- Common size analysis is one tool that allows investors to compare companies across time and with other companies.
- Vertical Common Size Analysis - Income statement as % of sales, to analyze a company's performance over time.
- Remvoe the impact of size as each line items is a % of reference item (revenue).
- To show how the revnues and spending on different types of expenses change from one year to the next. Take note if there is any change in the expenses % relation to the revenue.
- To provide meaningful comparisons between companies with different sizes.
- Horizontal Common Size Analysis - To express the financial statements in each year as a percentage of given base year. To see if certain expenses, assets or liabilities are growing faster than others.
- Check trend of growing of the 5-steps format in income statement . And check the CAGR.
- See cost of sales growth is it align with revenue growth? if cost of sales growth slowly, than the gross profit margin will increase year by year
- Check operating profit growth rate - higher than revenue? - if it is highly profitable business, the fixed cost should not increase much in relation to revenue.
- Check income before tax - is it align with operating profit?
- Check net profit - is it align? any change in the tax rate?
- Conclusion
- An excellent tool to get a better understanding of the trend of the company performance.
- A more meaningful way to compare companies of different size, or compare different years of data for the same company.
- It is not as detailed as ratio analysis - and doesn't provide enough data for sophisticated investing decisions.
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