Vertical analysis of a balance sheet asset example. Vertical balance analysis calculation formula
What do horizontal and vertical analysis show?
Vertical analysis of the balance sheet is based on calculating the shares of individual balance sheet items in relation to the value of its assets (liabilities) by dividing the asset or liability items by the balance sheet amount. It allows you to identify the specific weight of each item and analyze the stability of the financial condition of the enterprise at the time of reporting, as well as assess its dynamics. Vertical analysis shows the structure of the enterprise's funds and their sources.
Horizontal analysis of the balance sheet is based on item-by-item comparison of balance sheet indicators at certain equal intervals of time. There are several types of horizontal analysis. The most common methods are based on calculations:
- absolute deviations:
SB = SB 1 − SB 2 ;
- relative deviations (increase):
SB% = (SB 1 − SB 2) / SB 2 × 100;
- growth rate:
SB tr% = SB 1 / SB 2 × 100,
where SB 1 and SB 2 are indicators of balance sheet items recorded at the final and initial points in time.
The combination of horizontal and vertical analysis allows us to understand the dynamics of development and growth rates of the enterprise.
Horizontal and vertical analysis using the example of an enterprise
Let's look at how horizontal and vertical analysis of the balance sheet is done using the example of the company Mirny LLC.
Example
Balance sheet data of Mirny LLC for the last 3 reporting years:
Let's analyze the structure of indicators over time using vertical analysis of the balance sheet.
Horizontal analysis data:
Basic procedures for balance sheet analysis
All procedures for analyzing an organization's balance sheet are based on data from its public financial statements for one or more periods. In the process of analysis, strong and weak trends in the development of the enterprise are identified, and recommendations are made to improve its financial condition.
Analysis of an enterprise's balance sheet includes several stages.
Conducting a comprehensive analysis of the structure of the balance sheet is important precisely because individual analytical methods do not always make it possible to accurately identify the current dynamics.
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For example, a consistent increase in the balance sheet currency may indicate an increase in the company’s business activity, an unjustified increase in accounts receivable and payable, or an overstocking of warehouses.
What does the structure of the balance sheet show?
The structure of the balance sheet shows which assets and liabilities make the main contribution to it, how dynamically the company is developing, whether its position is stable, how well its debt obligations are secured by assets and whether they will be repaid on time.
Most often, the “golden rule of economics” is used to analyze the structure of the balance sheet.
Growth in net profit ≥ Growth in equity capital ≥ Growth in assets ≥ 1
Another indicator that people pay attention to when analyzing the quality of a company’s balance sheet is its total. The growth of this indicator from period to period, as a rule, indicates that the enterprise is developing successfully. They attract additional funds, increase reserves, and modernize their main production facilities.
B 1 > B 2 > B 3,
where B is the balance sheet currency.
Another important indicator is the growth rate of current and non-current assets, as well as short-term liabilities. As a rule, the excess of the growth rate of current assets over non-current assets indicates the mobility of the enterprise structure and its liquidity.
At the same time, the growth of non-current assets indicates that the company is investing a lot of money in re-equipment.
An analysis is also made of the growth of sources of long-term financing of the enterprise and the growth rate of its non-current assets. Exceeding the growth rate of funding sources indicates that the enterprise has the potential for development.
In addition, the percentage of equity capital, the growth rate of accounts payable and receivable, and the absence or presence of uncovered losses are determined.
Basic techniques for analyzing the balance sheet
Today, many different methods of analyzing the balance sheet are used, based on a comparison of balance sheet items and calculated ratios.
In addition to horizontal and vertical, trend and comparative methods of analysis are often used.
Trend analysis is based on comparing the same balance sheet indicator at certain intervals. That’s why it is often associated with the horizontal. It is believed that in order to conduct a qualitative analysis, it is necessary to have data for at least 5 years.
Trend analysis is used to forecast the development of an enterprise. Its application is based on the assumption that the external conditions in which the enterprise operates remain unchanged.
Factor analysis is based on identifying the reasons that influence a particular financial reporting indicator. Most often this relationship is expressed in the form of equations.
Methods of factor analysis may vary depending on the industry characteristics of the company, its size, as well as on the methods enshrined in the company's accounting policies.
Ratio analysis is based on the study of the relationship between balance sheet items and their changes over time. This is the most effective and accurate analysis method.
However, the mere fact that the coefficient under study falls within a certain optimal interval does not guarantee that the enterprise fully satisfies the specified parameters.
This can only be confirmed by analyzing the company’s reporting indicators in comparison with the indicators of other companies operating under approximately the same conditions:
- solvency ratios;
- business activity ratios;
- financial stability ratios;
- investment ratios.
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Horizontal and vertical methods of analysis of the balance sheet are an important, but not at all the main goal of financial analysis. They only show the dynamics and nature of changes in reporting indicators. In order to see the full picture of the company's development, it is also necessary to use other methods and tools of financial analysis.
Introduction
1. Theoretical justification of the need and essence of horizontal and vertical analysis of the organization’s balance sheet
2.1 Horizontal analysis
Conclusion
Introduction
Currently, economic transformations have created the need to increase the role of analysis in organizing the economic activities of an organization, which has led to changes in the content of the analytical procedure itself.
The word “analysis” is interpreted quite broadly in everyday life. Analytical methods have become so widespread that they are currently used both in the natural sciences and humanities, as well as in practical activities. The analysis procedure is the initial stage in the study of almost any process or phenomenon, when the researcher moves from a simple description to the study of the internal structure and relationships
Analysis of economic activity began to be carried out from the perspective of various users of analytical reports and, accordingly, according to databases of varying volume and information content. This approach was caused by both the multiplicity of goals facing different user groups and the contradictions of their interests.
The content of economic analysis and the solution of the tasks facing it are specified and carried out within the framework of its components: analysis of the financial statements of organizations and the financial results of its activities, carried out according to financial statements and aimed at determining the position of the organization in the market relative to past, current and future conditions of existence.
One of the main tasks of analyzing financial statements and, in particular, the balance sheet is the general characteristics of the organization’s funds and the sources of their formation.
Such an assessment is not possible without conducting a horizontal and vertical balance sheet analysis.
The purpose of this course work is to study the essence of horizontal and vertical analysis, sources of analytical information for carrying out such analysis, as well as conducting horizontal and vertical balance sheet analysis using the example of the organization under study, using the example of Breeze LLC.
1. Theoretical justification of the need and essence of horizontal and vertical analysis of the organization’s balance sheet
1.1 The need and essence of horizontal and vertical analysis of the organization’s balance sheet
An assessment of the financial condition of an organization begins with a general description of the organization’s funds and the sources of their formation, shown in the balance sheet.
