Common Size Income Statement

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Common-Size Income Statement

A common-size income statement expresses each line item as a percentage of total revenue (sales). It is a form of vertical analysis that standardizes financial statements so you can compare performance across periods, companies, or industries regardless of size.

Definition

  • Each line item on the income statement (COGS, operating expenses, taxes, net income, etc.) is shown as a percentage of total revenue.
  • These percentages reveal the relative weight of each component and simplify trend and cross-company comparisons.

Why it’s useful

  • Highlights what drives profitability and how costs scale with sales.
  • Facilitates comparisons across companies and time periods, even when revenue levels differ.
  • Reveals meaningful changes in cost structure (e.g., rising COGS or SG&A as a share of sales).
  • The same approach can be applied to balance sheets and cash flow statements.

How to prepare a common-size income statement

  1. Select total revenue (sales) as the base (100%).
  2. For each income statement line item, divide the line amount by total revenue and multiply by 100:
  3. Common-size % = (Line item / Total revenue) × 100
  4. Present a column of amounts and a column of percentages (or only percentages for comparison).

Relationship to margins

Common-size percentages are equivalent to commonly used margins:
– Gross margin = (Gross profit / Revenue) × 100
– Operating margin = (Operating income / Revenue) × 100
– Net profit margin = (Net income / Revenue) × 100

Example

Assume a company with:
– Revenue = $100,000
– Cost of goods sold (COGS) = $50,000
– Selling & general administrative (SG&A) = $10,000
– Taxes (21%) on pre-tax income

Calculated amounts:
– Gross profit = $50,000 → 50% of revenue
– Operating profit = $40,000 → 40% of revenue
– Net income = $31,600 → 31.6% of revenue

Presented as a common-size income statement:
– Revenue: 100.0%
– COGS: 50.0%
– Gross profit: 50.0%
– SG&A: 10.0%
– Operating profit: 40.0%
– Taxes: 8.4%
– Net income: 31.6%

Interpreting results

  • Stable percentages over time suggest a consistent cost structure and business model.
  • Increasing expense ratios (e.g., SG&A as a percent of revenue) may indicate rising overhead or weakening pricing power.
  • Comparing common-size statements to peers highlights competitive strengths and weaknesses.

Limitations

  • Does not show absolute size or scale—use with dollar amounts for full context.
  • One-time items can distort percentages for a single period.
  • Differences in accounting policies can affect comparability across firms.

Key takeaways

  • A common-size income statement standardizes each line item as a percent of revenue, aiding comparison and trend analysis.
  • It directly produces familiar margins (gross, operating, net).
  • Use it alongside absolute-dollar statements and ratio analysis for a complete financial assessment.