A physical model was extended with a polarization function to create a vectorized physical model (VPM) to analyze the vertical profile of the observed depolarization ratio due to multiple scattering from water clouds by space-borne lidar. The depolarization ratios due to single scattering, on-beam multiple scattering, and pulse stretching mechanisms are treated separately in the VPM. The VPM also includes a high-order scattering matrix and accommodates mechanisms that modify the polarization state during multiple scattering processes. The estimated profile of the depolarization ratio from the VPM showed good agreement with Monte Carlo simulations, with a mean relative error of about 2% ± 3%.