“Reading”, or familiarization with the contents, of the balance sheet allows you to establish the main sources of funds (own and borrowed); main areas of investment; the ratio of funds and sources and other characteristics that allow us to assess the property status of the enterprise and its security. But information presented in absolute values does not always allow one to accurately determine the dynamics of indicators and is insufficient to justify decisions. Therefore, along with absolute values, when analyzing the balance sheet, various analysis techniques are used that involve the calculation and assessment of relative indicators. These include horizontal, vertical analysis and calculation of coefficients.
Horizontal analysis involves studying the absolute indicators of an organization’s reporting items for a certain period, calculating the rate of their change and evaluating it.
In horizontal analysis, analytical tables are constructed in which absolute reporting indicators are supplemented with relative ones, i.e. changes in absolute indicators are calculated in total and as a percentage.
Horizontal analysis is an assessment of the growth (decrease) rate of balance sheet indicators for the reporting period. It helps to assess the rate of growth (or decline) for each group of the organization’s funds and their sources for the period under review.
Horizontal analysis consists of constructing one or more tables in which absolute financial indicators are supplemented with data on the relative rates of growth or decline of these indicators. The degree of generalization of balance sheet items is determined by the accountant. As a rule, the analysis uses growth rates obtained based on experience over a number of years and compares them with actual results for the period under review. This allows you not only to determine changes in individual balance sheet items, but also to make forecasts for the future.
Horizontal and vertical analysis complement each other. In practice, analytical tables are often built that characterize both the structure of the reporting accounting form and the dynamics of its individual indicators. Both of these types are especially valuable for inter-farm comparisons. They allow you to compare the balance sheets of organizations with completely different types of activities.
Conducting a horizontal analysis is advisable. only if there are several study periods. Then it becomes possible to monitor the dynamics of changes in funds and their sources.
Horizontal analysis is not informative in conditions of inflation, when an increase in the volume of a particular group of assets and liabilities is caused mainly by rising prices, and not by the organization’s own activities. In this case, horizontal analysis data can be used, for example, to compare the activities of several organizations in conditions of inflation.
For horizontal analysis, absolute values of balance sheet indicators are converted into relative ones. To do this, the data at the beginning of the period under review for each item of assets and liabilities is taken as 100% and, based on this, the values for the items at the end of the period under review are calculated.
The purpose of vertical analysis is to be able to analyze the whole through the individual elements that make up the whole. It is widely used to objectively assess the performance of an organization.
When considering the balance sheet results, vertical analysis allows you to see the share of each item in the overall total, determine the structure of funds and their sources, as well as the changes that have occurred in them.
The first feature of vertical analysis is the calculation of relative indicators based on the values of absolute indicators presented in the balance sheet. Relative indicators make it possible to smooth out external economic influences that can have a strong impact on absolute indicators (for example, inflation), thus revealing the results of the organization’s activities.
The second feature of vertical analysis is the mandatory presence of indicators at different points in time. This allows you to track and predict structural changes in the composition of assets and the sources of their coverage over time.
Thus, the advantages of vertical analysis include the ability to:
· study the results of financial and economic activities based on relative indicators that smooth out the influence of subjective external factors, which occurs when working with absolute indicators and makes it difficult to compare them in dynamics;
· conduct inter-farm comparisons of various organizations that differ in the amount of resources used and other volume indicators.
1.2 Sources of analytical information for horizontal and vertical analysis of the organization’s balance sheet
The sources of analytical information for horizontal and vertical analysis of an organization’s balance sheet is the balance sheet itself, or rather its sections and articles. Balance sheet items are combined into three groups, and the groups into sections. The basis of such a combination is the economic content of the balance sheet items themselves, and the order of the items on a specific side is determined by the vertical and horizontal relationships between the items and sections.
Table 1 - Appearance of the balance sheet
Asset items are arranged according to a specific system. Vertical relationships between balance sheet asset items suggest their arrangement in order of increasing liquidity levels. Less liquid items are displayed at the beginning ("non-tangible assets", "fixed assets", "long-term investments", etc.), and at the end the most liquid ones (cash in hand, in current and foreign currency accounts, in settlement documents) , i.e. in direct dependence on the speed with which this part of the property acquires monetary form in economic circulation.
Grouping of balance sheet items of the balance sheet asset, starting from the reporting year 2000, the asset has two sections:
♦ non-current assets;
♦ current assets.
The first section combines groups of long-term assets: non-tangible assets, fixed assets, construction in progress, long-term financial investments, other non-current assets.
The second section consists of current assets, which are formed into separate groups: inventories, accounts receivable, short-term financial investments, cash. Moreover, the amount of receivables, payments for which are expected within 12 months after the reporting date and over 12 months after the reporting date, are shown separately for each item.
The assets of the balance sheet of organizations include items that show certain groups of elements of the organization's turnover, combined depending on the stages of the circulation of funds. Assets are a property mass that must “actively work” and generate profit. If the property “does not work”, then this is considered as a loss, i.e. as a loss.
Thus, in section 1 of the balance sheet “Non-current assets” the following are reflected: fixed assets, intangible assets, financial investments and construction in progress.
Section 2 "Current assets" combines items including inventories, costs, cash, and funds in settlements. Current assets are constantly changing, moving from one type to another, and therefore are in the organization not for its own consumption, but for alienation. The purpose of this group of funds is to serve production purposes, to serve production.
As a rule, the asset is built in order of increasing liquidity, in which real estate is shown in the first section of the balance sheet. When building an asset in order of decreasing liquidity, the items of cash, goods and work in progress inventories, debtors, etc. come first.
The liability side of the balance sheet shows sources of financing by type (capital, reserves, profit, loans, accounts payable); by target nature (authorized, additional, reserve capital, accumulation funds, social sphere, consumption, bank loans, other loans, accounts payable, suppliers and contractors, wages, to the budget and other creditors) and by repayment terms (long-term - due repayable in more than a year and short-term, repayable within a year).
Regardless of the selected option, the following controls are applied:
Assets = Liabilities
Since liabilities represent the capital and obligations of the organization, and assets represent property and rights, this equality can be presented as follows:
Property + Rights = Capital + Liabilities
Balance sheet items are combined into three groups, and the groups into sections. The basis of such a combination is the economic content of the balance sheet items themselves, and the arrangement of items on a specific side is determined by the vertical and horizontal relationships between items and sections.
This equality is called the basic balance equation. The right side answers the question about the sources of financing for the enterprise, and the left side answers where the capital is directed.
For each type of funds or liabilities, a line is allocated in the balance sheet, called a balance sheet item. Balance sheet items are summarized into groups, and groups into sections. The basis of such a combination is the economic content of the balance sheet items themselves, and the arrangement of items on a specific side is determined by the vertical and horizontal relationships between items and sections.
Vertical relationships of balance sheet asset items influence the order of arrangement of balance sheet liability items. This is facilitated by the horizontal relationship between the balance sheet items of assets and liabilities: asset items must be located against liabilities, the sources of formation of some items are. For example, fixed assets are acquired from sources of own funds or long-term liabilities, and current liabilities are used mainly to accumulate the current assets of an economic entity. Thus, the vertical relationships of balance sheet liability items suggest a sequence: sources of equity (equity), long-term liabilities and current liabilities, which allows us to distinguish three sections of liabilities:
♦ capital and reserves;
♦ long-term liabilities;
♦ short-term liabilities.
For the third section, the determining factor is the authorized capital, which is typical for those economic entities where there is no single owner (JSC, LLC, etc.). In state and municipal enterprises, this part of the property is represented by the authorized capital. The initial property of legal entities is formed from contributions of their founders and participants, i.e. contributions to the authorized capital.
The indicator “Retained profit (uncovered loss)” appears in section 3 as an option for accounting policy in the case of profit distribution. Retained earnings are the part of an organization's profit that remains at its disposal as a source of financing.
The fourth section reveals the content of long-term liabilities of banks and long-term loans, and other long-term liabilities.
The fifth section of the balance sheet reflects funds in the form of bank loans and loans with urgent repayment within 12 months after the reporting date and various types of accounts payable. A special place in this section is occupied by sources of own funds that were not included in the previous sections of the balance sheet. They are called in the section of articles “Deferred income”, (reserves for future expenses), etc. These are funds received in advance, repayment of which is expected in subsequent periods.
The totals for the balance sheet items of an asset or liability are called the balance sheet currency.
Each line of the balance sheet has its own serial number, which ensures its location, and links to individual items.
To reflect the state of funds in the balance sheet, two columns are provided: “At the beginning of the reporting period” and “At the end of the reporting period.”
Thus, by studying the balance sheet, you can get an idea of where the company’s funds are invested in monetary value as of a certain date in two sections: by composition, by sources of formation.
1.3 Brief description of the organization under study
The object of consideration in this work is the limited liability company "Breeze" (hereinafter LLC "Breeze"), the average number of employees is 30 people.
The company's charter reflects the main type of activity: retail trade.
The founders of the enterprise are individuals, numbering four people, whose share in the authorized capital is 25%.
Private enterprise.
The company is a legal entity and has an independent balance sheet and current account.
Breeze LLC, represented by the director, enters into contracts, acquires rights and bears obligations, acting as plaintiff and defendant in court.
LLC "Breeze" on behalf of the director has the right:
1. Purchase and rent fixed and working capital.
2. Provide logistical support.
3. Carry out all types of commercial transactions.
4. Plan your activities.
5. Use net profit.
6. Determine and use the wage fund.
7. Determine staffing.
8. Establish additional vacations, shortened working hours and other social benefits for your employees.
Breeze LLC is obliged to:
1. conduct its activities in accordance with the law;
2. provide its employees with safe working conditions;
3. carry out operational and accounting records, maintain reports;
The enterprise, guided by the legislation of the Russian Federation, independently forms its accounting policy. The accounting policy is approved by order of the manager and changes (if necessary) can be introduced only from the beginning of the financial year.
Accounting is carried out in accordance with the uniform methodological principles and rules established by the Federal Law "On Accounting", the Regulations on Accounting and Financial Reporting in the Russian Federation, regulations (standards) on accounting, and a standard Chart of Accounts approved by order is also applied Ministry of Finance of Russia dated October 31, 2000 No. 94n. The manager is responsible for organizing accounting and compliance with laws when performing business operations.
Accounting is an independent structural unit of an organization and cannot be part of another organizational unit. It is headed by the chief accountant, who ensures the correctness of accounting, its reliability, and monitors the rational and economical use of all assets.
The Breeze LLC enterprise is distinguished by its small number, therefore the chief accountant combines the settlement department, the material department, the general department and the settlement operations department.
The main objectives of Breeze LLC are: · retail sales of consumer goods; · acquisition of retail goods and their sale. LLC "Breeze" concludes transactions (agreements, contracts) with enterprises of the Primorsky Territory and individuals. The enterprise has an independent balance sheet, which reflects its property. The property of the enterprise consists of fixed and working capital, as well as other material and financial assets. The management of the enterprise is carried out by its owner, who is the director of the enterprise. The director independently determines the management structure of the enterprise and forms staff. The enterprise provides the minimum wage guaranteed by law, working conditions and social protection measures for workers. The amount of remuneration for employees of the enterprise is established according to the staffing table. Trade in goods of Breeze LLC is carried out through a store in which there are five departments: 1. bakery; 2. meat; 3. milk; . 4 pastry shop; 5. grocery. Each department has four salespeople working in two shifts.
The development of the retail turnover of an enterprise is greatly influenced by the condition, development and use of the material and technical base of the enterprise. In 2007, the store's sales area was 200 square meters. m., including the sales area - 160 sq. m. The trading floor and warehouse premises of the enterprise are equipped with modern types of equipment and cash registers. The use of the material and technical base of trade is directly related to the operating hours of the enterprise, lunch breaks, weekends and sanitary days. The company operates around the clock with one day off on Sunday. The average duration of a work shift is almost 11 hours. Breeze LLC employs 30 people, 20 of them are sellers. The share of sellers in the total number of employees of the enterprise is 67%.
Accounting and reporting at LLC "Breeze" is carried out in accordance with its developed accounting policy. The accounting policy of Breeze LLC was developed by the chief accountant of the enterprise and approved by the order on the accounting policy of the director. LLC "Breeze" independently selects the form of accounting based on the specifics of the enterprise's work, while independently adapting the used accounting registers to the specifics of its work. LLC "Breeze" according to the accounting policy, accounting of goods is organized at sales (retail) prices. The retail price includes the selling price (wholesale), a trade margin to cover the trading costs of a retail trade organization. Breeze LLC is on a simplified taxation system of income minus expenses. In retail trade, the trade markup is the main source of income for a trading organization and is determined as a percentage of the purchase price of goods. The value of the trade markup is set at such a level as to cover distribution costs (expenses associated with the transportation, storage and sale of goods) and ensure that the trading organization receives a profit.
Table 2. Main technical and economic indicators of Breeze LLC
As can be seen from the preliminary analysis, in 2009 there was an increase in sales revenue by 19.5%. A good indicator is that the revenue growth rate is ahead of the cost growth rate, which is 18.3%. The cost price in 2009 compared to 2008 increased by 99 thousand rubles.
These factors led to an increase in sales profit by 17 thousand rubles or 34%.
Profit growth makes the enterprise more profitable, which is proven by an increase in this indicator by 1.1 rubles.
The efficient operation of the enterprise made it possible to increase wages by 13.3% and the annual fund increased by 60 thousand rubles.
In general, the work of Breeze LLC can be assessed positively.
2. Methodology for horizontal and vertical analysis of an organization’s balance sheet
2.1 Horizontal analysis
In the process of analysis, first of all, one should study the dynamics of the organization’s assets, changes in their composition and structure and evaluate them.
