A common-size financial statement is any financial statement in which each line item is expressed as a percentage of a single base figure, as in the common-size balance sheet and the common-size income statement. These are the two most common forms: on the balance sheet every line is a percentage of total assets, and on the income statement every line is a percentage of revenue or net sales.
How the technique works
Converting amounts to percentages of one base removes the effect of company size. A small shop and a national chain can then be compared line by line, and a single company can be compared with itself over several years. The method is a form of vertical analysis, because each figure is read against a total in the same column.
On a common-size income statement, cost of goods sold at 62 percent of sales leaves a gross margin of 38 percent, and readers can see at once whether operating expenses or interest are taking a growing share of each dollar of revenue. On a common-size balance sheet, the percentages show how assets are split between cash, receivables, inventory and fixed assets, and how they are funded by debt and equity.
Analysts often pair common-size statements with horizontal analysis, which tracks changes in each line from one period to the next. Cash flow statements can be prepared in common-size form too, usually with operating cash flow or revenue as the base.