Common Size Statement (Meaning, Examples)

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.

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Source: Common Size Statement (wallstreetmojo.com)

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

What is the Common Size Statement?

The common size financial statements are an analytical approach used to understand how a company allocates its resources across various balance sheet and income statement accounts.
There are two common-size statements: the balance sheet and the income statement.
In the balance sheet, assets, liabilities, and shareholder equity are expressed as percentages of total assets. The income statement presents each line item as a percentage of total revenue.
This method allows for easy year-over-year comparison of a company’s financial data and enables comparison between companies of different sizes.

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 of 30.09.2016.

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

Let me convert 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 –

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

In this case, for making the common size of the Balance SheetCommon Size Of The Balance Sheet The term "common size balance sheet" refers to a percentage analysis of balance sheet items based on a common figure, with each item presented as an easy-to-compare percentage. For example, each asset is expressed as a percentage of total assets, and each liability is expressed as a percentage of total liabilities.read more, we converted all the elements of the balance sheet as a percentage of the total. –

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Common Size Statement in Video

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

Reserves & surplus, which is 58.3%, is the highest portion. The company has a massive amount of reserves.
This company’s debt to equity ratioDebt To Equity Ratio The debt to equity ratio is a representation of the company's capital structure that determines the proportion of external liabilities to the shareholders' equity. It helps the investors determine the organization's leverage position and risk level. read more is (19.6÷1) = 0.33, which is low. That means that the company is not using enough debt. More debt brings financial leverageFinancial Leverage Financial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more and tax savings.
The majority of reserves and a surplusReserves And A Surplus Reserves and Surplus is the amount kept aside from the profits that are to be used either for the business or for the shareholders to pay out dividends. Reserves and surplus is reflected under shareholders funds in the balance sheet.read more portion are invested in non-current investments.
Most of the long-term borrowings are invested in fixed assetsInvested In Fixed Assets Fixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more.
The company predominantly invested in Noncurrent investments rather than current investments.
The company is a considerable capital intensive Capital Intensive Capital intensive refers to those industries or companies that require significant upfront capital investments in machinery, plant & equipment to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments. Examples include oil & gas, automobiles, real estate, metals & mining.read more company as an investment in non-current assets (Especially fixed assets is very high, which is nearly 42.5%)
Company trade receivables are 0.7%, whereas trade payables are 5.6%. It means that the company is not giving much credit to debtors, whereas it is enjoying the credit period from its creditors.

As seen above, the common size statement can give you a lot of better insights into the company’s financial position 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.

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

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

Reserves marginally increased by 2% compared to 2015. It means profitabilityProfitability Profitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more must have increased.
Long-term borrowings have decreased by 1%; some marginal repayments of loans must have happened.
There is an increase in short-term borrowings by 1.7%.
Inventory levels remained almost the same.
There is a marginal increase in trade receivablesIncrease In Trade Receivables Trade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more.
The share capitalShare Capital Share capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more remained the same, which means there is no fresh issuance of capital.

#2 – Common Size Statement of Income Statement

Let’s now perform the common size of the Income StatementCommon Size Of The Income Statement Common 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.

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)

The following conclusions can be derived after converting the same common-size financial statements and comparing them 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

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

Raw material contributes to being a high cost in the process of manufacture, which is nearly 23% of every sale.
The net profit 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 stockMore Closing Stock Closing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more than opening stock as Changes in inventories for Dec 2016 period are negative.

Common Size Statement of Colgate’s Income Statement

In Colgate, we note that the gross profit marginProfit Margin Profit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more is in the range of 56%-59%.
Selling General and administrative expensesSelling General And Administrative Expenses Selling, general and administrative (SG&A) expense includes all the expenses incurred in the selling of the products of the company whether direct or indirect along with the entire general and the administrative expenses during an accounting period under consideration such as advertisement expenses, sales promotion expenses, marketing salaries, etc.read more decreased from 36.1% in 2007 to 34.1% in the year ending 2015.
Operating income dropped significantly in 2015.
Net income decreased substantially to less than 10%.
Effective tax ratesEffective Tax Rates Effective tax rate determines the average taxation rate for a corporation or an individual. For both, there is a similar formula only with variation in considering variables. The effective tax rate formula for corporation = Total tax expense / EBTread more jumped to 44% in 2015. Between 2008 to 2014, it was in the range of 32-33%.

Common Size Statement of Colgate’s Balance Sheet

Cash and Cash equivalentsCash And Cash Equivalents Cash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more increased from 4.2% in 2007 to 8.1% of the total assets.
Receivables decreased from 16.6% in 2007 to 11.9% in 2015.
Inventories decreased from 11.6% to 9.9% overall.
Other current assets increased from 3.3% to 6.7% of the total assets over the last 9 years.
On the liabilities side, Accounts payableAccounts Payable Accounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more currently stands at 9.3% of the total assets.
There has been a significant jump in the Long Term DebtLong Term Debt Long-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability.read more to 52,4% in 2015.
Non controlling interests has also increased over the period of 9 years and is now at 2.1%

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.
Annual or quarterly changes in the elements can be easily compared within one company. For example, the Income statementIncome Statement The income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more 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 revenueSales Revenue Sales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity's income statement/profit & loss account.read more improved or declined. How much does each expense move? How much depreciation expense increased or decreased.
Promotes effective management decision making;

Frequently Asked Questions (FAQs)

1. What are the limitations of common-size statements?

Common size statements have several limitations. First, they only provide a snapshot of a company’s financial situation at a specific point in time and do not provide any information on trends or changes over time. Additionally, they may not be useful for comparing companies in different industries or with different business models. Finally, they may not capture all relevant financial information, as some items may be excluded or aggregated.

2. What is the difference between a comparative financial statement and a common size statement?

A comparative financial statement shows a company’s financial performance over two or more periods, typically in the form of income statements or balance sheets. A common-size statement, on the other hand, expresses financial information as a percentage of a base value, such as total assets or sales.

3. What is a common size statement vs. an audit report?

A common size statement is a financial statement that expresses each line item as a percentage of a base value, such as total assets or sales. On the other hand, an audit report is issued by an independent auditor that provides an opinion on the accuracy and completeness of a company’s financial statements.

Common Size Statement

What is the Common Size Statement?

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