124,105 2.8%
Year 7
Gross Profit Total Operating Expenses
Operating Income Percentage of Gross Profit
$1,638,000 -...
