Treasury Management Services
The role of commercial banks is to act as trusted partners to their corporate associates. Over the years, the degree of trust has been steadily increasing. As a result, many corporations across the world are outsourcing critical parts of their business to banks. In the previous articles, we have already seen how certain payment functions […]
Single Stage FCFF Model to Equity Valuation
Just like we have the single stage Free Cash Flow to the Firm (FCFF) model, we also have the Free Cash Flow to Equity model. This model also is not used by analysts in advanced calculations. Rather it is used for the most rudimentary back of the envelope calculations for deriving the equity valuation of […]
Cash vs. Accrual Basis of Accounting
Cash Basis of Accounting Cash Basis of Accounting uses receipts and payments of cash to record incomes and expenses. Therefore, under the cash basis of accounting, if a corporation makes salary payments of January, 3 months later in April, it will be considered as expenses in the month of April, since that is when the […]
Functions of the Money Market
Money markets are large and liquid markets. They exist in almost every country which has a developed financial system. The existence of a thriving and highly liquid money market in every economy of the world is not a mere coincidence. There are certain functions that are performed by the money market. Some of these functions […]
Inventory Turnover Ratio – Meaning, Formula and Interpretation
A company is said to be more efficient when it keeps the least inventory on hand to make the sales it does. The systems of the company must be so efficient that goods are available for sale as and when required and spend the least amount of time waiting in a warehouse. This is because […]
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.
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.
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 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:
| Particulars | Percentage |
| Sales | 100% |
| Less: COGS | 38% |
| Gross Profit | 62% |
| Less: SG&A | 14% |
| EBIDTA | 48% |
| Less: Depreciation | 10% |
| EBIT | 38% |
| Less Interest | 6% |
| PBT | 32% |
| Less: Taxes | 11% |
| PAT | 21% |
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Cash Flow to Debt Ratio – Meaning, Formula, Assumptions and Interpretation
February 12, 2025
