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A common-size financial statement is simply one that is created to display line

items on a statement as a percentage of one selected or common figure. Creating

common-size financial statements makes it easier to analyze a company over time
and compare it with peers. Using common-size financial statements helps investors
spot trends that a raw financial statement may not uncover.
All three of the primary financial statements can be put into a common-size format.
Financial statements in dollar amounts can easily be converted to common-size
statements using a spreadsheet, or they can be obtained from online resources like
Mergent Online. Below is an overview of each and a more detailed summary of the
benefits, as well as drawbacks, that such an analysis can provide investors.

Balance Sheet Analysis

The common figure for a common-size balance sheet analysis is total assets. Based
on the accounting equation, this also equals total liabilities and shareholders
equity, making either term interchangeable in the analysis. It is also possible to use
total liabilities when focusing on liabilities to indicate where a companys obligations
lie and whether it is being conservative or risky in managing its debts.
The common-size strategy from a balance sheet perspective lends insight into a
firms capital structure and how it compares to rivals. An investor can also look to
determine an optimal capital structure for an industry and compare it to the firm
being analyzed. Then he or she can conclude whether debt is too high, excess cash
is being retained on the balance sheet, or inventories are growing too high. The
goodwill level on a balance sheet also helps indicate the extent to which a company
has relied on acquisitions for growth.
Below is an example of a common-size balance sheet for technology giant
International Business Machines - IBM (NYSE:IBM). Running through some of the
examples touched on above, we can see that long-term debt averages around 20%
of total assets over the three-year period, which is a reasonable level. It is even
more reasonable when observing that cash represents around 10% of total assets,
and short-term debt accounts for 6% to 7% of total assets over the past three years.
It is important to add short-term and long-term debt together and compare this
amount to total cash on hand in the current assets section. It lets the investor know
how much of a cash cushion is available, or if a firm is dependent on the markets to
refinance debt when it comes due.

(Balance Sheet 3 Tahun/Periode triwulan/ Bulan/ semester kebalakang serta rasio


Analyzing the Income Statement

The common figure for an income statement is total top-line sales. This is actually
the same analysis as calculating a company's margins. For instance, a net profit
margin is simply net income divided by sales, which also happens to be a commonsize analysis. The same goes for calculating gross and operating margins. The
common-size method is appealing for research-intensive companies, for example,
because they tend to focus on research and development (R&D) and what it
represents as a percent of total sales.
Below is a common-size income statement for IBM. We will cover it in more detail
below, but notice the R&D expense that averages close to 6% of revenues. Looking
at the peer group and companies overall, according to a Booz & Co. analysis, this
puts IBM in the top five among tech giants and the top 20 firms in the world (2013)
in terms of total R&D spending as a percent of total sales.)
(Income statement 3 Tahun/Periode triwulan/ Bulan/ semester kebalakang serta
rasio vertikalnya)

Common Size and Cash Flow analyis

In similar fashion to an income statement analysis, many items in the cash flow
statement can be stated as a percent of total sales. This can give insight on a
number of cash flow items, including capital expenditures (capex) as a percent of
revenue. Share repurchase activity can also be put into context as a percent of the
total top line. Debt issuance is another important figure in proportion to the amount
of annual sales it helps generate. Because these items are calculated as a percent
of sales, they help indicate the extent to which they are being utilized to generate
overall revenue.
Below is IBMs cash flow statement in terms of total sales. It generated an
impressive level of operating cash flow that averaged 19% of sales over the threeyear period from 2010 to 2012. Share repurchase activity was also impressive at
more than 11% of total sales in each of the three years. You may also notice the
first row, which is net income as a percent of total sales, which matches exactly with

the common-size analysis from an income statement perspective. This simply

represents the net profit margin.
(Income statement 3 Tahun/Periode triwulan/ Bulan/ semester kebalakang serta
rasio vertikalnya)

What the Common-Size Reveals

The biggest benefit of a common-size analysis is that it can let an investor
identify large or drastic changes in a firms financials. Rapid increases or decreases
will be readily observable, such as a rapid drop in reported profits during one
quarter or year. In IBM's case, its results overall have been relatively steady. One
item of note is the Treasury stock in the balance sheet, which has grown to more
than a negative 100% of total assets. But rather than alarm investors, it indicates
the company has been hugely successful in generating cash to buy back shares,
which far exceeds what it has retained on its balance sheet.
A common-size analysis can also give insight into the different strategies that
companies pursue. For instance, one company may be willing to sacrifice margins
for market share, which would tend to make overall sales larger at the expense of
gross, operating or net profit margins. Ideally the company that pursues lower
margins will grow faster. While we looked at IBM on a stand-alone basis, like the
R&D analysis, IBM should also be analyzed by comparing it to key rivals.

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