What is a common-size income statement?
A common-size income statement restates every line on the income statement as a percentage of a single base figure — normally total revenue (sales). Expressing items this way is a form of vertical analysis: each entry shows its share of revenue, which makes trends and structural differences easier to spot across periods or between companies of different sizes.
Key definitions and formulas
– Vertical analysis: comparing each financial-statement line to a chosen base within the same statement (for the income statement, the usual base is total revenue).
– Common-size percentage for a line item = (line item / total revenue) × 100%.
– Gross margin = (revenue − cost of goods sold) / revenue = gross profit / revenue.
– Operating margin = operating profit / revenue.
– Net profit margin = net income / revenue.
Step-by-step: how to create a common-size income statement
1. Choose the reporting period(s) you want to analyze (single year or multiple years for trend analysis).
2. Obtain the income statement(s) on the same accounting basis (GAAP or IFRS).
3. Use total revenue (sales) as the base; confirm revenue ≠ 0.
4. For each line item, compute percentage = (line item value ÷ revenue) × 100.
5. Present the original amounts alongside percentages (e.g., $ and %).
6. Compare percentages across periods or versus peer companies and industry averages.
7. Interpret deviations and investigate large movements or one-time items.
Short checklist before you compare
– Same accounting standards and definitions (revenue recognition, cost classification).
– Same currency and, if multi-year, consistent inflation treatment.
– Remove or note one-off or nonrecurring items that could distort percentages.
– Confirm revenue is the intended base (sometimes analysts use a different base for special analyses).
– Check for changes in business mix that can alter margins (product mix, geography, acquisitions).
Worked numeric example (simple)
Assumptions:
– Revenue = $100,000
– Cost of goods sold (COGS) = $50,000
– Selling & general administrative expenses (S&GA) = $10,000
– Pre-tax operating profit = revenue − COGS − S&GA = $40,000
– Tax rate = 21% on pre-tax income → tax = 0.21 × $40,000 = $8,400
– Net income = $40,000 − $8,400 = $31,600
Common-size calculations:
– Revenue: $100,000 → 100.0%
– COGS: $50,000 → 50.0% (50,000 ÷ 100,000 × 100)
– Gross profit: $50,000 → 50.0%
– S&GA: $10,000 → 10.0%
– Operating profit: $40,000 → 40.0%
– Taxes: $8,400 → 8.4%
– Net income: $31,600 → 31.6%
Interpretation pointers
– Margins are just common-size percentages restated: gross, operating, and net margins follow directly from the common-size statement.
– Use the format to spot efficiency or cost issues: rising COGS% may indicate margin pressure; rising S&GA% could show higher overhead.
– Compare across time and peers to understand whether changes are company-specific or industry-wide.
– Watch for accounting changes or restructuring charges that can distort period-to-period comparisons.
Limitations and cautions
– Percentages remove scale but not risk: a high margin in percentage terms doesn’t replace the need to assess cash flow, leverage, or growth prospects.
– One-off gains, discontinued operations, or accounting policy shifts can make comparisons misleading unless adjusted.
– Common-size analysis is descriptive, not predictive — it highlights patterns but does not explain underlying causes without further analysis.
Useful further reading
– Investopedia — Common Size Income Statement: https://www.investopedia.com/terms/c/commonsizeincomestatement.asp
– CFA Institute — Understanding Income Statements: https://www.cfainstitute.org/en/research/foundation/2010/understanding-income-statements
– U.S. Securities and Exchange Commission (SEC) — About Income Statements: https://www.sec.gov/fast-answers/answers-incomehtm.html
Educational disclaimer
This explainer is for educational purposes and does not constitute professional investment advice, tax guidance, or a recommendation to buy or sell securities. Always do your own research or consult a qualified professional before making financial decisions.