Common Size Analysis: Definition & Examples

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  • 0:04 What Is Common Size Analysis?
  • 1:38 Applying Common Size Analysis
  • 3:55 Uses of Common Size Analysis
  • 4:44 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

There are many methods that a business can use to compare its financial results to that of its competitors to see how successful that business is. In this lesson, you will learn about common size analysis.

What Is Common Size Analysis?

Let's meet Sam, who owns the Hardware Haven. He runs a successful business and is always wondering how he is performing in relation to his competition. He finds comparing his results to competitors difficult because he is much smaller than they are. As a result, his competitors' profits are always greater, which makes him suspect they are more successful. He is looking for a way to compare his results with theirs in a meaningful way. Let's see if we can help Sam with this problem.

Common size, or vertical analysis, is a method of evaluating financial information by expressing each item in a financial statement as a percentage of a base amount for the same time period. A company can use this analysis on its balance sheet or its income statement.

A balance sheet summarizes the company's assets, which are things that it owns that have value; its liabilities, which are the amounts it owes to others; and its equity, which is an owner's investment in the business. An income statement shows the company's revenues, which is the amount of money it made by selling its goods and services, and its expenses, which is the amount of money it spent to earn its revenues.

The formula used in common size analysis is:

Common Size Amount = (Analysis Amount / Base Amount) x 100%

The base amount will change depending on whether the company is completing its analysis on the balance sheet or the income statement. If the company completes its analysis on the balance sheet, then the base amount will be total assets or total liabilities and owners' (or shareholders') equity. If the income statement is used, the base amount will be net sales.

Applying Common Size Analysis

Let's assume that Sam's cash balance is $75,000 and his total assets are $1,835,000. If we apply common size analysis, the common size amount would be:

= (analysis amount / base amount of total assets) x 100%

= ($75,000 / $1,835,000) x 100%

= 4.1%

Therefore, 4.1% of Sam's total assets are made up of cash.

Sam could also compare this common size amount to last year to determine changes that occurred. Let's assume that last year's cash balance was $85,000 and total assets were $1,595,000. At first glance, it appears that the cash balance has only decreased by $10,000 ($85,000 - $75,000). If we apply common size analysis to last year's cash balance, we can see that cash comprises 5.3% of Sam's total assets calculated as follows:

= (analysis amount / base amount of total assets) x 100%

= ($85,000 / $1,595,000) x 100%

= 5.3%

Common size analysis reveals that Sam's cash balance decreased by 1.2% (5.3% - 4.1%) of his total assets.

Here is Sam's common size analysis for his balance sheet:

Common Size Balance Sheet
Common Size Balance Sheet

Did you notice how all of the information is organized in a way that makes it really easy to figure out and conduct a common size analysis?

Now let's assume that Sam's operating income is $52,000 and his net sales for the year are $760,000. If we apply common size analysis, we calculate that operating income represents 6.8% of Sam's net sales calculated as follows:

= (analysis amount / base amount of net sales) x 100%

= ($52,000 / $760,000) x 100%

= 6.8%

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