Common-Size Analysis

Common-size statements remove the effect of size, so companies of very different scale, or the same company in different years, can be compared directly.

On a common-size income statement, revenue is set at 100% and every other line is shown as a percentage of it. For example, if revenue is 2 million and cost of goods sold is 1.2 million, cost of goods sold is 60% of revenue, leaving a gross margin of 40%. If operating expenses are 500,000, they are 25%, and operating income is 15%.

On a common-size balance sheet, each asset, liability and equity item is shown as a percentage of total assets. This reveals, for instance, how much of a company's assets are tied up in inventory or how much of its funding comes from debt.

Comparing common-size statements of two competitors might show that one spends 30% of revenue on marketing while the other spends 18%, or that one carries far more inventory relative to its size.

Common-size analysis is closely related to vertical analysis. Both focus on the structure of the statements rather than on changes over time.