In vertical analysis, each line item on a company’s financial statements is presented as a percentage of a larger number. For the income statement, each line item is presented as a percentage of gross sales.  On a balance sheet, each line item in the assets section is presented as a percentage of total assets. In the liability and equity sections, each line item is presented as a percentage of total liabilities and equity (which, based on the accounting equation, is equal to total assets.)Vertical analysis is most useful in making period-to-period comparisons.  For instance, if company managers consistently see that direct costs are 30% of gross sales, and then direct costs rise to 40% in the next period, it will immediately alert them that either costs have risen or there is some other inefficiency they need to address. Vertical analysis is most often used on the income statement.  A typical income statement with vertical analysis looks like this: ABC, Inc. Income Statement Year Percent Gross Sales 5,000,000 100% Cost of Good Sold -2,000,000 40% Gross Margin 3,000,000 60% Less:     Operating Expenses -2,000,000 40% Net Income Before Taxes & Depreciation 1,000,000 20% Taxes -250,000 5% Depreciation -100,000 2% Net Profit 650,000 13%