Common Size Analysis is actually the vertical analysis but for more than one reporting periods. As it covers more than one accounting period, it is of high importance for the financial analyst because he or she can easily see the trends across the years for making informed decisions.
Common size analysis can also be performed in horizontal analysis whereby the analyst can take any year figure as 100{1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} and present the rest of the years figures as a proportion/ percentage to this.
Example
Alpha industry has the following data available for the two years:
Alpha Industry
Income Statement
| 2015 | 2014 | |
| $ | $ | |
| Revenue | 200 | 190 |
| Cost of goods sold | (100) | (90) |
| Gross profit | 100 | 100 |
| Distribution expenses | (40) | (30) |
| Admin & selling expenses | (30) | (20) |
| Profit before tax | 30 | 50 |
Required: Conduct a vertical common size analysis of the income statement.
Solution
Alpha Industry
Common Size Analysis
| 2015 | 2014 | |
| $ | $ | |
| Revenue | 100 | 100 |
| Cost of goods sold | (50) | (47) |
| Gross profit | 50 | 53 |
| Distribution expenses | (20) | (15) |
| Admin & selling expenses | (15) | (11) |
| Profit before tax | 15 | 27 |