While regular financial analysis looks at actual income statement definition values, common size analysis expresses each figure as a percentage, allowing analysts to focus on structure and trends rather than scale alone. They play a vital role in financial analysis, budgeting, and strategic planning. In the vast sea of financial data, making sense of raw numbers can be overwhelming. Companies generate numerous financial reports, but how do you truly compare performance over different periods, or benchmark against competitors of varying sizes? This is where the Common Size Statement emerges as an indispensable analytical tool, transforming absolute figures into powerful, comparable percentages.

Common size balance sheet example

For example, https://hafiyagroup.com/2022/10/14/key-partners-nonprofit-leadership-center-of-tampa/ a company that increases its revenues at a slower rate than its expenses should identify how the items in the P&L are changing. By monitoring the trend of the common size income statement percentage for each line item, it is easy to spot changes which may need correcting. Analysts use financial ratio analysis to assess how efficiently a company uses its resources to generate sales and control costs. Efficiency ratios indicate whether assets and liabilities are being managed productively or contributing to unnecessary expenses and financial strain.

#1 – Common Size Statement of Balance Sheet

An analyst can further deep dive to determine the reason behind the same to gross vs net make a more meaningful insight. Using Clear Lake Sporting Goods’ current balance sheet, we can see how each line item in its statement is divided by total assets in order to assemble a common-size balance sheet (see Figure 5.22). Net income represents 10% of total revenues, and this margin can be compared to the previous year’s margin to see the company’s year-over-year performance. Common-size analysis enables us to compare companies on equal ground, and as this analysis shows, Coca-Cola is outperforming PepsiCo in terms of income statement information.

Example of common-size income statement—horizontal analysis

A statement that shows the percentage relation of each income/expense to the Revenue from Operations (Net Sales), is known as a Common-size Income Statement. To express the amounts as the percentage of the total, Revenue from Operations (Net Sales) is taken as 100. One may prepare a Common-size Statement of Profit & Loss (Income Statement) for different periods of the same firm or for the same period of different firms. With the help of the comparison between the Common-size Income Statements of different periods, one can understand the efficiency in earning revenues and incurring expenses. Notice that PepsiCo has the highest net sales at $57,838,000,000 versus Coca-Cola at $35,119,000,000. Once converted to common-size percentages, however, we see that Coca-Cola outperforms PepsiCo in virtually every income statement category.

• Brokerage services for Atomic are provided by Atomic Brokerage LLC (“Atomic Brokerage”), member of FINRA/SIPC and an affiliate of Atomic, which creates a conflict of interest.
• Vertical analysis refers to the analysis of specific line items in relation to a base item within the same financial period.
• In general, managers prefer expenses as a percent of net sales to decrease over time, and profit figures as a percent of net sales to increase over time.
• The top line of numbers in this statement is the bottom line net income from the income statement.
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It facilitates making it easier to compare companies or different periods because raw numbers transformed into percentages are easier to notice for trends and strategic decisions to be taken. It is very crucial in income statements, balance sheets, and cash flow statements. Common-size financial statements are often prepared for a balance sheet or an income statement.

• You have to set it up as common size, analyze the ratios, and interpret what they tell you about the company’s performance.
• A Common Size Income Statement is a financial statement where each line item is expressed as a percentage of some common number, typically revenue.
• Long-term debt increased by only $10,000 by issuing additional notes payable.
• If you haven’t yet, consider incorporating common size statements into your reports.
• That’s the insight common-size financial statement analysis can provide.

Even so, creating a common-size income statement can still have a lot of value. The analyst can determine if the smaller firm’s COGS percentage is higher or lower than the industry average, which is a key indicator of competitive advantage. If the regional firm has a COGS of 55% while the national average is 60%, the smaller entity possesses a 5-point efficiency advantage. This suggests superior supply chain management or procurement practices. Take your analysis skills to the next level with CFI’s Financial Ratios Definitive Guide.