Common Size Statement

Updated on May 9, 2024
Article byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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.

Vertical Analysis

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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.

Key Takeaways

  • 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.

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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 –

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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 Sheet, 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 ratio is (19.6÷1) = 0.33, which is low. That means that the company is not using enough debt. More debt brings financial leverage and tax savings.
  • The majority of reserves and a surplus portion are invested in non-current investments.
  • Most of the long-term borrowings are invested in fixed assets.
  • The company predominantly invested in Noncurrent investments rather than current investments.
  • The company is a considerable capital intensive 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.

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

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

  • Reserves marginally increased by 2% compared to 2015. It means profitability 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 receivables.
  • The share capital 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 Statement 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 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 stock 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 margin is in the range of 56%-59%.
  • Selling General and administrative expenses 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 rates jumped to 44% in 2015. Between 2008 to 2014, it was in the range of 32-33%.

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 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 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. 

This article has been a guide to what Common Size Statements are and their meaning. Here we discuss the common size of the balance sheet and income statement and 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!