practice report

2.3 Horizontal and vertical analysis of the report financial results

An income statement is accounting document, representing the results of an enterprise’s activities for a certain period. The results are reflected in individual areas of the organization's activities - core, other operating and non-operating. The results are assessed by comparing income and expenses for a certain period.

Table 3 Horizontal analysis of the income statement

Indicators	2014, (thousand rubles)	2013, (thousand rubles)	2012 (thousand rubles)	Relative change	Absolute change
Cost of sales
Gross profit
Business expenses
Administrative expenses
Revenue from sales
Interest receivable
Other income
other expenses
Profit before tax
Current tax at a profit
Net profit

Revenue in 2013 increased by 16%, in 2014 by 25% and amounted to RUB 668,677. The cost of production also increases in 2013 by 17%, in 2014 by 42%. Thus, the cost of production changed to a greater extent than revenue, which indicates an increase in the share of profit.

The enterprise's gross profit in 2013 increased by 13.63%, and then decreased by 9.64% and now amounts to RUB 151,670. Commercial expenses increase by 17%, management expenses fall every year by 12%.

Profit from sales is unstable, in 2013 there was an increase of 25%, but then in 2014 there was a sharp decrease of 12.5%, interest receivable also decreased, in 2014 by 30%. Other income, which includes income from the sale of property, sale of fixed assets, including income from trust management assets are reduced, in 2013 by 7%, in 2014 by 57%, as well as other expenses, respectively, in 2013 by 1%, in 2014 by 57%.

As a result, net profit in 2014 amounted to 75,026 rubles, which is 12,104 more than in 2012.

Table 4 Vertical analysis of the income statement

INDEX	Amount in thousand rubles.	Structure, %
Cost of sales
Gross profit
Business expenses
Administrative expenses
Revenue from sales
Interest receivable
Other income
other expenses
Profit before tax
Current income tax
Net profit

The share of cost in revenue increased from 68.40% to 77.32%, which means an increase in the cost intensity of products and a decrease in the efficiency of the organization’s core activities. This is certainly a negative trend, as it results in lower gross margins.

The share of commercial expenses in revenue fell from 3.1% to 2.89%. The share of management expenses in revenue also fell from 6.84% to 4.74%, which contributed to a decrease in sales profit by 5%.

The dynamics of the share of profit before tax, which decreased from 16.79% to 14.44%, is explained by a decrease in the share of other income from 49.82% to 17.01%. The share of other expenses also decreased. Accordingly, there was an increase in the current income tax (from 2.42% to 2.69%). As a result, the share net profit reporting year as part of sales revenue decreased compared to previous year by 3%.

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The results of the company’s activities for the reporting period are recorded in the financial results report (FRS), which, along with the balance sheet, is one of the main forms in the block financial statements. The information accumulated in this document serves as the basis for various analytical studies and enables the economist to find out how effective the company's business policy is. Reporting data is analyzed using various methods, and one of them is vertical analysis of the financial results statement. Let's find out how it is used in practice.

Vertical analysis methodology

The FFR reflects all information about the company’s income and expenses and displays the total amount of profit or loss for the reporting period. The tabular structure of the report recording the amounts of the main income and expense items of the current and previous periods is convenient for analysis.

It is this structure of the report that allows you to analyze data vertically, taking one indicator (usually revenue) as a base one and calculating the dynamics of others in relation to it. This approach is typical for vertical analysis. In practice it looks like this:

• The revenue value is taken as 100 percent;
• The remaining items are recalculated in relation to revenue, determining the share of each indicator in the structure of the report, using the formula Z / B * 100%, where Z is the value that should be calculated over time in relation to revenue, B is revenue.

Since the FRA contains information for two periods - current and past, the use of vertical analysis allows you to:

• track the movement of values ​​in the direction of growth or, conversely, decrease in general structure costs;
• draw conclusions about which expenses are growing unjustifiably, negatively affecting production costs;
• develop new business strategies when there is evidence of a decline in demand for manufactured products.

The practical application of vertical analytics principles has a very effective impact on the development of the company. Let's look at how the analysis of the financial results statement is carried out in practice.

