A common size statement is a type of financial statement analysis that expresses each line item as a percentage of a base figure within the statement. This method is also known as vertical analysis. Common size statements are expressed in percentages and are also called 100 percent statements or component percentage statements, as all the individual items are taken as a percentage of 100. There are two types of common size statements: common size income statement and common size balance sheet.
A common size income statement expresses each line item as a percentage of the value of revenue or sales. This type of statement helps to analyze and compare a companys performance over several periods with varying sales figures. The common size percentages can be subsequently compared to those of competitors to determine how the company is performing relative to the industry. By analyzing how a companys financial results have changed over time, common size financial statements help investors spot trends that a standard financial statement may not uncover. The common size percentages help to highlight any consistency in the numbers over time–whether those trends are positive or negative.
A common size balance sheet is a statement in which balance sheet items are being calculated as the ratio of each asset in relation to the total assets. Total assets are the overall base figure this time. Common size balance sheets are similar to common size income statements, but the only difference is that each line item on this accounting balance sheet is expressed as a percentage of total assets.
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 from the analysis.
