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Vertical Analysis Common Size | Balance Sheet and Income Statement - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell ican friends today we
are going to learn a concept that is
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vertical analysis of of common size so
basically we'll be studying three
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aspects over your horizontal and trend
analysis vertical analysis and ratio
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analysis these are the three things what
is the horizontal in the trend analysis
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it basically compares the financial
statement to determine the dollar and
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the percentage changes in the amount and
in the percentage change and the second
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is it computes the dollar change with
the percentage change that's the same
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thing vertical analysis it shows the
relationship of each item to a pays
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amount on the financial statement so it
says that you know what is going to be
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the percentage of the total amount an
income statement each item is expressed
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as a percentage of her net sales and
that a balance sheet each item is
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expressed as a percentage of the total
assets right so here assets is taken as
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the benchmark for percentage for a
purpose and over here sales in case of
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the income statement the ratio analysis
it puts the number in the perspective
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with the other number we are comparing
right and it helps to control the
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different sizes of the firm ratios
provide a meaningful relationship
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between the individual values and the
financial in the financial statement so
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let's let's understand what is the
vertical analysis or commonly known as
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the common size see the vertical
analysis analysis of a financial
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statement is done using three methods we
just saw horizontal right then we we
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just read a vertical
and ratio analysis right
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okay so in this tutorial we are going to
discuss about vertical analysis or the
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comments I statement in detail now
vertical analysis is basically you can
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say it is a technique used to identify
where a company has where the company
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has applied its resources
and you can say that I know how far
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those resources have been used they are
distributed among the various balance
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sheet and an income statement accounts
this analysis basically recommends
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relative weight you can say the relative
weight of each account on its share in
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asset resources or revenue generation
third in the vertical analysis each
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element of the of the financial
statement both I am talking about the
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income statement and the balance sheet
are shown as a percentage of the total
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assets so in case of the income
statement each element of income and
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expenditure is defined as the percentage
of the total asset so total asset not
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the total asset or total sales now as an
example of vertical analysis let's take
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a balance sheet of Tata group of company
as on 30.09 and let's try and
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understand things in here now this is
the balance sheet of Tata limited if we
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only look at the above balance sheet the
liability and asset which is available
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to us it doesn't it doesn't actually
make any sense over here but let me
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convert each you know or each and every
element of this balance sheet as a
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percentage of the total that is this 119,020 common size balance sheet then the
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balance sheet will appear something like
this so now this is all the balance
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sheet will look like it is the
percentage over here everything is
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imported form so now we have a look at
the balance sheet we look at the above
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balance sheet as you can see the assets
and liability look I mean my question is
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a does it look much intuitive right I
mean when we perform the vertical
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analysis the data provides financial
insight so in this case for making the
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common size balance sheet we have
basically converted all the elements of
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the balance sheet let it be liability
and the asset as a percentage of the
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total amount so over here the liability
is going to remain the same a liability
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and the asset total is going to remain
the same so all this amount is the
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percentage of the total among so on a
stand alone we can derive the conclusion
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from the balance sheet that the reserves
in surplus that is the RNs the results
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in surplus
is a 58.3% and it is the highest portion
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the company is having huge amount of
reserves in it
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the debt-to-equity ratio in this company
is 19.6 that is the
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long-term borrowing plus sir you can say
you will need to divide this long-term
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borrowing by the total one so you will
get 0.33% so which is completely
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low in in it in this scenario or and
that means the company is not using much
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of their long term borrowings or or debt
in the company the more debt brings the
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financial leverage and tax savings no
majority of the reserves and surplus is
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invested in the non current I'm
repeating it is invested in the non
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current investments as you can see over
here this are the non current arrest
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investments that he 42.5
43.9 and most of the
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long-term borrowing which is 19.6% okay
are invested into thee fixed assets
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42.5% now company
predominantly invested in in non current
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investment then the current investor and
investment so the company is is a huge
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capital intensive company as an
investment in the non current assets
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right or in the non current assets
especially the fixed assets sorry the
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non current assets especially the fixed
assets which is they especially is very
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high which is nearly around 42.5% so companies trade
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receivable if you just see it's just 0.7%
whereas the trade payables over
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here is 5.6% right and
this means that company's not giving
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much credit to debtors where is it
whereas it you know it is enjoying the
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credit period of its creditors as you
can see so as seen from the above
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vertical analysis or the common size
statement it can give you a lot of
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better insight from the help with the
help of the these these percentages
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which have been used over here okay
and of differentials written of the
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company and and then when you look at
the same otherwise right now for
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vertical analysis of the financial
statement over different period if you
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try and look now in the continuation of
the above common size statement that we
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just learned in an example now compare
know the two years balance sheet of the
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same company see look at this this is a
2016 data and this is a 2015 data we
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just knew this is the total right and we
made the percentage now we have
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converted this into into a percentage
firm and once we convert the percentage
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from the same will look something like
this since how it is going to look like
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something see after conversion of the
2 years balance sheet we can derive
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that you know reserves are marginally
they are marginally increased by 2% from
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56.7% this means the profitability must
have increased you can see from 56 to 58.3
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the long-term borrowing have
decreased by close enough to 1%
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this means that some marginal repayment
of the loan must have happened now if
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you see the short-term borrowing there
has been increase in the short-term
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borrowing by clearly a 1% flat
and inventory level as you can see over
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here it has remained the same close
enough for 6.9 and 6.6
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almost the same so there is marginal
increase in the trade receivables is
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0.4 to 0.7 the
share capital remains the same and that
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means there is no fresh issue of the
capital now let's go and perform some
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common size of the income statement for
different period and analyze the same on
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the standalone period basis and for
different years now as you can see this
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is the PNL account of the Tata Group
company for 2016 for different quarters
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as you can see from 2015 itself so a
plane looking at this a plane looking at
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the above income stated might be little
bit confusing so let's convert the same
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as a percentage of the sales or total
income from the operation and it will
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look something like this so this is the
final look of after converting into the
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percentage from CV following conclusion
you know can be drawn over from after
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converting the same as a common sized
financial statement there has been
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reduction
in the purchased of the finished goods
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nikka and and the semi finished steel
and the other product as the percentage
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fell from close enough to 3.3% as you can see the
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3.3% in December 2015 to
1.4% in December 2016
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and the raw material consumption is you
know close enough to in the 23%
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segment right so to minus 23%
remains as the past trend
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employee cost has reduced by 11%
okay
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probably before I reduce from the 11% in December 2015 to
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10.1 and then 8.5 okay
now the power cost to has reduced from 6
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to 5% okay and the total expense
reduced considerably around close enough
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to 91.5% in December 2015 to 82.2%
you can say 2% in
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December 2016 even the tax expense has
been increased the three times from
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1.6% in 2015 to close
enough to 4.2% so
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that's it for this particular topic if
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