Financial modelling terms explained

# Common-Size Analysis

Common-size analysis is a technique used to compare the relative size of different divisions of a business or to compare businesses that are in different sectors. It's a way of displaying financial data in a standard form, so that it can be easily compared.

## What Is Common-Size Analysis?

Common-size analysis is a financial analysis technique that adjusts financial statement items from their original form to percentages of some base figure. The most common base figure is total assets. This technique allows for easy comparison of financial statement items from different companies and different time periods. It also allows for easy determination of trends over time.

## How Do You Calculate Common-Size Analysis?

Common-size analysis is a technique that expresses each item in a financial statement as a percentage of a common base figure. This figure can be total assets, total equity, or some other measure. The purpose of common-size analysis is to identify the relative importance of each item in the financial statement and to spot trends over time.

To calculate common-size analysis, you need to know the total amount for each item in the statement. For example, if you are calculating common-size analysis for a company's balance sheet, you would need the total amount of assets, liabilities, and equity on the balance sheet. Once you have these totals, you can express each item as a percentage of the common base figure.

For example, if a company has total assets of \$100,000, total liabilities of \$50,000, and total equity of \$50,000, the common-size analysis for the company's balance sheet would be as follows:

Asset % = (\$100,000 / \$100,000) = 100%

Liability % = (\$50,000 / \$100,000) = 50%

Equity % = (\$50,000 / \$100,000) = 50%

## Why Is It Important to Know Your Common-Size Analysis?

Common-size analysis is important because it allows you to compare the performance of different companies or different time periods for the same company. This information can help you to identify trends and to make better decisions about where to allocate your resources.

## What's the Difference Between a Common-Size Analysis and a Profit-Volume Analysis?

A common-size analysis is a financial statement analysis technique that converts all items on a financial statement to percentages of some base figure. This technique allows for comparisons of financial statement items across different companies and different time periods. A profit-volume analysis is a financial statement analysis technique that examines how changes in sales volume affect a company's profits. This technique allows for the determination of how much a company must sell in order to break even and how much net profit the company makes for each unit of sales.

## What is An Example of a Common-Size Analysis?

A common-size analysis is a technique that is used to simplify financial statements by expressing all items on the statement as a percentage of a common base. This allows for a more accurate comparison of items from different statements and different time periods. An example of a common-size analysis is shown below.

In the first column, all of the items on the income statement are expressed as a percentage of total revenue. This allows for a comparison of the items from one statement to the next, as well as a comparison of different time periods. In the second column, all of the items on the balance sheet are expressed as a percentage of total assets. This allows for a comparison of the items from one statement to the next, as well as a comparison of different time periods.

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