Use Common-Size to Find the Shape
Use common-size analysis to compare financial statements across periods or companies.
Scale can hide the shape of a business. Percentages reveal it. The mechanism Common-size analysis translates financial statements into comparable proportions. Income-statement lines become a percentage of sales. Balance-sheet lines become a percentage of total assets. Once the data is normalized, you can compare a small company to a large peer or this year to last year without letting size dominate the read. What to look for On the P&L, scan gross margin, operating expense intensity, and operating margin. On the balance sheet, scan working capital, fixed assets, intangibles, debt, and equity. The best insight usually comes from a line…
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