Introduction
Financial analysis involves different approaches to looking at data within one period and across several months or years. When examining financial statements, one can look at actual values, such as assets, liabilities, inventory, sales, cash, etc. However, comparing several statements by one or multiple organizations may be challenging if one only sees dollar values. Common-size financial statements can be used here as they present a different outlook on the company’s finances.
The Benefits of Common-Size Financial Statements
Common-size financial statements offer a unique type of analysis. They take the data from balance sheets and income statements and convert the values in dollars into percentages (Wheelen et al., 2018). For example, if one takes an income statement and looks at the net sales, they will be marked as 100% (Wahlen et al., 2022). Here, different categories of products that yielded sales will be represented by percentages. For instance, in a firm that sells various types of cars, one model may be sold at a higher rate than others. Similarly, the balance sheet has different assets that combine into 100%. Therefore, the analyst using a common-size financial statement will see not dollar values but sales, assets, and liabilities rates.
This approach to financial analysis has excellent benefits for reviewing data in the long term. When looking at the percentages, one can easily find common trends and detect changes in sales and spending. First, in the sales statement, an analyst can determine which types of sales contribute to the net sales the most. This part of the investigation is vital for determining the future company strategy – which products the business should focus on and which categories are the least profitable (Haralayya, 2021).
Second, one may also determine how sales trends change with time – throughout the year or within several years. Such calculations are valuable for other types of analysis and can be used in marketing, long-term planning, and strategy change (Shrotriya, 2019). An analyst can utilize this data to determine the growth of the company in comparison to its older numbers.
Another potential value of common-size financial statements is the ability to compare data among several companies and the market. An analyst may take this approach and look at percentages in income or balance statements from multiple companies in the same industry. This comparison shows how businesses use their assets and what products yield the most sales (Wheelen et al., 2018).
A company that experiences problems in the market can estimate data from its most potent and weakest competitors to identify helpful and harmful trends. Therefore, common-size income statements are essential for industry analysis. By using this method, one can create strategic plans for the future and have a way to continuously review the changes within a company and in the industry as a whole.
Conclusion
In conclusion, common-size statements offer an excellent opportunity for the company to analyze its data in perspective. They include balance sheets and income statements, with dollar values as percentages from total net sales or assets. As an outcome, an analyst sees not the size of each category but its presence in other segments. This approach is vital for examining trends in sales and liabilities and viewing data throughout a period. Moreover, one can use common-size financial statements to compare one firm’s data with the industry’s best and worst companies. The results of this juxtaposition may reveal areas where the business needs to improve its strategic planning.
References
Haralayya, B. (2021). Financial statement analysis using common size on Mahindra Sindol Motors. Iconic Research and Engineering Journals, 5(1), 150-159.
Shrotriya, D. V. (2019). Common size statement: A technique of financial analysis. International Journal of Research and Analytical Reviews, 6(2), 424-430.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2022). Financial reporting, financial statement analysis and valuation. Cengage Learning.
Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E. (2018). Concepts in strategic management and business policy (15th ed.). Pearson Education Inc.