Vertical analysis of financial statements
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Vertical analysis of financial statements,
Vertical analysis of financial statements, a step-by-step introduction. Vertical analysis can be a great starting point to understand how a company is doing. And when you are lucky, like in the case of Meta Platforms / Facebook, the company you want to review has its #financialstatements available for download in an Excel file in the investor relations section of its website.
⏱️TIMESTAMPS⏱️
00:00 Introduction to vertical analysis
00:36 Vertical analysis income statement
04:08 Vertical analysis multiple years
06:27 Vertical analysis balance sheet
10:40 Vertical analysis year-over-year variance
Let’s start with a vertical analysis of the income statement. The way the income statement numbers are presented here is with the oldest year on the right, and the latest year on the left. Let’s start our vertical analysis of the income statement with that latest financial year: 2022. In a vertical analysis, you express each line item as a percentage of a base figure within the financial statement. In the case of the income statement, that base figure in the #verticalanalysis is revenue. Let’s put the year 2022 in cell G5. The first Excel calculation that we insert, in cell G6, is C6 divided by C$6. We want to express the outcome of that calculation as a percentage. I prefer to use a percentage with no decimals, or maybe maximum one decimal, to avoid being misleadingly precise. And then copy over the formula into rows 8 through 17. We have now expressed each line item in the income statement as a percentage of revenue. We are now looking at a common-size income statement, which is an income statement where each line item is expressed as a percentage of the base figure of revenue. The first thing we learn in this vertical analysis of the income statement is that Meta Platforms has Income from Operations of 25% of revenue, and Net Income of 20% of revenue.
In terms of expenses, research and development is the single largest line item at 30% of revenue: $35B spent on R&D in cell C9 on a revenue of nearly $117B in cell C6.
Let’s insert the subtotal of Gross Profit right after Cost of Revenue.
Now we have expressed the key income statement metrics as a percentage of revenue: gross profit, operating income, and net income. We can analyze these over time, or use them to compare Meta Platforms profitability to other tech companies.
How about a vertical analysis of the balance sheet as well? In a vertical analysis, you express each line item as a percentage of a base figure within the financial statement. In the case of the balance sheet, that base figure in the vertical analysis is either total assets, or the sum of liabilities and equity, which is the same number as the balance sheet needs to balance.
In column F, we start off the vertical analysis of the balance sheet with expressing each of the assets as a percentage of total assets. For the cash and cash equivalents line, F9 equals C9 divided by C$20. Let’s format that as a percentage, with no decimals. Let me show you the formula by using FORMULATEXT, and copy both of these cells down through row 20.
Let’s highlight current assets and total assets in bold. My first thought is that current assets at 32% of total assets is relatively low for a Big Tech company, but then again $41 billion of cash, cash equivalents and marketable securities in absolute terms, and 22% in relative terms, is still a very large “treasure chest”. The next thing that jumps out is property and equipment at 43% of total assets, the single largest line item in the list. If you want to dive deeper into the financials of Meta Platforms, then this is certainly a category to investigate, given how big the impact is of depreciation of property and equipment on the income statement, and of capital expenditures on the cash flow statement. If you take property and equipment plus operating lease assets, you even get to 50% of total assets!
Goodwill is something to be wary of on any balance sheet, as the risk of goodwill impairment is always lurking in the shadows. It’s important to know what the goodwill on a company’s balance sheet relates to. In the case of Meta Platforms, you will have to go all the way back to the 2014 annual report to find out that the majority of that goodwill amount relates to the WhatsApp acquisition.
Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!
Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through @thefinancestoryteller
⏱️TIMESTAMPS⏱️
00:00 Introduction to vertical analysis
00:36 Vertical analysis income statement
04:08 Vertical analysis multiple years
06:27 Vertical analysis balance sheet
10:40 Vertical analysis year-over-year variance
Let’s start with a vertical analysis of the income statement. The way the income statement numbers are presented here is with the oldest year on the right, and the latest year on the left. Let’s start our vertical analysis of the income statement with that latest financial year: 2022. In a vertical analysis, you express each line item as a percentage of a base figure within the financial statement. In the case of the income statement, that base figure in the #verticalanalysis is revenue. Let’s put the year 2022 in cell G5. The first Excel calculation that we insert, in cell G6, is C6 divided by C$6. We want to express the outcome of that calculation as a percentage. I prefer to use a percentage with no decimals, or maybe maximum one decimal, to avoid being misleadingly precise. And then copy over the formula into rows 8 through 17. We have now expressed each line item in the income statement as a percentage of revenue. We are now looking at a common-size income statement, which is an income statement where each line item is expressed as a percentage of the base figure of revenue. The first thing we learn in this vertical analysis of the income statement is that Meta Platforms has Income from Operations of 25% of revenue, and Net Income of 20% of revenue.
In terms of expenses, research and development is the single largest line item at 30% of revenue: $35B spent on R&D in cell C9 on a revenue of nearly $117B in cell C6.
Let’s insert the subtotal of Gross Profit right after Cost of Revenue.
Now we have expressed the key income statement metrics as a percentage of revenue: gross profit, operating income, and net income. We can analyze these over time, or use them to compare Meta Platforms profitability to other tech companies.
How about a vertical analysis of the balance sheet as well? In a vertical analysis, you express each line item as a percentage of a base figure within the financial statement. In the case of the balance sheet, that base figure in the vertical analysis is either total assets, or the sum of liabilities and equity, which is the same number as the balance sheet needs to balance.
In column F, we start off the vertical analysis of the balance sheet with expressing each of the assets as a percentage of total assets. For the cash and cash equivalents line, F9 equals C9 divided by C$20. Let’s format that as a percentage, with no decimals. Let me show you the formula by using FORMULATEXT, and copy both of these cells down through row 20.
Let’s highlight current assets and total assets in bold. My first thought is that current assets at 32% of total assets is relatively low for a Big Tech company, but then again $41 billion of cash, cash equivalents and marketable securities in absolute terms, and 22% in relative terms, is still a very large “treasure chest”. The next thing that jumps out is property and equipment at 43% of total assets, the single largest line item in the list. If you want to dive deeper into the financials of Meta Platforms, then this is certainly a category to investigate, given how big the impact is of depreciation of property and equipment on the income statement, and of capital expenditures on the cash flow statement. If you take property and equipment plus operating lease assets, you even get to 50% of total assets!
Goodwill is something to be wary of on any balance sheet, as the risk of goodwill impairment is always lurking in the shadows. It’s important to know what the goodwill on a company’s balance sheet relates to. In the case of Meta Platforms, you will have to go all the way back to the 2014 annual report to find out that the majority of that goodwill amount relates to the WhatsApp acquisition.
Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!
Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through @thefinancestoryteller
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