Common Size Statement

What is the Common Size Statement?

Common Size of financial statements is a technique used to identify where a company has applied its resources and in what proportions those resources are distributed among the various balance sheet and income statement accounts. The analysis determines the relative weight of each account and its share in asset resources or revenue generation.

In the common size, each element of financial statements (Both Income Statement and Balance sheet) are shown as a percentage of another item.  The assets, liabilities, and share capital is represented as a percentage of total assets. In the case of Income Statement, each element of income and expenditure is defined as a percentage of the total sales.

Vertical Analysis

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For eg:
Source: Common Size Statement (wallstreetmojo.com)

There are two types of Common Size Statements – a) Balance Sheet & b) Income Statement

#1 – Common Size Statement of Balance Sheet

As an example of common size, let us take a balance sheet of the Tata group companies as on 30.09.2016.

Vertical Analysis - 1

If we only look at the above balance sheet, it doesn’t make much sense.

Let me convert each and every element of this balance sheet as a percentage of “Total,” which is 119,020 (common size of the balance sheet). Then the balance sheet will appear as follows –

Vertical Analysis - 2

Now have a look at the above balance sheet. Looks much intuitive, right? When we perform a common size, the data provides financial insights.

In this case, for making the common size of the Balance Sheet, we converted all the elements of the balance sheet as a percentage of the total. –

On a standalone basis, we can derive the following conclusions from the balance sheet:

As seen above, the common size statement can give you a lot of better insights into the financial position of the company than when you look at the same otherwise.

Common Size statements of Balance Sheet Over different periods

In continuation of the above common size example, let us now compare two-year balance sheets of the same company.

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Let us convert the same into percentage terms and derive some conclusions.

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After the conversion of the two years balance sheets, we can derive that.

#2 – Common Size Statement of Income Statement

Let’s go now perform the common size of the Income StatementCommon Size Of The Income StatementCommon Size Income Statement is a Company’s financial statement that presents every listed line item as a percentage of total revenue or sales. Moreover, it helps analyze the contribution of every item towards the profitability of the Company. read more for different periods and analyze the same on the stand-alone period basis and for different years. Following is the P&L account of a Tata group company.

Income Statement 1

A plane looking at the above Income Statement might be confusing. So, let’s convert the same as a percentage of sales or Total income from operations. (Common Size of the Income Statement)

Income Statement 2

The following conclusions can be derived after converting the same as common size financial statements and comparing over different periods.

  • There is a reduction in the purchase of finished, semi-finished steel and other products as the percentage fell from 3.3% in Dec 2015 to 1.4% in Dec 2016.
  • Raw material consumption at ~23% remains as per the past trend.
  • Employee cost reduced from 11% in Dec 2015 to 8.5% in Dec 2016
  • Power cost too reduced from 6% to 5% in Dec 2016
  • Total expenses reduced considerably from 91.5% in Dec 2015 to 82.2% in Dec 2016
  • Income Tax expense increased three times from 1.6% in Dec 2015 to 4.2% in Dec 2016

On a standalone basis (i.e., by analyzing a single period), the following conclusions can be derived.

  • Raw material contributes to being a high cost in the process of manufacture, which is nearly 23% of every sale.
  • The net profitability margin of Dec 2016 period is 8.5%
  • Since PBT is 12.7% and tax expense is 4.2% of sales, the company tax rate is around 30%
  • The company has more closing stock than opening stock as Changes in inventories for Dec 2016 period is negative.

Common Size Statement of Colgate’s Income Statement

Colgate Balance Sheet Asset

Advantages

  • Profit statements and other financial reports of different companies can be easily compared even though they are of different sizes. For example, the Balance sheet of Apple Inc and Samsung can be easily comparable after converting both into percentage terms.
  • Within one company, annual or quarterly changes in the elements can be easily compared. For example, the Income statement of Apple Inc of different years can be comparable if the same is converted into a percentage. It gives a perfect indication of how much sales revenue improved or declined. How much each expense moved. How much depreciation expense increased or decreased.
  • Promotes effective management decision making;

This article has been a guide to what is Common Size Statements and its meaning. Here we discuss the common size of balance sheet and income statement along with practical examples of Tata and Colgate. You may learn more about Financial Analysis from the following articles –

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Comments

  1. sanjib says

    thank you very much for your effort for detailed analysis

    • Dheeraj Vaidya says

      Thanks for your kind words!

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