To do this, we will conduct a horizontal analysis of the assets of Breeze LLC
Horizontal analysis allows you to compare each balance sheet item at the moment with the previous period.
For analysis, we draw up an analytical balance sheet of the assets of Breeze LLC
Table 3 - Analytical balance sheet of assets of Breeze LLC
| ASSETS | 01.01.2008 | 01.01.2009 | Deviation | |
| absolute | % | |||
| I.Current assets | ||||
| Cash | 396 | 708 | 312 | 78,8 |
| 0 | 0 | 0 | 0 | |
| Accounts receivable | 11 | 24 | 13 | 118,1 |
| Advances to suppliers | 0 | 0 | 0 | 0 |
| Reserves | 236 | 214 | -22 | -9,6 |
| VAT | ||||
| Total current assets | 643 | 946 | 303 | 47,1 |
| II. Fixed assets | ||||
| 56 | 56 | 0 | 0 | |
| Fixed assets | 38 | 36 | -2 | -5,3 |
| 0 | 0 | 0 | 0 | |
| Intangible assets | 0 | 0 | 0 | 0 |
| Other noncurrent assets | 0 | 0 | 0 | 0 |
| Non-current assets, total | 94 | 92 | -2 | -2,1 |
| Total assets | 737 | 1038 | 301 | 40,8 |
A horizontal analysis of the assets of Breeze LLC shows that their absolute amount for 2009 increased by 301 thousand rubles, or 40.8%. It can be concluded that the organization is increasing its economic potential.
From the point of view of the asset structure, the observed increase was mainly due to the growth of current assets - by 303 thousand rubles. At the same time, the decrease in non-current assets for the same period amounted to 512 thousand. rubles
The increase in current assets occurred due to an increase in the organization's funds by 312 thousand rubles. Considering the decrease in inventory (-22 thousand rubles) and the increase in such an indicator as cash +312 thousand rubles), we can assume that the organization is not experiencing financial difficulties, because it has large financial resources that are not invested in excess reserves.
It should be noted that during the period under review, all receivables of Breeze LLC were short-term and payments on them were expected within 12 months after the reporting date. However, there is an increase in it (by 13 thousand rubles), which worsens the liquidity of current assets.
Analyzing the composition of non-current assets, it can be noted that the decrease of -2 thousand rubles was due to changes in the composition of fixed assets (-2 thousand rubles)
The second component of analyzing the financial condition of an organization is assessing the sources of the organization’s funds.
To evaluate sources, data from horizontal analysis of balance sheet liabilities are used.
Table 3 - Liabilities of the analytical balance sheet of Breeze LLC
| Liabilities | 01.01.2008 | 01.01.2009 | Deviation | |
| absolute | % | |||
| Short-term loans, loans | 50 | 0 | -50 | 0 |
| Accounts payable | 356 | 677 | 321 | 90,2 |
| Advances from buyers | 0 | 0 | 0 | 0 |
| Other current liabilities | 0 | 0 | 0 | 0 |
| Current liabilities, total | 406 | 677 | 271 | 66,7 |
| II. long term duties | ||||
| Long-term loans, loans | 0 | 0 | 0 | 0 |
| Other long-term liabilities | 0 | 0 | 0 | 0 |
| Long-term liabilities, total | 0 | 0 | 0 | 0 |
| III. Equity | ||||
| Authorized capital | 218 | 218 | 0 | 0 |
| Extra capital | 56 | 56 | 0 | 0 |
| Accumulated profit | 57 | 87 | 30 | 52,6 |
| Other sources of equity capital | 0 | 0 | 0 | 0 |
| Equity, total | 331 | 361 | 30 | 9,1 |
| Liabilities of everything | 737 | 1038 | 301 | 40,8 |
The liabilities of Breeze LLC increased by 301 thousand rubles. The increase was mainly due to an increase in short-term liabilities (by 271 thousand rubles). At the end of the analyzed period, the liabilities of Breeze LLC consist entirely of accounts payable. During the analyzed period, there was a tendency for other creditors to grow by 100 thousand rubles, and debt to the budget to grow by 165 thousand rubles.
The increase in equity capital occurred by 30 thousand rubles. The increase in equity capital occurred due to accumulated profit in the amount of 30 thousand rubles. Despite the significant increase in equity capital, the organization's additional capital remained unchanged.
Thus, based on the horizontal analysis carried out, we can say that the financial and economic activities of Breeze LLC contributed to the increase in its equity capital. However, the increase in accounts payable indicates that Briz LLC lacks its own working capital, and its current activities were financed mainly from borrowed funds.
2.2 Vertical analysis of the organization under study
Vertical analysis involves studying the relationship between sections and items of the balance sheet, i.e. their structure. Vertical analysis is carried out using an analytical table and involves studying changes in the shares of assets and liabilities of the balance sheet in order to predict changes in their structure.
Vertical analysis complements horizontal analysis. Vertical analysis, like horizontal analysis, is widely used when conducting inter-farm comparisons.
In practice, the interpretation of the results of vertical and horizontal analysis is interconnected into a single whole.
To conduct a vertical analysis, we will compile analytical tables.
Table 4
| ASSETS | 01.01.2008 | 01.01.2009 | Change in specific gravity in % | ||
| Cost Thousand rubles | Price. Thousand roubles | The share of the asset in the total value of the asset. % | |||
| I.Current assets | |||||
| Cash | 396 | 53,7 | 708 | 68,2 | 14,5 |
| Short-term financial investments | 0 | 0 | 0 | 0 | |
| Accounts receivable | 11 | 1,5 | 24 | 2,3 | 0,8 |
| Advances to suppliers | 0 | 0 | 0 | 0 | 0 |
| Reserves | 236 | 32 | 214 | 22,6 | -9,4 |
| VAT | 0 | 0 | 0 | 0 | 0 |
| Other current assets | 8 | 1,1 | 8 | 0,8 | -0,3 |
| Total current assets | 643 | 87,2 | 946 | 91,1 | 3,9 |
| II.Non-current assets | |||||
| Long-term financial investments | 56 | 7,6 | 56 | 5,4 | -2,2 |
| Fixed assets | 38 | 5,2 | 36 | 3,5 | -1,7 |
| incl. unfinished capital construction | 0 | 0 | 0 | 0 | 0 |
| Intangible assets | 0 | 0 | 0 | 0 | 0 |
| Other noncurrent assets | 0 | 0 | 0 | 0 | |
| Non-current assets, total | 94 | 12,7 | 92 | 8,9 | -3,9 |
| Total assets | 737 | 100 | 301 | 100 | 0 |
In the structure of the assets of the balance sheet of Breeze LLC, a significant share belongs to current assets. At the beginning of 2007, the value of current assets amounted to 87.2% of their total value, and at the end of the year - 91.1%. There is a tendency for the share of this type of assets to increase.
