Common Size Statement
Common Size Statement
Common size statements are not financial ratios but a way of presenting financial statements to make them more suitable for analysis. They are often used alongside ratio analysis, serving as a starting point for deeper financial analysis. Common size statements indicate which specific groups of ratios deserve more attention based on a given set of financial statements.
Purpose and Benefits
1. Standardized for Comparison
- Comparability: Common size statements standardize financial data, making it easier to compare companies of different sizes or to analyze the same company over different periods. For example, analysts can quickly compare the cost of goods sold (COGS) across two companies to determine which one has a lower COGS without performing extensive calculations.
- Step-by-Step Analysis: Analysts can look at financial statements step-by-step and compare them with other companies. This helps in understanding how a company's asset structure and cost structure differ from its competitors, and whether these differences are favorable or unfavorable.
2. Trend Analysis
- Internal Comparison: Trend analysis using common size statements allows companies to track their performance over time. It helps identify whether specific costs or revenues are increasing or decreasing in proportion to sales.
- Fixed Base: By setting sales or total assets at 100%, changes in other line items become easier to spot and analyze. This fixed base simplifies year-to-year comparisons, revealing trends and highlighting areas that need attention.
Components of Common Size Statements
Common Size Income Statement
In a common size income statement, the sales figure is set at 100%, and every other expense or profit item is expressed as a percentage of this sales figure. This helps in understanding how each expense item affects profitability.
Example: Common Size Income Statement
| Particulars | Percentage |
|---|---|
| Sales | 100% |
| Less: COGS | 38% |
| Gross Profit | 62% |
| Less: SG&A | 14% |
| EBITDA | 48% |
| Less: Depreciation | 10% |
| EBIT | 38% |
| Less: Interest | 6% |
| PBT | 32% |
| Less: Taxes | 11% |
| PAT | 21% |
Common Size Balance Sheet
In a common size balance sheet, the total assets figure is set at 100%, and all other items are expressed as percentages of total assets. This helps in understanding the structure of a company's finances and how assets are financed.
Example: Common Size Balance Sheet
| Particulars | Percentage |
|---|---|
| Total Assets | 100% |
| Cash & Equivalents | 5% |
| Accounts Receivable | 15% |
| Inventory | 20% |
| Property, Plant & Equipment | 30% |
| Other Assets | 30% |
| Total Liabilities | 60% |
| Accounts Payable | 10% |
| Short-term Debt | 15% |
| Long-term Debt | 25% |
| Other Liabilities | 10% |
| Equity | 40% |
| Common Stock | 20% |
| Retained Earnings | 20% |
Key Uses
- Comparison Across Companies: Facilitates benchmarking against other companies in the same industry.
- Identifying Trends: Helps in identifying whether certain expenses or income streams are increasing or decreasing over time.
- Highlighting Efficiency: By comparing cost structures, analysts can determine which company is managing its expenses more efficiently.
Summary
Common size statements provide a powerful tool for financial analysis by converting absolute numbers into relative terms. This standardization facilitates comparison and trend analysis, helping analysts and management make more informed decisions. They serve as a foundational tool for deeper financial analysis and are crucial in understanding the financial health and performance of a company.