Common Size Statement Analysis¶
Common size statement analysis, also known as percentage analysis, is a technique used to compare financial statements of companies, especially when they differ significantly in size. It helps in understanding the composition and trends within a company's financial performance over time or in comparison to other companies.
Addressing Size Differences¶
When comparing companies of different sizes, direct comparison of absolute figures (e.g., total assets, net income) can be misleading. Common size statements address this by expressing each item as a percentage of a base figure.
Common Size Balance Sheet¶
In a common size balance sheet:
- Total Assets = 100%
- All other balance sheet items (e.g., current assets, non-current assets, equity, liabilities) are expressed as a percentage of total assets.
This allows for easy comparison of the relative proportions of assets, liabilities, and equity, regardless of the company's overall size.
Example (Asian Paints Ltd.):
Let's say a simplified common size balance sheet for Asian Paints shows the following changes over two years:
Funds Employed (Liabilities & Equity)
| Item | Year 1 (%) | Year 2 (%) | Change (%) |
|---|---|---|---|
| Equity | 60 | 70 | +10 |
| Current Liabilities | 30 | 20 | -10 |
| Non-Current Liabilities | 10 | 10 | 0 |
Assets
| Item | Year 1 (%) | Year 2 (%) | Change (%) |
|---|---|---|---|
| Current Assets | 40 | 35 | -5 |
| Non-Current Assets | 50 | 45 | -5 |
| Non-Current Investments | 10 | 20 | +10 |
Analysis:
- The company increased its reliance on equity financing and reduced its current liabilities (debt).
- There's a decrease in both current and non-current assets, except for non-current investments, which increased.
- This suggests the company is reducing debt and not investing in new operational capacity but rather in investments.
Inter-firm Comparison¶
Common size statements are particularly useful for comparing companies within the same industry. By converting financial data to percentages, it becomes easier to identify differences and similarities in their financial structures and performance, regardless of their absolute size.
Example: Comparing Asian Paints with another paint manufacturer using common size statements would reveal how their cost structures, profitability, and financing strategies differ.
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