Common Size Analysis Definition, Uses & Calculation Video & Lesson Transcript

01 Feb Common Size Analysis Definition, Uses & Calculation Video & Lesson Transcript

Although this kind of analysis can be performed on many types of financial statements, the balance sheet and the income statement are most commonly analyzed using this tool. Common Size Financial Statements can be used to compare multiple companies at the same point in time. A common-size analysis is especially useful when comparing companies of different sizes.

• With a common size horizontal analysis, you can easily see if, for example, your expenses increased as a percentage of revenue, stayed the same or decreased among different time periods.
• By expressing the items in proportion to some size-related measure, standardized financial statements can be created, revealing trends and providing insight into how the different companies compare.
• It is also watched closely by lenders (e.g., banks) when assessing a company’s credit risk.
• The main difference is that a common size balance sheet lists line items as a percentage of total assets, liability, and equity, which is different from the normal numerical value.
• But rather than act as an alarm for you, it indicates the company had been hugely successful in generating cash to buy back shares, far exceeding what it had retained on its balance sheet.

Research & Development did not change at 1%, Selling General & Administrative declined ever so slightly from 38% to 37% of revenues. Operating Expenses declined a whopping 18%, from 72% to 54% of revenues. Income after taxes went up from 21% to 36%, and Net Income from 20% to 36%. EBITDA went from 32% to 49% of revenues, and EBIT went from 28% to 46% of revenues.

Balance Sheet Common Size Analysis

The common size income statement shows that the percentage of COGS has also gone up. This means that the cost of direct expenses and purchases have gone up. This suggests that the firm should try to find quality material at a lower cost and lower its direct expenses if possible. This can be used on the balance sheet to determine how cash compares to total assets.

Since we use net sales as the base on the income statement, it tells us how every dollar of net sales is spent by the company. For Synotech, Inc., approximately 51 cents of every sales dollar is used by cost of goods sold and 49 cents of every sales dollar is left in gross profit to cover remaining expenses. Of the 49 cents remaining, almost 35 cents is used by operating expenses (selling, general and administrative), 1 cent by other and 2 cents in interest.

Common Size Analysis

On the other hand, the cost of goods sold has also increased, not just in absolute terms but also as a percentage of revenue. On the plus side, Sporty Shoes has reduced its selling, general and administrative expenses. Let’s say that you’re looking into the line items on an income statement for a company. The items include selling and general administrative expenses, taxes, revenue, cost of goods sold, and net income.

• In the expense category, cost of goods sold as a percent of net sales increased, as did other operating expenses, interest expense, and income tax expense.
• In general, you can prepare a common-size income statement by going line-by-line and dividing each expense as a percentage of sales.
• A cash flow statement shows the way cash is moving in and out of the firm.
• A Common-Size Statement helps the analyst to ascertain the structural relations of various components of cost/expenses/assets/liabilities etc. to the required total of assets/liabilities and capital.
• The ratios tell investors and finance managers how the company is doing in terms of revenues, and can be used to make predictions of future revenues and expenses.

The basic objective of a Common-size Balance Sheet is to analyse the changes in the individual items of a Balance Sheet. Adam Hayes, Ph.D., CFA, is a financial writer with https://kelleysbookkeeping.com/ 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

Chapter 3: Reconstitution of a Partnership Firm: Change in Profit Sharing Ratio

Below is an overview of each financial statement and a more detailed summary of the benefits and drawbacks that such an analysis can provide to you. In some cash flow statements, the items are all presented as a percentage of total cash flow. On the debt and equity side of the balance sheet, however, there were a few percentage changes worth noting. In the prior year, the balance sheet reflected 55 percent debt and 45 percent equity. In the current year, that balance shifted to 60 percent debt and 40 percent equity.

One can then determine how the cost structure or asset base of a competitor varies from the company’s. It generated an impressive level of operating cash flow that averaged 26.9%% of sales over the three-year period. Share repurchase activity as a percentage of total sales in each of the three years was minimal or non-existent, possibly due to economic and market conditions resulting from the Covid-19 pandemic. You may also notice the first row, which is net income as a percent of total sales—matches precisely with the common size analysis from an income statement perspective. A common size financial statement displays line items as a percentage of one selected or common figure. Creating common size financial statements makes it easier to analyze a company over time and compare it with its peers.