What is a Common Size Financial Statement?
A common size financial statement is a type of financial statement that presents the financial information of a company in a standardized format. It allows for easy comparison of different companies or different periods within the same company. The common size financial statement expresses each line item as a percentage of a base amount, such as total assets or total revenue.
The purpose of a common size financial statement is to highlight the relative importance of each line item in the financial statements and to identify trends or patterns. By expressing each line item as a percentage, it eliminates the impact of differences in company size or scale, allowing for a more meaningful comparison.
For example, a common size income statement would express each expense item as a percentage of total revenue, while a common size balance sheet would express each asset and liability item as a percentage of total assets or total liabilities, respectively.
Common size financial statements are often used by investors, analysts, and other stakeholders to evaluate the financial health and performance of a company. They can be used to identify areas of strength or weakness, assess the efficiency of operations, and compare the financial performance of different companies in the same industry.
Definition and Explanation
A common size financial statement is a financial statement that presents all the items as a percentage of a base figure. This base figure is usually the total assets, total liabilities, or total sales of the company. By expressing each item as a percentage of the base figure, common size financial statements allow for easy comparison and analysis of financial data across different time periods or companies.
The purpose of common size financial statements is to highlight the relative importance of each item in the financial statement and to identify trends or patterns in the financial data. By presenting the financial data in a standardized format, common size financial statements make it easier for investors, analysts, and other stakeholders to understand and interpret the financial performance of a company.
To create a common size financial statement, each item in the original financial statement is divided by the base figure and multiplied by 100 to express it as a percentage. For example, in a common size income statement, each expense item is divided by the total sales and multiplied by 100 to show the percentage of sales that each expense represents.
Common size financial statements are particularly useful when comparing companies of different sizes or industries. By expressing financial data as a percentage of a base figure, common size financial statements allow for a more meaningful comparison of companies with different scales of operations or different levels of financial resources.
Benefits of Using Common Size Financial Statements
Common size financial statements are a valuable tool for financial analysis and decision-making. They provide a standardized way to compare the financial performance of different companies or different periods within the same company. Here are some of the key benefits of using common size financial statements:
1. Standardized Comparison
Common size financial statements allow for a standardized comparison of companies or periods by expressing all financial data as a percentage of a common base. This eliminates the impact of differences in company size or changes in the scale of operations over time, making it easier to identify trends and patterns.
2. Identifying Financial Strengths and Weaknesses
By analyzing the common size financial statements, analysts can quickly identify the relative strengths and weaknesses of a company’s financial position. For example, if a company’s common size income statement shows a higher percentage of revenue allocated to operating expenses compared to its competitors, it may indicate inefficiencies in cost management.
3. Benchmarking Performance
Common size financial statements can be used as a benchmarking tool to compare a company’s financial performance against industry averages or competitors. This helps management and investors understand how the company is performing relative to its peers and identify areas for improvement.
4. Trend Analysis
Common size financial statements provide a clear picture of the changes in a company’s financial structure over time. By comparing the percentages over multiple periods, analysts can identify trends and patterns in the company’s financial performance. This information can be used to forecast future performance and make informed decisions.
5. Effective Communication
Common size financial statements are easy to understand and communicate to stakeholders. They provide a concise summary of a company’s financial position and performance, making it easier for investors, lenders, and other stakeholders to evaluate the company’s financial health.
| Benefits | Explanation |
|---|---|
| Standardized Comparison | Allows for a standardized comparison of companies or periods. |
| Identifying Financial Strengths and Weaknesses | Quickly identifies the relative strengths and weaknesses of a company’s financial position. |
| Benchmarking Performance | Compares a company’s financial performance against industry averages or competitors. |
| Trend Analysis | Provides a clear picture of the changes in a company’s financial structure over time. |
| Effective Communication | Easy to understand and communicate to stakeholders. |
Example of a Common Size Financial Statement
To better understand how a common size financial statement works, let’s take a look at an example. We will use a fictional company called XYZ Corporation to illustrate the concept.
XYZ Corporation Common Size Income Statement
Below is a common size income statement for XYZ Corporation:
| 2019 | 2020 | |
|---|---|---|
| Revenue | 100% | 100% |
| Cost of Goods Sold | 60% | 55% |
| Gross Profit | 40% | 45% |
| Operating Expenses | 25% | 30% |
| Operating Income | 15% | 15% |
| Interest Expense | 5% | 5% |
| Net Income | 10% | 10% |
From the table, we can see that the cost of goods sold decreased from 60% in 2019 to 55% in 2020, indicating a more efficient production process. The gross profit increased from 40% to 45%, showing improved profitability. However, the operating expenses increased from 25% to 30%, which could be a cause for concern.
By using common size financial statements, analysts and investors can quickly identify trends and patterns in a company’s financials, making it easier to make informed decisions.
- A common size financial statement expresses each line item as a percentage of a base figure, typically revenue.
- By using common size financial statements, analysts and investors can easily compare and analyze a company’s financial performance over time.
- Common size financial statements allow for the identification of trends and patterns, helping in making informed decisions.
Overall, common size financial statements provide a valuable tool for financial analysis and decision making. They offer a clear and concise way to evaluate a company’s performance and identify areas of strength or concern.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.