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Securitization and Sports Finance
The business of sports can be asset-intensive and can lead to negative cash flows for a number of years. Sporting franchises have to shell out huge sums of money in order to build new stadiums and also to ensure that the best players are playing for their teams. Also, the legal structure as well as […]
The Freemium Model – Different Types of Freemium Models
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Five Reasons Which Make Cryptocurrency a Bad Investment
The incredible rise in the price of cryptocurrencies in the past few months has caught the interest of almost every investor in the entire world. Even the most traditional investors have been introduced to the concept of cryptocurrencies. However, not all investors want to invest in it. For instance, Warren Buffet has famously stated that […]
Degree of Financial Leverage Ratio
A high debt equity ratio makes the company financed by debt more than by equity. Therefore there are fixed interest payments involved. Hence when the going is good, the company makes a handsome return as a small percentage of change in EBIT creates a large percentage change in earnings per share. However the inverse of […]
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
