Common Size Financial Statements

Definition

Common Size Financial Statements display items on a company based on a financial item (typically revenues or assets). Common size statements can be used in two different ways: compare how a company has changed its % of revenue/assets composition over time or how these metrics compare to its competitors.

Percentage of Composition
Looking at a breakdown of a Common Size Income Statement can illustrate the line items that are a significant portion of revenue. An example of a common size metric is a simple one, "gross profit margin". A company's gross profit margin is just its gross profit over its revenue. All things being equal, a higher gross profit margin would be better for a company, whereas a declining gross profit margin would raise some red flags.

Investors can easily use common size metrics to help with other decision - what are the operating expenses to revenue? Is that increasing? If so, why? Is it a sign of a troubled industry or poor management decisions?

How about current liabilities to assets? Is this increasing for a company? If so, is this a sign of a deteriorating short-term credit issues? Or is the company expanding rapidly with short-term debt?

Comparing Competitors
Common size statements can also be used to compare across competitors. Let's say you are comparing two large retailers: Wal-Mart and Target. However, WMT's revenues are still approximately 4-5x that of Target (during the time this was written). Another way to look at the two competitors and to see ways they are similar (and not!) would to take at their respective common size statements. What is Wal-Mart's % of COGS to Revenue? What about Target's? Does this metric paint a better picture of managing expenses by the respective company?

Formula

Common Size for Income Statement Line Items is Financial Line Item / Revenues.
Common Size for Balance Sheet Line Items is Financial Line Item / Assets
Common Size for Cash Flow Line Items is either Financial Line Item / Revenues OR Financial Line Item / Avg Assets during the period.