Common Size Income Statement

A common size income statement is an income statement in which each account is expressed as a percentage of the value of sales. It is used for vertical analysis, in which each line item in a financial statement is listed as a percentage of a base figure within the statement, to make comparisons easier.

A common size income statement analysis makes it easier to see what is driving a company’s profits, and compare that performance to its peers. By looking at how that performance has been changing over time, common size financial statements help investors spot trends that a raw financial statement may not uncover. Large changes in the percentage of revenue used by different expense categories over a given period of time could be a sign that the business model is changing, or that manufacturing costs are changing.

The common figure for an income statement is total sales revenue, so the analysis is the same as calculating a company’s margins. The net profit margin is simply net income divided by sales, which happens to be a common-size analysis. The same goes for calculating the gross margin (sales revenue minus cost of goods sold, divided by sales revenue) and operating margin (gross profit minus selling & general administrative expenses, divided by sales revenue).

For example, Company A has an income statement with five different line items, revenue, cost of goods sold (COGS), selling & general administrative expenses (S&GA), taxes and net income. Net income is calculated by subtracting COGS, S&GA expenses and taxes from revenue. If revenue is $100,000, COGS is $50,000 and S&GA is $10,000, then gross profit is $50,000, operating profit is $40,000 and net income is $31,600 (less taxes at 21%). The common size version of this income statement is to divide each line item by revenue, or $100,000. Revenue divided by $100,000 is 100%. COGS divided by $100,000 is 50%, operating profit divided by $100,000 is 40% and net income divided by $100,000 is 32%. As we can see, gross margin is 50%, operating margin is 40% and the net profit margin is 32% - the common size statement figures.

For more on common size financial statements, read The Common-Size Analysis of Financial Statements.