Analysing Income Statements
Vertical Analysis
Here is a sample income statement. Notice that it has both the dollar figures and a % beside the number. This is called vertical analysis or the percent to sales ratio.
The following is an example of a set of analysed income statements. Looking at these statements, and the percent to sales rations, we can learn a great deal about the company.
Some important things you notice from the numbers are:
- Sales are up 13% from last year and 27.5% from two years ago
- Gross profit is up 8.8% from last year and 18.2% from two years ago
- Net profits are down over $7300 from last year and $2400 from two years ago to a point nearly at the break even
Important lessons learned from the percent to sales ratios are:
- Gross profit percent (margin) is dropping steadily
- Labour costs are increasing as a percentage of sales
- Overhead costs as a percentage of sales are about the same as the previous year