The Common-Size Analysis of Financial Statements

By analyzing how a company’s financial results have changed over time, common size financial statements help investors spot trends that a standard financial statement may not uncover. The common size percentages help difference between comparative and common size statement to highlight any consistency in the numbers over time–whether those trends are positive or negative. Generally accepted accounting principles (GAAP) are based on consistency and comparability of financial statements.

Whereas the common size financial statements present all these items in percentage terms more often. As a result, the financial statement user can more easily compare the financial performance to the company’s peers. The ability to compare various size companies is another advantage of using comparative statements for financial analysis.

1. COGS divided by $100,000 is 50%, operating profit divided by $100,000 is 40%, and net income divided by $100,000 is 32%.
2. The use of percentages eliminates the difference in dollar amounts presented in the financial statements of different size companies.
3. Comparative analysis accounting identifies an organization’s financial performance.
4. This analysis reveals, for example, what percentage of sales is the cost of goods sold and how that value has changed over time.
5. The analysis results indicate that company XYZ finances its operations mainly through equity instead of debt.

The first step is identifying which figures should be examined for trends and the period relevant to the analysis. Hence, this analysis makes the strategies of other businesses in the industry more apparent and can help the company evaluate how to deal with its competitors in the future. Managers can track the strategies of their competitors, for example, altering capital structures, cost drivers, etc.

Balance Sheet Common Size Analysis

A percentage of sales presentation is often used to generate comparative financial statements for the income statement — the area of a financial statement dedicated to a company’s revenues and expenses. Common size financial statements present all items in percentage terms where balance sheet items are presented as percentages of assets and income statement items are presented as percentages of sales. Published financial statements are common size statements that contain financial results for the respective accounting period. In the above example, if the results were presented for a single accounting period, it is a common size statement. Financial statements are of wide use to a number of stakeholders, especially for shareholders as such statements provide a number of important information. The changes in assets and liabilities that you see on the balance sheet are also reflected in the revenues and expenses that you see on the income statement, which result in the company’s gains or losses.

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A firm’s enterprise value (EV) can be calculated using this data as well as other ratios used, all of which are used to compare a company to others in its peer group. Financial management can use a common-size analysis to contrast the current cash flow with prior years. It can indicate if the debt is too large, if too much cash is retained, or if inventories are increasing too quickly.

How to Evaluate a Company’s Balance Sheet

Whereas, the expense is the term that means the cost which is incurred in the process of producing or offering a primary business operation. Comparative statements are used to figure out finances which is a good practice for the business owner. Spotting financial patterns can help companies forecast effectively, as the loss period can be more apparent. Likewise, they can use the identified trend lines to alter strategy, increasing the company’s efficiency of resources. Investors can use the analysis to aid their investment decision and determine their profitability.

Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. The main difference between the two evaluation methods is that the standard size analysis deals with the company’s intrinsic value, using only the data from a single business. For instance, company ABC performs a standard size analysis on company XYZ and uncovers that it is continuously altering its capital structure to take on more debt.