How to Calculate Common Size Percentage

Common size analysis standardizes financial statements, making it easier to compare a company’s performance and financial position. This method transforms absolute dollar figures into percentages, revealing the proportional relationship of each line item to a base figure. It allows for a clearer understanding of how a company’s financial structure evolves over time or how it stacks up against competitors, regardless of their absolute size.

Key Financial Statements for Analysis

Common size analysis is applied to a company’s financial statements. The Income Statement and the Balance Sheet are the two primary statements used for this type of analysis.

The Income Statement, also known as the Profit and Loss (P&L) statement, details a company’s financial performance over a specific period, such as a quarter or a year. It outlines revenues earned and expenses incurred during that period, ultimately leading to the calculation of net income or loss. This statement provides insights into a company’s operational efficiency and profitability.

The Balance Sheet, in contrast, presents a snapshot of a company’s financial position at a specific point in time. It lists a company’s assets, which are what it owns, its liabilities, which are what it owes, and its equity, representing the owners’ stake. The Balance Sheet adheres to the fundamental accounting equation where assets equal liabilities plus equity.

Step-by-Step Calculation of Common Size Percentages

Calculating common size percentages involves dividing each line item by a chosen base figure. The general formula for this calculation is: (Specific Line Item Amount / Base Figure) 100 = Common Size Percentage.

For the Income Statement, the total revenue or sales for the period serves as the base figure. Each line item on the income statement, such as Cost of Goods Sold, Operating Expenses, or Net Income, is divided by this total revenue. For instance, if a company has $1,000,000 in total revenue and $400,000 in Cost of Goods Sold, the common size percentage for Cost of Goods Sold would be (400,000 / 1,000,000) 100 = 40%. Similarly, if Operating Expenses are $300,000, they represent 30% of revenue.

When calculating common size percentages for the Balance Sheet, total assets are used as the base figure. Every asset, liability, and equity line item is divided by the total assets. For example, if a company’s total assets are $5,000,000, and its Cash balance is $500,000, the common size percentage for Cash would be (500,000 / 5,000,000) 100 = 10%. If Accounts Payable totals $750,000, its common size percentage would be (750,000 / 5,000,000) 100 = 15%.

Understanding the Analysis

The calculated common size percentages offer insights into a company’s financial characteristics and performance. This analysis helps in identifying the relative importance of each component within the financial statements.

One application is trend analysis, which involves comparing a company’s common size percentages over several reporting periods. Observing changes in these percentages can highlight shifts in the proportional relationships of line items, such as whether the cost of goods sold is consuming a larger or smaller portion of revenue over time. This can reveal improvements or deteriorations in operational efficiency.

Common size analysis also aids industry benchmarking, enabling comparisons between a company’s financial structure or performance and that of its competitors or industry averages. By standardizing financial statements, differences in company size become irrelevant, allowing for a direct comparison of their underlying financial makeup. This helps to identify areas where a company might be more or less efficient than its peers.