Common Size Income Statement

What is a Common Size Income Statement?

A Common Size Income Statement is a financial statement where each line item is expressed as a percentage of some common number, typically revenue. This allows for easier analysis and comparison across time periods, companies, or industries. For an income statement, this usually means dividing each line item by total revenue, and multiplying by 100 to get a percentage.

Example in Table Format

Here is a simplified example of a common size income statement for a hypothetical company:

Item	Amount (in $)	% of Revenue
Revenue	1,000,000	100%
Cost of Goods Sold (COGS)	400,000	40%
Gross Profit	600,000	60%
Operating Expenses
– R&D	50,000	5%
– Marketing	100,000	10%
– Administrative	150,000	15%
Operating Income	300,000	30%
Interest Expense	20,000	2%
Taxes	70,000	7%
Net Income	210,000	21%

Importance

Ease of Comparison: It’s easier to compare the financial statements of companies of different sizes.
Time Series Analysis: The financial performance of a company can be tracked over multiple periods.
Identifying Trends: Analysts can easily identify whether certain costs are creeping up or down relative to revenue.
Benchmarking: Can help a company to compare itself against industry averages.
Investment Analysis: Investors can use common size income statements to evaluate the financial health of a potential investment.

Issues and Limitations

Revenue Dependence: All the other percentages are calculated as a percentage of revenue. If revenue reporting is incorrect, the whole common size income statement can be misleading.
Lack of Detail: The common size format can sometimes over-simplify the data, hiding important nuances.
Inflation Effects: Rising costs may not be immediately evident if revenue is also rising.
Non-Operational Items: Unusual or non-recurring items can skew percentages and make comparison difficult.
Industry Differences: Percentages may not be directly comparable across different industries.
Doesn’t Capture Qualitative Factors: Things like management quality, intellectual property, or customer loyalty aren’t represented in financial statements.

Understanding the benefits and limitations of a common size income statement can enable a more nuanced financial analysis and decision-making process.

All topics to explore on Income Statement: