Financial Education

Suppose someone told you that a particular company had $1 billion in earnings one year. Is that good or bad? The answer depends on many factors, including:

• How much revenue did the company book in order to achieve those earnings?
• How much did competitors of a similar size earn?
• How much did the company earn last year?

How can an investor fairly compare one company’s earnings to another, given that they cannot be exactly alike in all other respects? How can the firm’s performance be compared to its past performance to determine whether it is improving? Common size analysis is one tool that allows investors to compare companies across time and with other companies.

The following articles explain how to use common size analysis in practice:

1. Vertical Common Size Income Statements shows how to express the income statement as a percentage of sales and use this data to analyze a company’s performance over time.
2. Horizontal Common Size Income Statements demonstrates how to express the financial statements in each year as a percentage of a given base year. This permits an investor to see if certain expenses, assets or liabilities are growing faster than others.
3. Common Size Balance Sheets can be used to compare companies even when they use different currencies.
4. Using Common Size Statements to Forecast Earnings shows how to do just that.

For more information, see all articles on: Common Size Analysis, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Security Selection

See also:

Horizontal Common Size Income Statements

Vertical Common Size Income Statements

Common Size Balance Sheets

Ratio Analysis

Using Common Size Financial Statements to Forecast Earnings