Vertical analysis of the income statement using an example

Based on the FMR compiled for 2017 by Orion LLC, we will conduct an analysis using the vertical method:

Articles of the ODF	Information for the year (RUB)		Analysis of data for the year (%)
Sales revenue
Total revenue
Product cost
Other cost
Total cost
Gross profit
Business expenses
Administrative expenses
Other operating expenses
Result from asset impairment
Profit from operating activities
Exchange differences
Financial expenses
Impairment of investments
Profit from investment activities
Profit before tax
Income tax expenses
Net profit

Since the purpose of the analysis is to identify changes in the structure of costs and income of the company, we will calculate the share of all items in total revenue.

Using the formula Z / B x 100%, we calculate the percentage share of each report item.

For example, let’s calculate the share of sales revenue in total revenue for 2017:

642,030 / 667,630 x 100 = 96.2%, i.e. sales revenue is 96.2% of the total. All indicators are calculated using this algorithm. Having filled out the table, we will conduct a vertical analysis of the financial results statement.

After analyzing the calculated values, the economist will draw the following conclusions:

• despite the fact that the absolute value of revenue increased in 2017 compared to data for 2016 by 63,430 rubles, the share of gross profit in revenue decreased by 8.68% (63.79 - 55.11);
• the share of product costs in revenue increased from 36.21 to 44.89%. A similar phenomenon is a negative condition when the net profit of the current period is growing compared to the previous year, but changes in the composition of cost items of the general financial fund are already showing a steady decline, and, therefore, it is necessary to take measures to reduce costs;
• against the background of a decrease in the share of profit from operating activities by 4.08%, in 2017 the share of profit from investments increased by 1.55%. As a result, the growth in the share of profit before tax in 2017 amounted to 2.52%, and net profit - 0.75%.

Considering the current situation, we can draw a conclusion about further stimulation of the company’s investment activities, since its profit has noticeably increased, as well as review the range of products and find out the reasons for the increase in costs and administrative expenses.

The final performance indicators of the company are recorded in the financial results report. The report is one of the documents on the basis of which you can analyze the enterprise and its activities. Analysis of the financial results report allows you to draw conclusions about the effectiveness of the organization.

Why do you need analysis of the results report?

The financial performance statement reflects statistical data about a company's income and expenses. That's why it used to be called an income statement. The report is a table containing the name of the indicator (for example, “Revenue”, “Other expenses”, etc.) and the periods for which the data is reflected. Information in the report can be shown for 3 months, six months, 9 months and a year. Moreover, the data is presented in comparison for two years - the current and the previous one.

The report is the content document for the research. Analysis of the financial results statement makes it possible to identify key indicators by which one can judge the viability of the organization and the effectiveness of its functioning. Information from the report is necessary both for internal use and for third party organizations And government agencies: tax inspectorates, banks, investors, etc.

Horizontal and vertical analyzes of the income statement

The ways to analyze a firm's performance report are:

• horizontal analysis;
• vertical analysis.

Both methods allow you to identify changes that have arisen in reporting indicators, and on this basis make decisions for the effective functioning of the enterprise.

The essence horizontal analysis consists of comparing data over two years, determining relative and absolute change. Absolute deviation is calculated as the difference between the information for this year And previous period. Relative deviation is the ratio of the absolute change to the base year data multiplied by 100%. This method of analysis is considered quite simple. It allows you to establish whether acts and liabilities increased or decreased, due to which there was an increase in assets (for example, due to retained earnings), decreased or increased cash flow. Each of the indicators signals what actions managers should take in the future to improve the situation or maintain it, and the growth of the company.

A different approach is typical for the vertical analysis of the financial results statement: the dynamics of each of the report indicators in relation to the company’s revenue is studied. When using this method, the revenue indicator is taken as 100%, and the remaining indicators are recalculated in relation to the revenue indicator. In other words, to understand what share a certain indicator occupies in the structure of the report, the size of the indicator is divided by the size of revenue, and the ratio is multiplied by 100%. Thus, each report indicator is converted into percentages. Since the report contains information for two periods, it becomes possible to track the dynamics of the increase or decrease of the indicator. Based on the results of the analysis, it becomes obvious what costs influenced the increase in cost, it is clear how administrative and marketing expenses changed their influence in terms of generating revenue, which will directly indicate why profits increased or decreased. After analyzing the indicators, management tactics are developed aimed at reducing negative trends and maintaining positive trends.

The practical application of horizontal and vertical analysis methods has shown their effectiveness in determining the state of the company and the effectiveness of its work. An action plan created based on research will help improve the situation of the enterprise.