The structure of current assets in Breeze LLC was dominated by cash, the share of which as of the beginning of 2008 was 53.7%. During 2008, there was an increase in cash and its share at the end of 2008 amounted to 68.2%. The increase in the share of cash indicates, on the one hand, an improvement in liquidity in Breeze LLC, and on the other hand, about its insufficiently efficient use.
As of 01/01/2008, commodity inventories had a significant share in current assets - 30.9%. During the period under review, there is a tendency to reduce them in the current assets of Breeze LLC.
The next type of current assets with a significant share was accounts receivable. As of January 1, 2008, the share of this type of assets was 1.5%; by the end of 2008, the share increased by 0.8%.
Thus, the current assets of the organization Breeze LLC are characterized by a large share of cash, a small share of inventory and the presence of advances issued to suppliers, which worsens the liquidity of current assets.
The share of non-current assets of Breeze LLC at the beginning of 2008 was 12.8%, and as of 01/01/2009 only 8.9%. There is a trend towards a decrease in the share of this type of asset.
The main decrease in the share of this type of assets occurred in terms of a decrease in the share of fixed assets by 1.7%. The decrease in the share of fixed assets is mainly due to the liquidation of obsolete equipment.
Liabilities include equity and short-term liabilities. Therefore, based on the share of liabilities, we can conclude that the sources of financial and economic activities of Breeze LLC have changed.
balance sheet financial asset
Table 5
During the analyzed period, Breeze LLC experienced a decrease in the share of equity capital from 44.9% to 34.8%. It should be noted that keeping the share of equity capital below 50% is undesirable, since the organization will depend to a greater extent on the persons who provided him loans, advances and credits.
Breeze LLC had no long-term obligations during the period under review. If we take into account the possibility of replacing short-term liabilities with long-term ones, then the predominance of short-term sources in the structure of borrowed funds is a negative fact that characterizes the deterioration of the balance sheet structure and an increased risk of loss of financial stability.
The share of short-term liabilities in the analyzed period increased by 10.1% in the total volume of liabilities of Breeze LLC.
At the end of the analyzed period, the liabilities of Breeze LLC consisted entirely of accounts payable, the structure of which was dominated by debt to the budget and other creditors. As of January 1, 2009, accounts payable amounted to 65.2% of the organization's total liabilities. This is 16.9% more than the share of this type of liabilities in accounts payable at the beginning of the analyzed period (48.3).
In the structure of accounts payable, a significant share falls on other creditors. For this type of liability, there was an increase in the share of 15.1%. This suggests that the organization was unable to mobilize internal resources to pay accounts payable.
Thus, based on the horizontal and vertical analysis carried out, we can say that the financial and economic activities of Breeze LLC did not contribute to the increase in its equity capital. However, the increase in short-term accounts payable indicates that Briz LLC lacks its own working capital, and its current activities were financed mainly from borrowed funds.
Conclusion
For an organization, it is important not only to carry out analysis and competently present the results, but also to formulate, based on them, recommendations for improving indicators and quality characteristics in the organization’s activities. The main purpose of financial analysis is not the calculation of indicators, but the ability to interpret the results obtained.
Based on horizontal and vertical analysis of the balance sheet, positive and negative trends in changes in sections and items of the balance sheet are determined.
In the structure of the assets of the organization Breeze LLC, a large share belongs to cash. During the period under review, the share of current assets was more than 50%. This indicates the formation of a mobile asset structure, which helps accelerate the turnover of the organization’s working capital.
In the period under review, the value of non-current assets decreased. The structure of non-current assets has changed little. The lion's share of such assets consists of fixed assets.
The dynamics of the value of current assets of Breeze LLC was positive. The main contribution to the formation of current assets is made by cash, followed by inventories and accounts receivable. The structure of current assets as of 01/01/2009 with a low share of debt and a high level of cash indicates a favorable state of settlements organizations with customers.
Since the cost of inventories has decreased, this is a positive factor in the financial and economic activities of the organization
During the analyzed period, Breeze LLC had no receivables in the value of current assets, which is a positive change and may indicate an improvement in the situation with payment for the organization’s products and the choice of an appropriate sales policy. A positive factor is that Breeze LLC does not have accounts receivable for which payments are expected more than 12 months after the reporting date, since funds are not withdrawn from circulation for a long period.
The data from the analysis show that equity capital increased in absolute terms over the analyzed period, but short-term liabilities also increased. These values of equity and borrowed capital indicate the dynamics of increasing financial dependence of the organization and an increase in the degree of financial risks. This allows us to assert that the organization has a fairly large dependence on creditors.
Accumulated profit in value terms increased, the share of profit in the value of all liabilities increased by 0.8%. An increase in accumulated profit is the result of the organization’s efficient operation and an increase in its business activity.
During the analyzed period, the organization's borrowed capital consisted entirely of accounts payable. The lion's share of borrowed funds comes from other creditors, i.e. money that will be spent or has already been spent on the purchase of supplies, materials, etc. The increase in the amount for other creditors is a positive thing.
Having carried out a horizontal and vertical analysis of the balance sheet, we can draw the following general conclusion based on the results of the financial analysis of Breeze LLC
The analysis data shows that certain measures must be taken to increase the financial stability and liquidity of Breeze LLC. To do this, it is necessary to promote an increase in the provision of reserves with own working capital. Therefore, you should increase your own working capital. An increase in own working capital affects accounts payable, the amount of which can be reduced.
One of the ways to reduce accounts payable is to use available free cash and reduce the share of buyer advances in the sources of working capital.
The most risk-free way to replenish the sources of reserve formation is to increase real equity capital through the accumulation of profits. Another way to replenish current assets is to increase the amount of borrowed funds through attracting long-term bank loans.
Bibliography
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2. Abryutina M.S. Grachev A.V. Analysis of the financial and economic activities of the enterprise. Educational and practical manual. – M.: "Business and Service", 2008.
3. Bakanov M.I. Sheremet A.D. Theory of economic analysis. - N.: Textbook Finance and Statistics, 1997.
4. Efimova O.V. The financial analysis. – M.: Publishing house "Accounting", 2008.
6. Kovalev V.V. The financial analysis. Capital Management. Choice of investments. Reporting analysis. – M.: Finance and Statistics, 2006.
7. Lyubushin M.P., Leshcheva V.B., Dyakova V.G. Analysis of the financial and economic activities of the enterprise. Textbook for universities. – M.: UNITY-DANA, 2005.
8. Lovashin V.A. Analysis of the financial and economic activities of the enterprise. Textbook for universities. – M.: UNITY-DANA, 2005.
9. Markov A.P. Analysis of the financial and economic activity of the enterprise. – M.: DELO, 2005.
10. Markaryan E.A., Gerasimenko G.P. Financial analysis: Textbook. – Rostov n/d.: Publishing house Rost., univ., 2004.
11. Methodology for economic analysis of an industrial enterprise (association). / Ed. Buzhinekogo A.I., Sheremet A.D. – M.: Finance and Statistics, 2008.
