Thursday 22 May 2014

Income Statement - Common Size Analysis

  • 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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2 comments:

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