One of the sections of our financial analysis we had to do for the big finance project two weeks ago is a “Common-Size” Analysis:
A common-size financial statement is simply one that is created to display line items on a statement as a percentage of one selected or common figure. Creating common-size financial statements makes it easier to analyze a company over time and compare it with peers. Using common-size financial statements helps investors spot trends that a raw financial statement may not uncover.
All three of the primary financial statements can be put into a common-size format. Financial statements in dollar amounts can easily be converted to common-size statements using a spreadsheet, or they can be obtained from online resources like Mergent Online. Below is an overview of each and a more detailed summary of the benefits, as well as drawbacks, that such an analysis can provide investors.
When financial statements are looked at in common-size it’s easier to look at year over year numbers (horizontal analysis) and to compare to other organizations’ statements with different revenue levels (vertical analysis) and industry standards. For my work I’ve found it helpful to watch for trends where we have particular budget line items shifting up or down from year to year and to examine why that might be.
Probably not interesting to most of you…but one of the many nuggets I’m getting from my schooling that are helpful in the day-to-day work of an executive at our favorite not-for-profit, Samaritan Ministries.