12. Nazarenko V.G. Financial and economic analysis. – M.: UNITY-DANA, 2005.
13. Markelov R.O. Financial recovery of the enterprise. – M.: INFRA-M, 2005.
14. Ovcharenko M.B. Analysis of the financial and economic activities of a trade organization. – M.: UNITY-DANA, 2007.
15. Pavlov R.S. Analysis of the financial and economic activity of the enterprise. – M.: INFRA-M, 2008.
16. Peshkova E.P. Marketing analysis of the company's activities. – M.: "Os-89", 2008.
17. Ripoll-Zaragosi F.B. Financial and management analysis. –M.: Prior Publishing House, 2006.
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Balance analysis is carried out using one of the following methods:
- ? analysis directly from the balance sheet without first changing the composition of balance sheet items;
- ? by constructing a consolidated comparative balance sheet with the aggregation of some elements of balance sheet items that are homogeneous in composition;
- ? carrying out additional adjustments to the balance sheet for the inflation index with subsequent aggregation of items in the necessary economic sections. A comparative analytical balance can be obtained from the original balance sheet by condensing individual items and supplementing it with indicators of structure, dynamics and structural dynamics.
The analytical balance sheet is useful in that it brings together and systematizes the calculations that an analyst usually makes when reading a balance sheet. The analytical balance sheet usually covers a lot of important indicators that characterize the statics and dynamics of the financial condition of the organization. This balance actually includes indicators of both horizontal and vertical analysis. Directly from the analytical balance sheet you can obtain a number of the most important characteristics of the financial condition of the organization. These include:
the total value of the organization’s property, reflected in the bottom line of the balance sheet;
the value of immobilized (non-current) assets, equal to the total of section I of the balance sheet;
the cost of mobile (working) funds equal to the total of section II of the balance sheet;
cost of material working capital (inventories);
the amount of the organization’s own funds equal to the total of section III of the balance sheet;
the amount of borrowed funds equal to the sum of the results of sections IV and V of the balance sheet;
the amount of own working capital equal to the difference in the results of sections III and I of the balance sheet;
A separate position in the aggregated balance sheet shows net working capital, defined as the part of current assets (working capital) financed by invested capital. The value of this indicator characterizes the degree of liquidity of the enterprise, which makes this indicator of particular importance.
Typically, net working capital (NWC) is calculated using the formula
CHOC = TA - TP,
where TA are current (current) assets,
TP -- current (short-term) liabilities.
The greater the net working capital, the more financially stable the enterprise.
When analyzing the comparative balance sheet, it is necessary to pay attention to the change in the share of the amount of own working capital in the value of the property, to the ratio of the growth rates of equity and borrowed capital, as well as to the ratio of the growth rates of receivables and payables.
With stable financial stability, the organization should increase in dynamics the share of its own working capital, the growth rate of equity capital should be higher than the growth rate of borrowed capital, and the growth rate of receivables and payables should balance each other.
Horizontal balance sheet analysis consists in constructing one or more analytical tables in which absolute balance sheet indicators are supplemented with dynamics indicators. The degree of aggregation of indicators is determined by the analyst.
Table 1 - Horizontal analysis of balance sheet assets
|
Asset items |
At the beginning of the year, thousand rubles. |
At the end of the year, thousand rubles. |
Changes (+,-) |
|
|
in thousand rubles |
||||
|
Fixed assets- everything, including: |
||||
|
Intangible assets |
||||
|
Fixed assets |
||||
|
Construction in progress |
||||
|
Deferred tax assets |
||||
|
Other noncurrent assets |
||||
|
Current assets- everything, including |
||||
|
Cash |
||||
|
Other current assets |
||||
|
Total assets |
Based on the given table. 1. we can conclude the following. The total value of the organization's property increased during the reporting year by 33,538 thousand rubles, or 140.65%.
The most significant increase in absolute terms was the least mobile part of current assets - inventories, and in relative terms - cash. There is a fairly significant increase in accounts receivable (see Appendix 1). This fact reflects the diversion of part of current assets to lending to consumers of finished products, goods, works and services of the organization, subsidiaries and other debtors, which indicates the actual immobilization of this part of working capital from the production process. On the other hand, accounts receivable indicate the upcoming receipt of funds if the organization has solvent debtors.
Non-current assets during the reporting period increased by 24455 thousand. rub., or 140.68%. The increase in the value of non-current assets occurred due to an increase in the value of fixed assets and the formation of deferred tax assets, as well as under the item “Construction in progress”
Table 2 - Horizontal analysis of balance sheet liabilities
|
Liability items |
At the beginning of the year, thousand rubles. |
At the end of the year, thousand rubles. |
Changes (+,-) |
|
|
in thousand rubles |
||||
|
Capital and reserves- everything, including: |
||||
|
Authorized capital |
||||
|
Extra capital |
||||
|
Reserve capital |
||||
|
long term duties- everything, including |
||||
|
Loans and credits |
||||
|
Short-term liabilities- everything, including |
||||
|
Loans and credits |
||||
|
Accounts payable |
||||
|
revenue of the future periods |
||||
|
Reserves for future expenses |
||||
|
Total liabilities |
As follows from the calculations presented in table. 2., the increase in the value of liabilities for the reporting period by 33,538 thousand rubles, or 140.65%, is mainly due to an increase in equity capital by 14,176 thousand rubles, or 121.44%. Long-term liabilities over the same period increased by 15,000 thousand rubles, and short-term liabilities by 4,362 thousand rubles. (126.59%).
The growth of equity capital was due to the growth of retained earnings in the amount of 14,176 thousand rubles. The authorized, additional and reserve capital did not change in absolute amounts.
Among borrowed funds, the debt to participants for payment of income increased most significantly - by 2,694 thousand rubles.
The next analytical procedure is vertical analysis -- presentation of financial statements in the form of relative indicators. This representation allows you to see the share of each balance sheet item in its overall total. An obligatory element of the analysis is the dynamic series of these quantities, through which it is possible to track and predict structural changes in the composition of assets and the sources of their coverage. Thus, two main features of vertical analysis can be distinguished:
the transition to relative indicators allows for a comparative analysis of enterprises taking into account industry specifics and other characteristics;
relative indicators smooth out the negative impact of inflationary processes, which significantly distort the absolute indicators of financial statements and thereby complicate their comparison over time.
It should be noted that the importance of permanent and current assets for manufacturing and trading companies is different. Thus, a significant part of the assets of a production company will obviously be formed from fixed production assets. At the same time, the assets of a company engaged in trading activities will primarily consist of inventories, goods for resale and other property, which is reflected in the section “Current assets”. Thus, when analyzing the ratio of permanent and current assets, more attention should be paid to the change in structure itself, and, if possible, compare it with the structure of assets of peer companies and find out the reasons for the differences.
