Common size financial statements

Common size financial statements restate a company's income statement or balance sheet as percentages instead of raw dollar figures. On a common size income statement, every line is expressed as a percentage of revenue. On a common size balance sheet, every line is expressed as a percentage of total assets. The dollar amounts disappear and what's left is the proportion each item takes up.

The point is comparability. A retailer with $2 billion in revenue and a retailer with $20 billion in revenue can't be compared usefully line by line in dollar terms, the bigger company will simply have bigger numbers everywhere. Converting both to common size format strips out the effect of scale, so an investor can directly compare what share of revenue each company spends on cost of goods sold, or what share of assets each company holds in inventory, regardless of how large either business is.

Common size statements are also useful for tracking a single company over time. Looking at a company's own income statement as percentages of revenue across several years makes it easy to spot whether margins are expanding or contracting, or whether a particular expense line is growing faster than sales, trends that can be harder to notice when scanning raw dollar figures that are also growing every year.

The technique doesn't replace absolute numbers entirely, a company can hold margins steady in percentage terms while its dollar profits shrink if revenue is falling, so common size analysis is best used alongside the underlying financial statements rather than in place of them.