Current Ratio – Formula, Meaning, Assumptions and Interpretations
February 12, 2025
In the previous articles, we have already seen that the sponsorship of sports teams can happen at multiple levels. We have also seen how the sponsoring of individual athletes works and how it provides benefits to the sponsor as well as the athlete. It is important to note that sponsorship can happen at levels which […]
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 […]
A lot of developing countries do not have the finances required to build large scale infrastructure projects. However, these countries do have large parcels of lands in urban areas. There is a dire need for infrastructure projects in the developing world. Cities like Beijing, Mumbai, Karachi and Bangkok are bursting at their seams due to […]
When a new investor enters the world of cryptocurrency, they often use two terms mentioned together. These two terms are “cryptocurrencies” and “blockchain”. The two terms are used together so often that it gives many investors the idea that they both mean the same thing. This is particularly true if the investors are not tech-savvy. […]
In the previous article, we have already seen how the valuation of a sporting franchise can be found using the income approach. This approach relies extensively on finding out the cash flow that is likely to accrue to the sporting franchise and then discounting it at a predetermined discount rate in order to find out […]
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% |
Your email address will not be published. Required fields are marked *