Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Profitability Ratios
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- ROIC vs ROCE
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Capitalization Rate
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
What is Comparative Income Statement?
A Comparative Income Statement shows the operating results for a number of accounting periods and helps the reader of such statement to compare the results over the different periods for better understanding and also for detailed analysis of variation of line wise items of Income Statement.
- Comparative Income Statement format combines several Income Statements as columns in a Single Statement which helps the reader in analyzing trends and measure the performance over different reporting periods.
- It can also be used to compare two different companies operating metrics as well. Such Analysis helps in comparing the performance with another business which can be used to analyze how companies react to market conditions affecting the companies belonging to the same Industry.
- Thus Comparative Income Statement is an important tool through which the result of operations of a business (or say operation of the business of different companies) over multiple accounting periods can be analyzed to understand the various factors contributing to the change over the period for better interpretation and analysis.
- It helps various stakeholders of business and also Analyst community to analyze the impact of business decisions over the company’s top line and bottom line and helps in identifying various trends over the period which otherwise would have been difficult and time-consuming.
- Comparative Income Statement shows absolute figures, changes in absolute figures, absolute data in terms of percentages and also as an increase (or decrease) in terms of percentages over the different periods. With the help of a Comparative Income Statement format in one snapshot, the performance of a company over different periods can be compared and changes in expense items and Sales can be easily ascertained.
Example and Format of Comparative Income Statement
Let’s understand Comparative Income Statement with the help of an example.
ABC Limited has provided the following information pertaining to its two accounting periods i.e. 2016 and 2017.
Prepare a Comparative Income Statement and interpret the basic findings.
Comparative Income Statement format of ABC Limited for the period ended 2016 and 2017
Based on the above Comparative Income Statement of ABC Limited it can be analyzed how an increase in sales (25% over the previous year) has impacted the Net profit (increased by 100% in absolute terms over the previous year) and how various line items have contributed. Basic Analysis includes the following:
- Net Sales increased by 25% over the period
- Gross Profit Ratio increased from 25% to 28% over the period.
- Net Profit Ratio increased from 6% to 9% over the period.
- Tax Expense doubled from $8000 to $16000 and Interest expense increased by 5.88%.
Thus we can see how Comparative Income Statement helps to ascertain the changes of various components of expenses and identify the reason for changes which help the management in decision making in the future.
Types of Comparative Income Statement Analysis
#1 – Horizontal Analysis
One of the popular technique of Comparative Income Statement which shows the change in amount both in absolute and percentage terms over a period of time. It helps in easy analysis of trends and as such also known as Trend Analysis. One can easily observe growth patterns and seasonality using the Horizontal Analysis Technique.
An Illustration showing Horizontal Analysis is depicted below:
Colgate’s Horizontal Analysis
Let us now look at an example of Colgate’s Horizontal analysis.
We can find the growth rate of Net Sales of 2015, the formula is (Net Sales 2015 – Net Sales 2014) / Net Sales 2014. Likewise, we can find the growth rates of other line items using a similar formula.
We note the following –
- In 2014 and 2015, Colgate saw negative revenue growth.
- Cost of Sales has also decreased during the corresponding period.
- Net Income decreased the most in 2015 with a 36.5% decline in 2015.
#2 – Vertical Analysis
Another technique which exhibits Comparative Income Statement in terms of relative size of line items is the Vertical Analysis. This technique enables easy comparison of Income Statement of companies of different size as well. It shows each item on the Income Statement as a percentage of Base figures (which is usually the Sales figure) with the statement. Under this, all components of Income Statement are shown as a percentage of Sales such as Gross Profit, Net Profit, and Cost of Sales etc which makes it very handy to use even when comparing of different as it removes the Size biases and makes analysis more easy and understandable. It is mostly used for individual statement for a reporting period but can also be used for timeline analysis.
An Illustration showing Vertical Analysis is depicted below
Vertical Analysis of Colgate’s Income Statement
Below is the snapshot of Colgate’s Comparative Income Statement
- In Colgate, Gross profit has been in the range of the range of 56%-59%.
- SG&A expenses decreased from 36.1% in 2007 to 34.1% in the year ending 2015.
- Operating income has dropped significantly in 2015.
- Net income decreased substantially to less than 10%.
- Between 2008 to 2014, the tax rate was in the range of 32-33%.
- It makes analyses simple and fast as past figures can easily be compared with the current figures without the need for referring to separate past Income Statements.
- It makes comparison across different companies also easy and helps in analyzing the efficiency both at Gross Profit Level and Net Profit Level.
- It shows percentage changes in all line items of the Income Statement which makes analysis and Interpretation of Top Line (Sales) and Bottom Line (Net Profit) easy and more informative.
- Financial Data reported in Comparative Income Statement is useful only if same accounting principles are followed in the preparation of such statements. In the case where deviation is observed such Comparative Income Statement will not serve the intended purpose.
- Comparative Income Statement is not of much use in cases where the company has diversified into new business lines which have impacted the Sales and Profitability drastically.
This has been a guide to Comparative Income Statement. Here we discuss its examples and types of comparative income statement analysis (including the horizontal analysis and vertical analysis). You may learn more about financial analysis from the following articles –