Yield To Maturity (YTM)
Yield to maturity is a fundamental concept which every bond investor must be aware of. The term yield to maturity might sound complex and intimidating. However, in reality, the concept is quite simple. In this article, we will have a closer look at what yield to maturity is as well as the manner in which […]
The Planning Fallacy
Investors are used to looking at projections of future events. They commonly use projections about future cash flows, future profits, and even future dividends in order to make investing decisions. However, a lot of the time, the projections that they use are overly optimistic. This leads them to make bad investing decisions. This problem of […]
Cognitive Dissonance Bias
All investors have pre-existing beliefs about the way investment markets work. These beliefs are often deep-rooted and subconscious. For example, some investors believe that investing in index funds is better than investing in mutual funds. There are still other investors who believe that investing in precious metals or real estate is better than investing in […]
Mental Accounting
Traditional economic theory assumes that all money is fungible. The meaning of the word fungible is “interchangeable.” Hence, according to economic theory, if we have $100, the value of that should be the same for us regardless of how that was obtained. However, behavioral finance theory argues that this is not the case. According to […]
The Phenomenon of House Poverty
Homeownership has been at the center of every American dream for the past few decades. The conventional belief is that buying a home always turns out to be a good investment in the long run. This is the reason why owning a home is considered to be one of the biggest and the most important […]
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
