A common size financial statement is an income statement or balance sheet in which all items are expressed as percentages of a common base figure rather than as absolute numerical figures.
For example, in a common-size income statement you will find the income and expenditure amounts as percentage of net sales. Similarly, a common size balance sheet will report all items of asset, liability and owners’ equity amount as percentage of total assets.
The advantage of common-size balance sheet is that it is useful for financials analyst to compute and compare two or more companies of different size or different sectors of the economy which would lessens bias over companies of different size while comparing them.
For example, a small manufacturing unit can compare its cost of goods sold (say 80%) to a much larger unit’s cost of goods sold (say 75%). Similarly, one company’s inventory might be 35% (of total assets) while a competitor’s might be 25%.
Common size financial statements generally include the income statement, balance sheet and cash flow statement. The technique is also known as vertical analysis.
