What Is a Common Size Financial Statement?
Let me explain what a common size financial statement is: it takes the dollar amounts from your standard financial statements, divides them consistently by a fixed base figure, and presents each line as a percentage. This approach makes it straightforward for you to analyze and compare data between companies or across different periods. For instance, you might see on a common size balance sheet that one company holds 20% of its total assets in cash, while another has 25%.
Key Takeaways
- A common size financial statement shows entries as percentages of a common base rather than absolute numbers.
- These statements allow analysts like you to compare companies of different sizes, industries, or over time on an equal footing.
- They typically include the income statement, balance sheet, and cash flow statement.
- Variations can occur due to different accounting practices and assumptions between companies.
Understanding Common Size Financial Statements
While companies don't always report in this format, I recommend you convert statements to common size yourself when comparing firms of different sizes or sectors. This method cuts through biases and lets you track changes over time, such as what percentage of sales goes to cost of goods sold and how that's shifted. You'll commonly apply this to income statements, balance sheets, and cash flow statements, reducing all figures to percentages of sales or assets, though each statement has its own standardization approach.
Remember, these statements simplify spotting what drives profits and benchmarking against similar businesses.
Common Size Balance Sheet Statement
The balance sheet gives you a snapshot of assets, liabilities, and shareholders' equity at a point in time, following the equation where assets equal liabilities plus equity. In common size form, you express everything as a percentage of total assets. Alternatively, you could break it down with assets as percentages of total assets, liabilities of total liabilities, and equity of total equity.
Common Size Cash Flow Statement
Your cash flow statement outlines sources and uses of cash, divided into operations, investing, and financing sections. For a common size version, you might express all items as percentages of total cash flow. More commonly, you'll see operational items as percentages of total operational cash flow, and similarly for investing and financing sections.
Common Size Income Statement
The income statement, or P&L, covers sales, expenses, and net income over a period, with the basic equation being sales minus expenses equals net income. In common size, you define all items as percentages of sales. This term 'common size' is most associated with income statements, but you can apply it to balance sheets and cash flows too.
Example of a Common Size Income Statement
Consider a simple example: if a company reports gross sales of $100,000, cost of goods sold at $50,000, taxes at $1,000, and net income of $49,000, the common size version would show sales as 1.00, cost of goods sold as 0.50, taxes as 0.01, and net income as 0.49. This format lets you quickly grasp proportions and compare directly.
Other articles for you
Grantor trust rules treat the creator of the trust as the owner for tax purposes, allowing control over assets while providing certain tax benefits.
Autoregressive models use past data to predict future values, commonly applied in time series analysis like stock price forecasting.
A distress sale involves quickly selling an asset at a loss due to urgent financial needs like debts or emergencies.
ADP and ACP tests ensure 401(k) plans do not unfairly favor highly compensated employees over others to maintain IRS qualification.
Fast-moving consumer goods (FMCGs) are affordable, high-turnover products with short shelf lives that dominate daily consumer purchases.
The Aroon indicator measures trend changes and strength in asset prices by tracking time between highs and lows.
The cup and handle pattern is a bullish technical indicator used in stock trading to signal potential buying opportunities after a price consolidation.
Nominal value is the face or par value of securities like bonds and stocks, distinct from market value, and crucial for financial and economic calculations without adjusting for inflation.
A hostile bid is a takeover attempt where the bidder approaches shareholders directly after management rejects the offer.
The Graham number is a valuation tool that identifies potentially undervalued stocks based on a company's earnings and book value per share.