 Financial statement analysis is a process whereby investors and creditors evaluate the financial health of a business. It's also used by internal decision makers like owners and managers. We will look in detail at many ways to analyze a set of financial statements to gain new perspectives on the performance and financial health of a company. There are three general tools or techniques used to complete financial statement analysis, horizontal analysis, vertical analysis, and ratio analysis. These techniques should be used together to aid in the valuation of the financial health of a business. The focus of this video will be on vertical analysis. Vertical analysis focuses on the relationship between amounts within the same financial statement. It expresses the relationship of each account or subtotal in terms of a base amount. For the income statement, the base amount is net sales revenue. For the balance sheet, the base amount is total assets. Here you can see the formula for income statement items. The vertical analysis percentage is an income statement item divided by net sales revenue. Here you can see the formula for the balance sheet items. The vertical analysis percentage is a balance sheet item divided by total assets. Here's a more comprehensive example of Appu's Quickie Mart's income statement. Notice how each item is less than 100% because no amount is larger than net sales revenue. Here's an example of Appu's Quickie Mart's balance sheet. Notice again how each item is less than 100% because no amount is larger than total assets. The real power of vertical analysis lies in comparing one company to another. We call this common size statements and it's the subject of the next video in this series.