Common-size
Every line restated as a percentage — of revenue on an income statement, of total assets on a balance sheet — so firms of different size can be compared.
Where you will meet it
Common-size appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Use the framework for analysing financial statements
“The framework runs in six steps: state the purpose and context of the analysis, collect the data, process it into ratios and common-size statements, analyse and interpret the processed data, develop and communicate conclusions, and follow up.”
- Show how a financial statement analysis framework is applied to a specific problem, question or purpose (for example, valuing equity against comparables, critiquing a credit rating, getting a full view of financial leverage, or assessing the views in management's discussion of results)
“Process it: adjust statements, build common-size figures and ratios.”
- Build a common-size income statement and explain what it shows
“A common-size income statement expresses every line as a percentage of revenue, which removes the effect of size and makes companies of very different scale directly comparable.”
- Build a common-size balance sheet and explain what it shows
“A common-size balance sheet expresses each item as a percentage of total assets, exposing the structure of what a company owns and how it is financed.”
Practise it
Practise common-size until it is automatic: questions that explain every wrong option.
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