Indicators	As of 12/31/13	As of 12/31/12	Changes (+, -)
thousand rubles	%	thousand rubles	%	thousand rubles	%
Revenue	8 053 502	100,00	8 188 785	100,00	-135 283	0,00
Production cost	6 021 856	74,77	5 715 893	69,80	+305 963	+4,97
Gross profit	2 031 646	25,23	2 472 892	30,19	-441 246	-4,96
Business expenses	168 008	2,09	162 237	1,98	+5771	+0,11
Administrative expenses	425 010	5,28	412 380	5,04	+12 630	+0,24
Profit (loss) from sale	1 438 628	17,86	1 898 275	23,18	-459 647	-5,32
Income from participation in other organizations		0,00		0,00	+43	0,00
Interest receivable	230 969	2,87	87 821	1,07	+143 148	+1,71
Percentage to be paid	6 674	0,08		0,00	+6 674	+0,08
Financial result from financial activities	224 338	2,79	87 821	1,07	+136 517	+1,72
Other income	483 977	6,01	262 190	3,20	+221 787	+2,81
other expenses	1 094 606	13,59	344 339	4,21	+750 267	+9,38
Balance of other income and expenses	-610 629	7,58	82 149	1,00	+528 480	+6,58
Profit (loss) before tax	1 052 337	13,07	1 903 947	23,25	-851 610	-10,18
Current income tax, including:	329 899	4,09	383 396	4,68	-53 497	-0,59
Permanent tax liabilities (assets) (PNO or PNA)	124 388	1,54	6 729	0,08	+17 659	+1,46
Changing deferred tax obligations(IT)	4 947	0,06	2 643	0,03	+2304	+0,03
Changing deferred tax assets(SHE)	(10)	0,00	(1480)	0,02	-1470	-0,02
Other	2 034	0,03	(5 960)	0,07	-3926	-0,04
Including: (income tax of previous years)	2 034	0,03	(5 960)	0,07	-3926	-0,04
Net profit	719 515	8,93	1 510 468	18,45	-790 953	-9,52

Based on the results of a vertical analysis of the financial results statement, the following conclusions can be drawn: The company's revenue during the reporting period decreased by 135,283 thousand rubles. At the same time, production costs increased by 305,963 thousand rubles. As a result of these changes, the enterprise's gross profit in reporting period decreased by 441,246 thousand rubles. The organization's commercial expenses during the reporting period increased by 5,771 thousand rubles. and at the end of 2013 amounted to 168,008 thousand rubles. The organization's administrative expenses increased by 12,630 thousand rubles. This may indicate a decrease in production volumes at the enterprise. Sales profit, compared to 2012, decreased by 459,647 thousand rubles. and at the end of 2013 amounted to 1,438,628 thousand rubles.

The enterprise's income from participation in other organizations amounted to 43 thousand rubles. As of 2012, the organization did not receive any income. During the reporting period, the item “Interest receivable” increased by 143,148 thousand rubles. At the same time, under the item “Interest payable” there was also an increase in the amount of 6,674 thousand rubles, but for 2012 this interest was not recorded. The financial result from financial activities for the analyzed period increased by 136,517 thousand rubles. Other income of the enterprise increased by 221,787 thousand rubles. At the same time, other expenses of the enterprise increased by 750,267 thousand rubles. The balance of other income and expenses for the analyzed period decreased significantly by 528,480 thousand rubles, but as of December 31, 2013 it remains negative and amounts to 610,629 thousand rubles.

The enterprise's profit before tax for the analyzed period decreased by 851,610 thousand rubles. and at the end of 2013 it is 1,052,337 thousand. rub. The current corporate income tax decreased by RUB 53,497 thousand. and at the end of 2013 it is 329,899 thousand rubles. At the same time, the amount of permanent tax liabilities (assets) during the reporting period increased by 17,659 thousand rubles; the change in deferred tax liabilities has a positive trend: the increase in the amount is 2,304 thousand rubles, and the change in deferred tax assets has a negative trend: the decrease is 1,470 thousand rubles.

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 structure financial indicators for the period under review. This analysis used to evaluate structure balance sheet, profit and loss statement and flow statement Money. 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 company 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 probability of bankruptcy risk and the level 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 conduct a vertical analysis non-current assets, for this it is necessary to estimate what part / share is occupied by its components.

Share 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 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 (FPE) 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 one financial statements 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.