Common Size Financial Statements

It says that every dollar of revenue led to 14 cents of net operational cash flow available for financing and investing activities. They are crucial tools in financial analysis, budgeting, and strategic planning processes. A common-size analysis can also give insight into companies’ strategies. One company may be willing to sacrifice margins for market share, which would tend to make overall sales larger at the expense of gross, operating, or net profit margins. Share repurchase activity can also be considered a percent of the total top line. Debt issuance is another important figure in proportion to the amount of annual sales it helps to generate.

Using Common-Size Analysis to Evaluate Trends within a Company

A common-size analysis is unlikely to provide a comprehensive and clear conclusion on a company on its own. You should also be aware common size statement analysis of temporary versus permanent differences. A short-term drop in profitability could indicate just a speed bump rather than a permanent loss in profit margins. Common size financial statements make it easier to determine what drives a company’s profits and to compare the company to similar businesses. The current assets formula determines that the “total current assets,” which are the total of all assets that can be converted to cash within one year, makes up 37% of the company’s total assets.

This company’s debt-to-asset ratio isn’t too high, but a better test is the ratio of annual operational cash flow divided by annual debt service payments. The most significant benefit of a common-size analysis is that it can let you identify large or drastic changes in a firm’s financials. Rapid increases or decreases will be readily observable, such as a fast drop in reported profits during one quarter or year. Share repurchase activity as a percentage of total sales in each of the three years was minimal or non-existent. It reveals the relative proportion of expenses and profitability, helping identify areas of strength and weakness.

Comparisons Between Companies (Cross-Sectional Analysis)

Common-size statements allow Clear Lake to compare their statements in a meaningful way (see Figure 5.26). Notice that Clear Lake spends 50 percent of its sales on cost of goods sold while Charlie spends 59 percent. This is a significant difference that would be an indicator that Clear Lake and Charlie have key differences in their operations, purchasing policies, or general performance in their core products. 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.

But rather than act as an alarm, this indicates that the company had been hugely successful in generating cash to buy back shares, far exceeding what it had retained on its balance sheet. It precisely matches the common-size analysis from an income statement perspective. A net profit margin is simply net income divided by sales, which is also a common-size analysis. You can see that long-term debt averages around 34% of total assets over the two-year period, which is reasonable. 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.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Common size analysis can be done either vertically or horizontally.

Debt Management Ratios

Common size balance sheets are similar to common size income statements. The only difference is that each line item on this accounting balance sheet is expressed as a percentage of total assets. To prepare common size statements, each line item on the financial statement is divided by a base figure (such as total revenue or total assets) and multiplied by 100 to express it as a percentage.

1. This table is the equivalent of doing a common-size product mix analysis on sales units.
2. The most common cash flow statement format is the indirect method, which begins with net income.
3. For each line item on this sample income statement, we’ve shown the percentage that it makes up of total revenue.
4. To prepare a common size balance sheet, each period’s figures are divided by the base figure, usually total assets, to calculate the percentages.
5. To express the amounts as the percentage of the total, Revenue from Operations (Net Sales) is taken as 100.

However, even if you can adequately interpret the ratios, they are diagnostic more than prescriptive. We will discuss some of the challenges in applying ratio (and other forms of financial statement) analysis in a little bit. Common-Size Statement fails to convey proper records during seasonal fluctuations in various components of sales, assets liabilities etc. e.g. sales and closing stock significantly vary. Thus, the statement fails to supply the real information to the users of financial statements. The most common cash flow statement format is the indirect method, which begins with net income.

These items are calculated as a percentage of sales so they help indicate how much the company uses them to generate overall revenue. 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. But you can perform this analysis on your entire income statement, too. Doing so will help you see at a glance which expenses take up the largest percentage of your revenue.

1. This is a little easier to understand than the larger numbers showing Synotech earned $762 million dollars.
2. This tool is especially important if you’re using key performance indicators to measure your business’s performance and profitability.
3. It says that every dollar of revenue led to 14 cents of net operational cash flow available for financing and investing activities.
4. It provides investors with a clear picture of a company’s financial health and efficiency.
5. Many items in the cash flow statement can be stated as a percent of total sales, similar to an income statement analysis.

FAST (Finance and Strategy Toolkit) is the membership program that gives you resources for better strategic financial management. Get direct access to me as well as tools for improved decisions that can lead to improved performance. I mentioned that ROA is a very common performance metric in banking, so that’s why this table is expressed in assets.

Objectives of Common Size Income Statement

Common size statements are financial reports that express each item as a percentage of a key figure, usually total revenue or total assets. This approach simplifies the comparison of financial information between various companies or over different time periods. A common size statement is a financial analysis tool that helps in evaluating and comparing financial statements. It does this by showing each item as a percentage of a common base figure.

Divide each line item by total revenue and multiply by 100 to express it as a percentage of total revenue. A Common-Size Statement helps an analyst to find out a trend relating to percentage share of each asset in total assets and percentage share of each liability in total liabilities. Let’s look more broadly at base numbers by using other parts of the UBPR as examples. The first is a snip of their income statement expressed as a percentage of average assets. Columns 2-4 are repeated in the columns on the far right for the previous year.