A company’s profitability is represented beyond just financial figures. The big picture and comparison hold a real deal.
This is generally not effectively reflected in depicting raw numbers. A better view is possible through a common size income statement. Offering a percentage based insight into the data, it provides in-depth insights into cost structure, profitability and operational efficiency. It assists in comparison across companies and time periods, helping the stakeholders in decision-making. Understand more about its role in supporting profitability for the companies.
What is a Common Size Income Statement?
A common size income statement is a financial statement where each item is expressed as a percentage of total revenue. Rather than showing only numbers, it indicates the relative contribution of expenses, costs, and profits to overall sales. The format makes it easier to analyse a company’s cost structure, profitability, and operational efficiency. It also assists in analysing finances among different companies and time periods. Yet, the common size income statement is not a generally used format among the firms. The types of common size financial statements include the income and cash flow statement and balance sheet.
Example of Common Size Income Statement
The common size income statement can be of two types: vertical and horizontal analysis.
Vertical Analysis
Vertical analysis is a financial analysis method where each line item (revenues, expenses, costs) in the income statement is expressed as a percentage of total revenue. The total revenue or sales or top line is taken as 100% and all other items are shown as a proportion of revenue. This method helps analyse how revenue is distributed across costs and profits. Vertical analysis is used by analysts, investors, and management in the following scenarios:
- To compare companies within the same industry
- Analyse changes in cost structure over time
- Identify high expenses or declining margins
- Supporting investment and valuation decisions
Example of Vertical Analysis
| Item | Amount (in INR) | % of revenue |
| Revenue | 1,00,000 | 100% |
| COGS | 60,000 | 60% |
| Net profit | 20,000 | 20% |
Interpretation: For every INR 1 earned, INR 0.60 is spent on production, and INR 0.20 is retained as profit.
Horizontal Analysis
Horizontal analysis is a financial analysis method used to evaluate changes in financial performance over time. It compares income statement figures across two or more periods to identify growth trends, declines or inconsistencies. The horizontal analysis focuses on absolute and percentage change. It helps investors and analysts in the following manner:
- Track revenue and profit growth over multiple brands
- Identify rising costs or shrinking margins
- Evaluating consistency in business performance
- Supporting long-term investment and trend analysis
- Compare company performance before and after strategic changes
Example of Horizontal Analysis
| Item | Year 1 (in INR) | Year 2 (in INR) | Change (in INR) | % Change |
| Revenue (Sales) | 5,00,000 | 6,00,000 | +1,00,000 | +20% |
| Cost of Goods Sold (COGS) | 3,00,000 | 3,90,000 | +90,000 | +30% |
| Operating Expenses | 1,00,000 | 1,20,000 | +20,000 | +20% |
| Net Profit | 1,00,000 | 90,000 | -10,000 | -10% |
Interpretation: Although revenue increased by 20%, costs rose faster, resulting in a 10% decline in net profit. It highlights pressure on margins.
Significance of Common Size Income Statement
The common size income statement holds the following significance:
Size Neutral Comparison
A common size income statement allows comparison between companies of different sizes by expressing all figures as percentages of revenue. It is especially useful for setting standards within the same industry where absolute numbers can be misleading.
Improved Trend Analysis
Converting figures into percentages makes it easier to track structural changes in costs and profitability over multiple periods. Shifts such as rising expenses or declining margins are quickly identifiable.
Streamlines Result Interpretation
Percentage based presentation helps users understand cost structure, profit margins and expense distribution at a glance.
Allows Early Detection of Issues
Common size analysis highlights warning signs such as increasing COGS percentages, shrinking operating margins, or consistent profit declines. It enables timely corrective action.
Assists in Strategy Evaluation
It helps assess the impact of strategic decisions such as price cuts, cost optimisation, or expansions. Changes in margin percentage will demonstrate whether a strategy is improving or hurting profitability.
Improves Communication with Stakeholders
The easy-to-read and understand format makes it easier to communicate with both technical and non-technical audiences. It includes investors, lenders and non-finance stakeholders to understand the company’s financial performance.
Conclusion
A common size income statement is a simple and robust tool that helps analyse financial performance. It converts financial data into an easy-to-interpret form. It means it converts the data into percentage terms, which assists in analysis, strategic decision-making and communication among stakeholders. It also helps detect warning signs. Despite being less commonly used in practice, it is an effective method for investors, lenders and other professionals in the field.
Lynn Martelli is an editor at Readability. She received her MFA in Creative Writing from Antioch University and has worked as an editor for over 10 years. Lynn has edited a wide variety of books, including fiction, non-fiction, memoirs, and more. In her free time, Lynn enjoys reading, writing, and spending time with her family and friends.
