The integral percent method (integral percentages) is one of the procedures used in the static (vertical) analysis of financial statements. Through it, it is possible to analyze the internal financial structure of the company in a given period, it is prepared from the most significant item of the financial statement and all other items of the statement are compared with it. It is also known as the common percent method or percent reduction method.
Procedure basis
It is based on the mathematical axiom that states that the whole is equal to the sum of the parts, thus, the 'whole' is assigned the value of 100%, resulting 'the parts' in a relative percentage.
Integral Percent = Partial Value / Base Value X 100
Constant Factor = 100 / Base Value X Partial Value
How does it apply
On the balance sheet: total assets are assigned the value of 100% and all other asset items are expressed as a percentage of total assets; with which it is determined whether the investments made in the period were excessive or insufficient. Likewise, the total liability plus capital is assigned the value of 100% and all other items of both liability and capital are expressed as a percentage of the total liability plus stockholders' equity; This determines the dependence of the economic unit on its creditors, that is, its degree of indebtedness. The calculations of the proportions of accounts receivable and fixed assets will be made on their net values, that is, discounting accumulated depreciation and uncollectible accounts, comparing these accounts separately with their respective reserves,to see what relationship exists between them.
In the income statement: the operating structure indicators show us, through the percentage of income statement, how is the behavior of each of the items, net sales are assigned the value of 100% and all other accounts They are expressed as a percentage of net sales, hence the profit items that are presented in the income statement are divided by the total income or net sales in order to calculate profit margins.
The following video presents a practical example of the application of the integral percent method.
Because it is used
The use of this method is recommended to achieve a better understanding of the financial situation of the economic unit and the relationships it maintains internally between its different items, since it allows making quick comparisons between the elements that make up the financial statements and indicates the magnitude proportional of each item, with respect to the total investment.
The main advantage of its use is that it makes it easier to understand and weight the figures in the financial statements and their relationships.
The main disadvantage is that you can reach the wrong conclusions when you want to compare percentages in different periods or years. For this reason it is located only as a vertical analysis method and it is recommended only to compare with another company in the same sector.
Bibliography
- Campos Huerta, María de la Luz. Compendium for the study of basic corporate finance in universities. Universidad Iberoamericana, 2010. p.109 Valbuena Álvarez, Rubén. The evaluation of the project in the decision of the employer. Faculty of Economics, UNAM, 2000. p.138
