Financial Statement Analysis: Comparative and Common-Size Statements
Two horizontal-analysis tools
Both are forms of statement analysis that help compare one entity across periods or across firms of different size. They are not ratio analysis, though they are used alongside it.
Comparative statements
Set items in columns: item, earlier year, current year, absolute change (current − earlier), percentage change (change ÷ earlier year × 100). Prepare for both the income statement and the balance sheet. The absolute change shows size; the percentage change shows significance.
Common-size statements
Express every item as a percentage of one base:
- Income statement: base = net sales (revenue from operations); each expense and each profit line becomes a percentage of sales.
- Balance sheet: base = total assets (equal to total equity and liabilities); each asset and liability line becomes a percentage of the total. Because the base is 100 every year and for every firm, common-size statements remove scale, letting a ₹50 lakh firm be compared with a ₹50 crore firm.
Worked example
Sales rise from ₹20,00,000 to ₹25,00,000: change ₹5,00,000, i.e. 25.0%. Cost of goods sold rises from ₹12,00,000 to ₹16,00,000: change ₹4,00,000, i.e. 33.3%. Gross profit: ₹8,00,000 to ₹9,00,000, change ₹1,00,000, i.e. 12.5%. Common-size gross profit: 40.0% falling to 36.0%. Reasoning: sales grew 25% but cost grew faster at 33.3%, so gross margin fell four percentage points. The comparative statement shows direction; the common-size statement exposes the margin erosion that absolute figures conceal.
Traps that cost marks
Using the current year as the denominator for percentage change; computing percentage change when the base year figure is zero or negative (the result is meaningless - say so); comparing absolute changes across firms of different size; using total assets on one side and total liabilities on the other as different bases; assuming a common-size statement reveals absolute size - it deliberately does not.