What are common-size financial statements and how do I use them for analysis?

Common-size statements express every line item as a percentage of a base figure, making it easy to compare companies of different sizes and spot trends over time.

Vertical Analysis (Common-Size)

• Income Statement: Every item as a % of revenue
• Balance Sheet: Every item as a % of total assets

Example -- Pinecrest Manufacturing vs. Lakeshore Industries:

Income Statement Item	Pinecrest	Lakeshore
Revenue	100%	100%
COGS	62%	71%
Gross Profit	38%	29%
SG&A	18%	14%
Operating Income	20%	15%
Net Income	12%	9%

Even though Lakeshore has 3x Pinecrest's revenue in absolute dollars, the common-size analysis reveals Pinecrest has superior margins at every level.

Horizontal Analysis (Trend)

Expresses each item as a percentage of its base-year value:

Item	Year 1 (Base)	Year 2	Year 3
Revenue	100%	112%	128%
COGS	100%	115%	135%
SG&A	100%	108%	118%

Here, COGS is growing faster than revenue (135% vs 128%), indicating margin compression. SG&A is growing slower, suggesting operational leverage.

Balance Sheet Common-Size Example:

Item	Company A	Company B
Cash	8%	22%
Receivables	15%	10%
Inventory	25%	5%
PP&E	40%	18%
Intangibles	12%	45%

Company A is asset-heavy (manufacturing), while Company B is intangible-heavy (technology or pharma).

Key Insights from Common-Size Analysis:

1. Cross-company comparison eliminates size bias
2. Trend identification reveals margin expansion or compression
3. Capital structure shifts become visible on common-size balance sheets
4. Red flags like suddenly higher inventory or receivables percentages stand out

Exam Tip: Be ready to calculate common-size ratios from raw numbers and interpret what changes mean for the company's financial health.

Practice common-size analysis in our CFA Level I community discussions.