MSG Team's other articles

9328 Financial Goal – Profit vs Wealth

Every firm has a predefined goal or an objective. Therefore the most important goal of a financial manager is to increase the owner’s economic welfare. Here economics welfare may refer to maximization of profit or maximization of shareholders wealth. Therefore Shareholders wealth maximization (SWM) plays a very crucial role as far as financial goals of […]

11198 Scalability and Startups

Scalability is considered to be a very important factor in any start-up company. Investors all over the world are highly impressed by scalable business models and prefer investing in the same. However, many people in the start-up community still do not have a clear idea about what scalability is. In this article, we will have […]

10830 Prospectus in Investment Banking – Part 1

The job of an investment banker includes enabling the flow of information between the company and its investors. When a company is going public for the first time, investors do not have any information about the company. As such, they do not have a strong basis for making a well-informed decision. Hence, it is the […]

9960 Interbank Lending Markets and Repurchase Agreements

Banks have to lend money in accordance with the amount of reserves that they have on hand. However, there is no way of finding out the exact amount of loans that a bank can give out while still complying with the reserve requirements because taking deposits and making loans happen simultaneously. Therefore, it is impossible […]

8989 Distribution of Risks in an Infrastructure Project

Infrastructure projects tend to have a lot of financial risks. In many cases, the risks are poorly managed. In fact, incorrect risk management is one of the main reasons behind the delay, which can cause cost overruns in the long term. It is difficult to reduce the total risk that any infrastructure project faces. However, […]

Search with tags

  • No tags available.

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

Trend analysis is analysis which entails comparison with the company’s 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:

ParticularsPercentage
Sales100%
Less: COGS38%
Gross Profit62%
Less: SG&A14%
EBIDTA48%
Less: Depreciation10%
EBIT38%
Less Interest6%
PBT32%
Less: Taxes11%
PAT21%

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles