A common-size financial statement displays line items as a percentage of one selec🌳ted or common figure. Creating common-size financial statements makes it easier to analyze a company over time and compare it to its peers. Using common-size financial statements helps spot trends that a raw financial statement may not uncover.

All three of the primary financial statements can be put into a common-size format. Financial statements in dollar amounts can easily be converted to c🐬ommon-size statements using a spreadsheet.

Balance Sheet Analysis

The common figure for a common-size 澳洲幸运5开奖号码历史查询:balance sheet analysis is total assets. Based on the 澳洲幸运5开奖号码历史查询:accounting equation, this also equals total liabilities and 澳洲幸运5开奖号码历史查询:shareholders’ equity, making either term interchangeable in the analysis. It's also possible to use total liꦅabilities to indicate where a company’s obligations lie and whether it's being conservative or risky in managing its debts.

The common-size strategy from a balance sheet perspective lends insight into a firm’s capital structure and how it compares to its rivals. You can also look to determine an 澳洲幸运5开奖号码历史查询:optimal capital structure for🐠 a given industry and compare it to the ꦬfirm being analyzed. You can then conclude whether the debt level is too high, if excess cash is being retained on the balance sheet, or if inventories are growing too high.

This common-size balance sheet is a good example. You can see that long-term debt averages around 34% of total assets over the two-year peri♐od, which is rea🐽sonable. Cash ranges between 5% and 8.5% of total assets and short-term debt accounts for about 5% of total assets over the two years.

It's important to add short-term and long-term debt together and compare this amount to the total cash on hand in the current assets section. This lets you know how much of a cash cushion is available or if a firm is dependent on the markets to refinance debt when it comes due.

Analyzing the Income Statement

The common figure for an income statement is total top-line sales. This is the same analysis used to calculate a company's margins. A net profit margin is simply net income divided by sales, which is also a common-size analysis.

The same goes for 澳洲幸运5开奖号码历史查询:calculating gross﷽ and operating margins. The common-size method is appealing for research-intensive companies because they tend to focus on 澳洲幸运5开奖号码历史查询:research and development (R&D) and what it represents as🍎 a percent of total sal🅺es.

This 澳洲幸运5开奖号码历史查询:common-size income statement sho🦋ws an R&D expens🅠e that averages close to 1.5% of revenues.

Common Size and Cash Flow

Many items in the 澳洲幸运5开奖号码历史查询:cash flow statement can be stated as a percent of total sales, similar to an income statement analysis. This can give insight into several cash flow items, including 澳洲幸运5开奖号码历史查询:capital expenditures (CapEx) as a percent of revenue.

澳洲幸运5开奖号码历史查询:Share repurchase activity can also be considered as a percentage of the total top linꦛe. Debt issuance is another important figure in proportion to the amount of annual sales it helps to generate. These items are calculated as a percentage of sales, so they help indicate how much the company uses debt to generate overall revenue.

The cash flow statement in terms of total sales indicates that it generated an impressive level of 澳洲幸运5开奖号码历史查询:operating cash flow, averaging 26.9% of sales over three years.

Share repurchase activity as a percentage of total sa🎐les in each of the three years was minimal or non-eꦫxistent.

The first row is net income as a percentage of total sales. It precisely matches the common-size analysis from an income statement perspective. This represents the 澳洲幸运5开奖号码历史查询:net profit margin.

Comparison With Regular Financial Statements

The key benefit of a common-size analysis is that it allows for a 澳洲幸运5开奖号码历史查询:vertical analysis by line item over a single period, such as quarterly or annually. It also allows you to view a 澳洲幸运5开奖号码历史查询:horizontal perspective over a period such as the three years that 🦩were analyzed in our example.

Just looking at a raw financial statement makes this more difficult, but looking up and down a financial statement using a vertical analysis allows an investor to catch significant changes at a company. A common-size analysis helps put analysis in context on a percentage basis. It's the same as a 澳洲幸运5开奖号码历史查询:ratio analysis of the profit and loss statement.

What the Common Size Reveals

The most significant benefit of a common-size analysis is that it can let you identify large or drastic changes in a firm’s fi🐻nancials. Rapid increases or decreases will be readily observable, such as a fast drop in reported profits during one quarter or year.

The overall results during the period examined wer🎀e relatively steady. One item of note is the Treasury stock in the balance sheet, which had grown to more than negative 100% of total assets. But rather than act as an alarm, this indicates that the company had been successful in generating cash to buy back shares, far exceeding wha𒊎t it had retained on its balance sheet.

A common-size analysis can also give insight into companies' strategies. One company may be willing to sacrifice margins for 澳洲幸运5开奖号码历史查询:market share, which would tend to make overall sales larger at the expense of gross, operating, or net profit mar🌞gins. T🍎he company that pursues lower margins will ideally grow faster. 

Explain Like I'm Five

Each public company has to disclose certain information about its financial performance, including profits, revenues, assets, and ꦺdebts. This information i🧸s typically expressed in absolute dollar terms, making it difficult to compare the performance of different companies or time periods.

A common-size financial statement expresses these values as percentages, rather than dollars. They state net income as a percentage of total revenues or debt as a percentage of😼 assets. This makes it easy to tell at a glance if a company is becoming more profitable or whether it carries more debt than its competitors.

The Bottom Line

A common-size analysis is unlikely to provide a comprehensive and clear conclusion ꧋on a company on its own. It must be done in the context o✃f financial statement analysis.

You should also be aware of temporary versus perman✅ent differences. A short-term drop in profitability could indicate just a speed bump rather than a permanent loss in profit margins.