What is a common size analysis?

Common -size analysis is a method of comparing financial statements of companies of various companies or financial statements of one company from different time periods. It achieves these comparisons by measuring a certain part of the company's financial operations against overall operation. In this way, a common size analysis reduces raw numbers to a percentage that allows much easier comparison of companies and over time. This method of analysis can be performed either by income statements or balance sheets, but is only as accurate as the accounting procedures used to come up with numbers. For the same reason, it is difficult to look at the numbers produced by the company in a single year and compare them with what it did, for example five years ago, because the financial conditions of WV at that time have changed. Fortunately, you can analyze normal size, allowing a much more reliable comparison.

as an example of imagineIt has a total assets measuring $ 10,000 in the US (USD). Of this total, it has $ 2,500 in cash, $ 3,500 in receivables and supplies worth $ 4,000. To portray these different elements for common size analysis, all would be reduced to the percentage of the total assets. In other words, cash would be 25 percent, receivables like 35 percent and an inventory of 40 percent.

Using a common size analysis, the comparison can be made more easily throughout and throughout the industry. This comparison is best done using benchmarks. The scale could be either another company that behaves well in the field, or if the company wants to measure its performance Against its own standards, the scale would be last year, in which it worked especially well. Placing current numbers against benchmark would allow the company to find out where its operations could be missing.

Common -size analysis can also be done on the basis of liabilities that the company has or may BI have done in its balance sheet as a whole. In this way, elements of the company operations such as debt, shareholder and the costs of the goods sold may be measured against financial operations as a whole. The only limit of such an analysis is the potential of defective accounting procedures to distort the numbers on which the percentages are based.