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Common Size Income Statements Net Sales Costs excluding depreciation Depreciation Total Operating Costs Earnings before

interest & taxes Less interest Earnings before taxes Taxes (40%) Net income before preferred dividends Preferred dividends Net income available to common stockholders 1997 100.0% 87.6 3.2 90.8 9.2 2.1 7.1 2.8 4.3 0.1 4.1 1998 100.0% 87.2 3.3 90.5 9.5 2.9 6.5 2.6 3.9 0.1 3.8 Industry 1998 100.0% 87.6 2.8 90.4 9.6 1.3 8.3 3.3 5.0 0.0 5.0

============================================================ Common Size Balance Sheets 1997 Assets Cash & Marketable securities Accounts receivable Inventories Total Current Assets Net plant & equipment Total Assets Liabilities & Equity Accounts payable Notes payable Accruals Total current liabilities Long term bonds Total Debt Preferred equity Common equity Total Liab. & Equity 4.8% 18.8 24.7 48.2 51.8 100.0 1.8% 3.6 7.7 13.1 34.5 47.6 2.4 50.0 100.0 1998 0.5% 18.8 30.8 50.0 50.0 100.0 3.0% 5.5 7.0 15.5 37.7 53.2 2.0 44.8 100.0 Industry 1998 3.2% 17.8 19.8 40.8 59.2 100.0 1.8% 4.4 3.6 9.8 30.2 40.0 0.0 60.0 100.0

Horizontal Common Size Income Statements
A vertical common size income statement expresses expenses in a given year as a percentage of that year’s sales, which allows an investor to evaluate a company’s performance over time. Another approach to this type of analysis is a horizontal common

Consider the following. In the example of a vertical common size statement we discovered that cost of goods sold rose to 56. Inc. 2004 is used as the base year for each of the subsequent years. In a spreadsheet this can be done simply by dividing each line item by that year’s net revenues figure. Inc. Consider the following. . 2006. which is the 3-year income statement presentation for Plantronics. In this case. 2006. usually sales or assets. included in their 10K statement filed June 5.size income statement. each line item on the income statement in a given year is pegged to a base year.5 percent in 2005.5 percent of sales in fiscal year 2006 from 48. Now consider the same income statement expressed in the horizontal common size format. such as the prior year or some arbitrary starting year. Vertical Common Size Income Statements Vertical common size financial statements remove the impact of size by expressing each line item as a percentage of a reference item. which is the 3-year income statement presentation for Plantronics. included in their 10K statement filed June 5. In this case.

it is easy to see that a significant increase in the cost of sales relative to total sales drove declining profit margins. including: . However.We can see right away that in Plantronics’ 2006 fiscal year its net income fell even though revenues increased significantly. Is that good or bad? The answer depends on many factors. it is not so easy to tell exactly why the performance deteriorated. Now consider the same statement expressed in a vertical common size format. Common Size Analysis Suppose someone told you that a particular company had $1 billion in earnings one year. Presented in this format.

2. Horizontal Common Size Income Statements demonstrates how to express the financial statements in each year as a percentage of a given base year. Common Size Balance Sheets can be used to compare companies even when they use different currencies. assets or liabilities are growing faster than others. Using Common Size Statements to Forecast Earnings shows how to do just that. . Vertical Common Size Income Statements shows how to express the income statement as a percentage of sales and use this data to analyze a company’s performance over time. 4. The following articles explain how to use common size analysis in practice: 1. given that they cannot be exactly alike in all other respects? How can the firm’s performance be compared to its past performance to determine whether it is improving? Common size analysis is one tool that allows investors to compare companies across time and with other companies.• • • How much revenue did the company book in order to achieve those earnings? How much did competitors of a similar size earn? How much did the company earn last year? How can an investor fairly compare one company’s earnings to another. This permits an investor to see if certain expenses. 3.

Inc.) Since cost of sales are rising much faster than sales themselves. Consider our vertical common size income statement for Plantronics. it is clear that profitability is falling.5 percent. the same data can be inferred because we see that sales grew 80 percent from 2004 through 2006 while cost of sales grew 111 percent. This article addresses how they can be used to forecast future earnings.1 and 8. Higher revenues would result in higher expense.In this format. .3 percent of sales. and the company might trim the expense if sales decline. (In each case taking the ending value and subtracting the 100 percent starting value. This suggests that Plantronics views them at least partially as a variable cost. Using Common Size Financial Statements to Forecast Earnings We have shown how to prepare vertical common size income statements. An earnings model might assume that R&D for Plantronics would be 8. and the resulting estimate would probably be close to the actual figure. Now consider the horizontal common size statement. Right away we can see that research and development expense has remained fairly stable between 8.

which might bring cost of sales up to 60 percent of revenues from the current 56.5 percent. So now we can design an earnings model: . When making this type of estimate. In other words. which in turn suggests that there is a fixed cost component to this expense. Plantronics plans to increase both its advertising expense and its capital expenditures (future fixed costs) in 2007. in a post titled Plantronics Valuation. We could assume a 70 percent average rate. it helps to look into the footnotes to see if there will be any unusual expenses or changes to the historic relationship. but the two-year trend is probably more accurate than a single year so perhaps an estimate closer to 75 percent would be more appropriate. general and administrative expense is consistently growing slower than revenue. Given this data. As revenues rise. By looking at the relative change (the change in SGA divided by the change in revenues) shows a one year relationship of 65 percent and a two year relationship of 75 percent. in 2005 SGA grew 65 percent as fast as revenue and in from 2004-2006 they grew 75 percent as fast. This shift may continue since the recent acquisition added new consumer lines. An example of this can be found on Stock Market Beat. we will go with an estimate that SGA will grow 75 percent as fast as sales.This shows that selling. The same method can be used to evaluate cost of sales. Again looking at the footnotes we see that cost of sales is rising due both to increased capital expenditures and to a shift to more consumer products at lower margins. the fixed part of the expense doesn’t rise but the variable portion does.

3 percent of revenues Previous year SGA times (1 + (75 percent of the revenue growth rate) http://www. general and administrative Growth rate to be estimated 60 percent of revenues 8.aspx .Revenues Cost of sales Research and development Selling.com/office/finance/articles/79118.brighthub.