Table 3 - Vertical analysis of balance sheet assets
|
Asset items |
Share at the end of the year, % |
Change in structure (+-) |
|
|
Fixed assets- everything, including: |
|||
|
Intangible assets |
|||
|
Fixed assets |
|||
|
Construction in progress |
|||
|
Profitable investments in material assets |
|||
|
Long-term financial investments |
|||
|
Deferred tax assets |
|||
|
Other noncurrent assets |
|||
|
Current assets- everything, including |
|||
|
VAT on purchased assets |
|||
|
Long-term accounts receivable |
|||
|
Short-term receivables |
|||
|
Short-term financial investments |
|||
|
Cash |
|||
|
Other current assets |
|||
|
Total assets |
Both at the beginning and at the end of the reporting period, non-current assets occupy a larger share of the property than current assets. During the reporting year, their share increased by 0.02 points, which indicates the formation of a more stable asset structure.
Table 4 - Vertical analysis of balance sheet liabilities
|
Liability items |
Share at the beginning of the year, % |
Share at the end of the year, % |
Change in structure (+-) |
|
Capital and reserves- everything, including: |
|||
|
Authorized capital |
|||
|
Own shares purchased from shareholders |
|||
|
Extra capital |
|||
|
Reserve capital |
|||
|
Retained earnings (uncovered loss) |
|||
|
long term duties-total, including |
|||
|
Loans and credits |
|||
|
Deferred tax liabilities |
|||
|
Other long-term liabilities |
|||
|
Short-term liabilities-total, including |
|||
|
Loans and credits |
|||
|
Accounts payable |
|||
|
Debt to participants for payment of income |
|||
|
revenue of the future periods |
|||
|
Reserves for future expenses |
|||
|
Other current liabilities |
|||
|
Total liabilities |
From the table 4. It is clear that equity capital predominates in the organization’s liabilities. By the end of the year, there was a tendency towards a slight reduction in its share.
In the process of analysis, special attention must be paid to the elements that have the greatest share, and the elements whose share has changed abruptly. As a rule, elements with the maximum specific weight or those that change abruptly are indicators of the “problem points” of the organization. To obtain more accurate information, it is necessary to estimate the absolute values of these elements.
Based on the results of the balance sheet analysis as a whole, we can conclude the following. An analysis of structural dynamics indicators revealed the presence of a rather favorable trend: the increase in property was ensured due to the increase in non-current assets. Thus, newly attracted financial resources were invested mainly in liquid assets, which strengthens the financial stability of the organization. The increase in equity capital had the greatest impact on the increase in sources of funds.
Horizontal and vertical analysis complement each other. Therefore, in practice, it is advisable to build analytical tables that characterize both the structure of the reporting accounting form and the dynamics of its individual indicators.
Trend analysis -- part of the forward-looking analysis that is necessary in managing the financial resources of an organization. In the process of trend analysis, a graph of the organization’s possible development is constructed, the average annual growth rate is determined, and the forecast value of each indicator is calculated. This is the simplest way of financial forecasting. The exclusion of random deviations makes it possible to identify stable dynamic series of individual indicators, which can serve as a fairly reliable basis for predicting the development of business entities.
Analysis of the dynamics of the balance sheet currency, the structure of assets and liabilities of the organization allows us to draw a number of important conclusions necessary both for the implementation of current financial and economic activities and for making management decisions for the future.
In general terms, signs of a “good” balance are:
the balance sheet currency at the end of the reporting period increased compared to the beginning;
the growth rate of current assets is higher than the growth rate of non-current assets;
The organization's own capital exceeds its borrowed capital and its growth rate is higher than the growth rate of borrowed capital;
The growth rates of accounts receivable and accounts payable are approximately the same.
The most common methods for assessing the financial situation are vertical and horizontal analysis of the balance sheet. These methods allow you to increase company income, reduce risks and prevent possible negative consequences from improper accounting and reporting.
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What is a balance sheet?
The balance sheet is the main report of an organization, revealing the essence of its economic condition.
As a general rule, the report is submitted no later than March 31 of the year following the reporting year. If the deadline falls on a non-working holiday or weekend, you must report on the first working day following it.
The document is sent electronically to the Federal Tax Service at the place of registration. From January 1, 2020, there is no need to report to the territorial statistics department (Federal Law No. 444-FZ dated November 28, 2018).
Fill out the balance sheet in the BukhSoft program. It's comfortable. The program is suitable for all types of organizations and individual entrepreneurs using general and simplified taxation systems. The finished document can be downloaded and printed, and also sent to the tax office electronically.
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The Ministry of Finance approved the balance sheet form by order No. 66n dated July 2, 2010. The balance sheet consists of two parts:
Vertical balance analysis
Vertical balance sheet analysis is also called structural. The main feature is that when it is carried out, the final data is shown relative to other values included in the balance sheet in the form of separate items. This analysis allows us to judge what share each element of the economic life of an enterprise occupies in its overall structure.
Each indicator of a balance sheet item when conducting a vertical analysis is calculated as a percentage in relation to the same indicator in the previous period.
Such an analysis allows us to identify the following changes that have occurred in the financial condition of the enterprise:
- in what direction has the debt changed in relation to creditors;
- what happened to fixed assets and their depreciation.
The convenience of vertical analysis lies in the fact that analytics in percentage terms clearly demonstrates the deviation of results compared to a particular period.
Algorithm for compiling a vertical balance sheet of an organization:
Step 1. Designate the sum of assets and liabilities as 100%.
Step 3. Calculate the dynamics of change.
Vertical balance sheet analysis: example and conclusions
Let's give a simple example of vertical balance sheet analysis. Let's compare 2018 and 2019:
Indicator name
% 01.01.2018
% 01.01.2019
I. WORKING CAPITAL
Inventory
II. FIXED ASSETS
Buildings and constructions
Depreciation
Equity
Short-term debt
Long-term debt
Conclusions: fixed assets accounted for 36% of the asset as of 01/01/2018. As of January 1, 2019, the share of fixed assets in the overall structure decreased. Consequently, either alienation or write-off of fixed assets occurred. Along with the alienation of fixed assets, there was a decrease in the share of depreciation in the structure, since there were fewer objects.
The increased accounts receivable show that the fixed assets were sold, but the buyers did not pay immediately.
The reduction in the share of equity capital is associated with losses that the company incurred in the current period.
Horizontal balance sheet analysis
Horizontal balance analysis is also called “trend analysis”. Horizontal and vertical analysis of the balance sheet differ in that the first allows tracking changes in physical terms.
Horizontal analysis requires equal time periods, such as a calendar year or 12 months. This type of analysis allows you to understand how the items and indicators of a company’s economic activity change over time.
Algorithm for horizontal balance analysis:
Step 1. To calculate changes in natural values: subtract the indicator of the balance sheet item of the previous year from the indicator of the item of the current period.
