What are Common Size Statements ?
Common size statements are not financial ratios. Rather they are a way of presenting financial statements that makes them more suitable for analysis. However, analysts always use them in conjunction with ratio analysis. In fact, financial analysts use common size statements as the starting point to help them dig deeper. Common size statements tell them what particular group of ratios deserves more attention for any given set of financial statements.
What Are Common Size Statements ?
Common size statements are financial statements expressed in percentage form. Therefore a common size income statement would consider the sales figure as 100%. Every expense in the income statement will then be expressed as a percentage of the sales figure. Similarly in common size balance sheet the total assets figure is considered to be 100%. Everything else is expressed as a percentage of the same.
Standardized for Comparison
The logic behind creating common size financial statements is that they are easily comparable. Analysts can compare the COGS across two companies and state which one has lower COGS without any calculation! Thus, using the common size statements the analysts look step by step at the financial statements and compare them with other companies. This helps them understand how the company has a different asset structure and cost structure in comparison to its competitors and whether it is favorable or unfavorable for the organization.
Trend analysis is analysis which entails comparison with the companys own past performance. The problem in conducting this analysis is that all the numbers keep changing and there is no fixed base. With the help of common size statements, the base gets fixed at 100% and all the numbers can be compared across years. Thus with the help of this trend analysis, a company can figure out whether its advertising costs have gone up compared to last year and if so why?
Sample of a typical common size income statement:
MSG Video - Common Size Statements Vertical and Horizontal Analysis
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- What is Ratio Analysis ?
- Techniques Used in Ratio Analysis
- Different Users of Ratio Analysis
- Limitations of Ratio Analysis
- Capital Structure Ratio
- Debt to Equity Ratio
- Debt Ratio
- Equity to Fixed Assets Ratio
- Proprietary Ratio
- Interest Coverage Ratio
- Degree of Financial Leverage Ratio
- Degree of Operating Leverage Ratio
- Degree of Combined Leverage Ratio
- Introduction to Cash Flow Ratios
- Cash Flow to Debt Ratio
- Free Cash Flow to Operating Cash Flow
- Operating Cash Flow to Sales Ratio
- Market Related Ratios
- Price to Earnings (PE) Ratio
- Price Earnings Growth (PEG) Ratio
- Price to Book Value Ratio
- Price to Cash Flow Ratio
- Price to Sales Ratio
- Dividend Yield Ratio
- Put Call Ratio
- Introduction to Liquidity Ratios
- Current Ratio
- Quick Ratio
- Cash Ratio
- What is Negative Working Capital ?
- Introduction to Turnover Ratios
- Accounts Receivable Turnover Ratio
- Accounts Payable Turnover Ratio
- How to Use AP Turnover Ratio
- Fixed Asset Turnover Ratio
- Inventory Turnover Ratio
- Working Capital to Sales Ratio
- Introduction to Profitability Ratios
- What are Common Size Statements ?
- What are Profit Margins ?
- Return on Assets (ROA) - Meaning, Formula, Assumptions and Interpretation
- Return on Equity (ROE) - Meaning, Formula, Assumptions and Interpretation
- Return on Invested Capital (ROIC)