Vertical Analysis Financial Metrics
Due to the complexity of corporate financial statements, the prospect of deciphering meaningful insight can be a daunting task (thevalueatrisk.blogspot.com, 2009). A relatively effective process exists known as Vertical Analysis. The premise of Vertical Analysis is to create common-size financial statements, where all balance sheet and income statement items are converted into percentage terms for purposes of comparison. Using vertical analysis, comparisons can be made between firms regardless of size. This approach is especially useful when determining the relative financial health of competing firms within the same industry. Financial metrics display a large degree of variability across industries; however, within a given industry, competitors
should be fairly aligned in terms of funding sources (debt vs equity), liquidity, asset turnovers etc. Looking at the common – size statement of income for Ross and TJX, we can determine that the cost of goods sold for both companies is fairly high. At a 5-year average from 2012 to 2016, Ross and TJX reported at 72.06% and 71.68%, respectively. This indicates that the cost of producing their goods is about 72% of revenues for both companies. Although TJX has kept its cost of producing its goods a bit lower than Ross has, the difference was only .38%. While the cost of goods sold for Ross and TJX has been decreasing over the past five years, on average, the cost of producing goods by both companies was fairly similar.
At a 5-year average for Ross and TJX, gross profit compares at 27.94% versus 28.32%, and selling and administrative expense compares at 14.83% versus 16.52%, respectively. Because Ross has been able to maintain lower costs in both the cost of producing its goods and in its marketing expenses, Ross has been able to generate a higher operating income than has TJX over the same reporting period – 13.10% versus 11.80%, respectively. Although net income has increased steadily for both companies over the past five years, again Ross exceeds TJX in this measure as well – 8.16% versus 7.32%, respectively.
should be fairly aligned in terms of funding sources (debt vs equity), liquidity, asset turnovers etc. Looking at the common – size statement of income for Ross and TJX, we can determine that the cost of goods sold for both companies is fairly high. At a 5-year average from 2012 to 2016, Ross and TJX reported at 72.06% and 71.68%, respectively. This indicates that the cost of producing their goods is about 72% of revenues for both companies. Although TJX has kept its cost of producing its goods a bit lower than Ross has, the difference was only .38%. While the cost of goods sold for Ross and TJX has been decreasing over the past five years, on average, the cost of producing goods by both companies was fairly similar.
At a 5-year average for Ross and TJX, gross profit compares at 27.94% versus 28.32%, and selling and administrative expense compares at 14.83% versus 16.52%, respectively. Because Ross has been able to maintain lower costs in both the cost of producing its goods and in its marketing expenses, Ross has been able to generate a higher operating income than has TJX over the same reporting period – 13.10% versus 11.80%, respectively. Although net income has increased steadily for both companies over the past five years, again Ross exceeds TJX in this measure as well – 8.16% versus 7.32%, respectively.