Step 2. To calculate the deviation as a percentage: divide the row value from the “Change, rubles” column by the indicator from the “Status as of 01/01/2018, rubles” column. and multiply by 100%.
Horizontal balance sheet analysis: example and conclusions
Let's give a simple example of horizontal balance sheet analysis. Let's compare 2018 and 2019:
Indicator name
Status as of 01/01/2018, rub.
Status as of 01/01/2019, rub.
Change, rub.
Deviation,%
I. WORKING CAPITAL
Inventory
Short-term receivables
Cash and short-term financial investments
II. FIXED ASSETS
Buildings and constructions
Depreciation
Equity
Short-term debt
Long-term debt
For analysis, 2-3 periods are usually taken. This allows you to track changes in financial and economic performance indicators over time.
Conclusions: in 2019, almost all indicators indicate a decrease in the financial activity of the enterprise compared to the same period in 2018. The largest decrease is in inventories - their value decreased by 33.86%.
At the same time, there is an increase in accounts receivable by 23.46%. Long-term debt is increasing, but negatively. This trend may lead to counterparties not repaying debts. Some of them may be liquidated or declared bankrupt in accordance with a court decision.
A decrease in the share of equity capital also indicates that the financial and economic condition of the company is in an unstable position.
We can conclude that the company needs to revise its development strategy in order to increase its financial stability.
Vertical analysis is a method for diagnosing the financial condition of an organization and assessing the dynamics of changes in the structure. The purpose and essence of vertical analysis of financial statements is to analyze changes in the structure of financial indicators for the period under review. This analysis is used to evaluate the structure of the balance sheet, income statement and cash flow statement. In the article, we will look at how a vertical analysis of the balance sheet and income statement is carried out using the example of the KAMAZ PJSC enterprise.
The directions for conducting a vertical analysis of the organization’s balance sheet are as follows:
- Assessment of structural changes in the company's assets/liabilities.
- Calculation of changes in the share of borrowed capital of the organization.
- Determination of the composition of working and non-working capital.
- Comparison of the capital structure of different companies or companies in different industries.
Vertical analysis can be used not only for the balance sheet, but also for the income statement ( form No. 2) when determining the structure of income and expenses. For example, to diagnose the structure of revenue or profit from sales, etc. Vertical analysis can similarly be used for the statement of changes in equity ( form No. 3) and cash flow statement ( form No. 4), but typically vertical analysis is limited to the balance sheet and income statement.
Comparison of vertical balance sheet analysis with other methods of financial analysis
Vertical analysis is one of the tools (methods) for analyzing the financial statements of an organization to diagnose a negative trend in changes in indicators, a decrease in financial stability due to an increase in the share of borrowed capital, etc. In addition to this, other methods are also used ⇓.
| Title of financial statement analysis | Application areas | Advantages | Flaws |
| Vertical analysis (analogue: structural analysis) |
Used to determine the organization's capital structure, financial indicators and changes in structure over time | Allows you to track structural changes in the company's assets and liabilities | Used for diagnostics Does not assess the financial condition of the enterprise |
| Horizontal analysis (analogue: trend analysis) |
Used to assess the direction and forecast the dynamics of changes in financial indicators | Allows you to evaluate the dynamics of changes in financial indicators over the years | Serves more for diagnostics rather than for making management decisions and assessing financial condition |
| Ratio Analysis | Assessment of financial indicators characterizing: profitability, financial stability, turnover and liquidity of the organization | Gives an assessment of the effectiveness of certain indicators of the enterprise's economic activity. The introduced standards allow us to identify problematic indicators and make management decisions Used to assess the financial performance of enterprises in the same industry |
It is difficult to determine the likelihood of bankruptcy risk and the level of financial reliability |
| Scoring (rating) assessment | Comprehensive assessment of the company’s financial condition, solvency and financial reliability. Application of bankruptcy probability assessment models, rating models, scoring and expert methods | A complex criterion based on a financial condition assessment model allows you to determine the likelihood of bankruptcy risk | The final estimate may be distorted due to a peak overestimation of one of the model indicators |
An example of a vertical balance sheet analysis for PJSC KAMAZ in Excel
Let's consider an example of a vertical analysis of the balance sheet for the company PJSC KAMAZ. To do this, you need to download the balance from the company’s official website or from the link →.
Let's carry out a vertical analysis of non-current assets; for this it is necessary to assess what part / share is occupied by its components.
Share of intangible assets (F9) =C9/$C$18
Share of research and development results(F10) = C10/$C$18
Share of fixed assets(F13) = C13/$C$18
Share of profitable investments in material assets(F14) = C14/$C$18
Share of financial investments(F15) = C15/$C$18
Share of deferred tax assets(F16) = C16/$C$18
Share of other non-current assets(F17) = C17/$C$18
You can see that the sum of all parts gives 100%. The figure below shows an example of a vertical analysis of non-current assets in the balance sheet ⇓.
At the next stage, we can identify the maximum and minimum shares in the formation of non-current assets for 2014.
The maximum share in the formation of non-current assets (66.3%) is occupied by fixed assets, the minimum share is the results of research and development (0.4%). To reflect the dynamics of structure changes, it is necessary to construct an area diagram ⇓.
It can be noted that by 2016 there was a decrease in the share of fixed assets (PE) from 66.3% to 36.1% and an increase in the share of financial investments from 7% to 43%. A decrease in the share of fixed assets may indicate a decrease in the enterprise’s investments in production and the development of long-term potential. Fixed assets include: buildings, structures, equipment, vehicles, tools and equipment.
Vertical analysis of the income statement
The versatility of the method allows it to be used to analyze the statement of financial results (form No. 2) and determine how the share of expenses and income changed during the formation of revenue. For example, let’s take the previous financial statements of KAMAZ PJSC and reflect the change in revenue indicators for 2015 and 2016. You can see that the revenue is 100%.
Income from subsidies received (E8) =C8/C7
Cost of sales (E9) =C9/$C$7
Gross profit (E10) =C10/$C$7
All other lines of the income statement are calculated in the same way. The figure below shows an example of using the method ⇓.
As can be seen from the figure, the cost of production (expenses) is higher than revenue, but positive revenue is maintained due to income in the form of subsidies.
From 2015 to 2016, there was an increase in the share of gross profit from 4.6% to 9.%, a decrease in sales profit from 6.2% to 4.4%, and a decrease in profit before tax from 4.7% to 1.3%.
conclusions
Vertical analysis is used as a method of analyzing financial indicators from the balance sheet, income statement, and can also be used for the statement of cash flows and for the statement of capital flows. The method is used to assess the dynamics of the structure of assets and liabilities of the balance sheet. To conduct a comprehensive financial analysis, it must be used in conjunction with horizontal and ratio analysis, as well as assessment using bankruptcy models.