Financial Education

A vertical common size income statement expresses expenses in a given year as a percentage of that year’s sales, which allows an investor to evaluate a company’s performance over time. Another approach to this type of analysis is a horizontal common size income statement. In this case, each line item on the income statement in a given year is pegged to a base year, such as the prior year or some arbitrary starting year.

Consider the following, which is the 3-year income statement presentation for Plantronics, Inc. included in their 10K statement filed June 5, 2006.

In the example of a vertical common size statement we discovered that cost of goods sold rose to 56.5 percent of sales in fiscal year 2006 from 48.5 percent in 2005. Now consider the same income statement expressed in the horizontal common size format. In this case, 2004 is used as the base year for each of the subsequent years.

In this format, the same data can be inferred because we see that sales grew 80 percent from 2004 through 2006 while cost of sales grew 111 percent. (In each case taking the ending value and subtracting the 100 percent starting value.) Since cost of sales are rising much faster than sales themselves, it is clear that profitability is falling.

See also:
Common Size Financial Statements
Vertical Common Size Income Statements
Horizontal Common Size Balance Sheets

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

See also:

Common Size Analysis

Common Size Balance Sheets

Vertical Common Size Income Statements

Using Common Size Financial Statements to Forecast Earnings

Profit Margins