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Common size analysis, also referred as vertical analysis, is a tool that financial managers use to analyse financial statements. It evaluates financial statements by expressing each line item as a percentage of the base amount for that period. The analysis helps to understand the impact of each item in the financial statement and its contribution to the resulting figure.
The technique can be used to analyse the three primary financial statements, i.e., balance sheet, income statement and cash flow statement. In the balance sheet, the common base item to which other line items are expressed is total assets, while in the income statement, it is total revenues.
The term “common size balance sheet” refers to the presentation of all the line items in a balance sheet in a separate column in the form of relative percentages of total assets, primarily. This technique is convenient for comparison of the number of assets, liabilities and equity among different companies, especially when they are used for an acquisition analysis.
It is convenient to build a common size balance sheet as it helps in building trend lines to discover the patterns over a specific period. In short, it is not just an upgraded variety of the balance sheet per se, but it also captures each single line item as a percentage of total assets, total liabilities and total equity besides the usual numeric value.
Let’s look at the common size vertical format balance sheet of Sundaram Pipes, Fittings and Motor Pumps.
As you can see that a common size balance has drawn comparisons between assets and liabilities and even called out the percentage of the base amount for that period. The analysis helps to understand the impact of each item in the financial statement and its contribution to the resulting figure.
As you can see that a common size balance has drawn comparisons between assets and liabilities and even called out the percentage of the base amount for that period. The analysis helps to understand the impact of each item in the financial statement and its contribution to the resulting figure.
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