How To Prepare a Common-Size Income Statement Analysis

Often shortened to “COGS,” this is how much it cost to produce all of the goods or services you sold to your customers. If the company is a service business, this line item can also be called Cost of Sales. These sections then provide the details about the sources of cash and how the cash was used in each of these different parts of the business. sample income statement He is asked to prepare a common-sized profit and loss and discuss with his manager what actions should be taken, if any, to improve weak areas. The more debt there is, the higher the ROE, and that means for investors, there’s more return for their money. This makes the company more attractive in the eyes of the investors/owners.

As we can see, gross margin is 50%, operating margin is 40%, and the net profit margin is 32%–the common size income statement figures. Common size income statements include an additional column of data summarizing each line item as a percentage of your total revenue. A common size income statement is generally how horizontal analysis is done in most companies when they evaluate the business performance over multiple time periods. However, financial statements may not provide all the information an investor or company leader needs.

Using Common-Size Analysis to Evaluate Trends within a Company

This shows that Sporty Shoes’ increased cost of goods is not as bad as it first appeared. It could be that at least a part of it was due to factors beyond its control. For example, weather conditions might have reduced the production of a raw material it needs and hence increased the price. At first glance, the cost of goods sold may not look like a serious concern.

From the table above, we calculate that cash represents 14.5% of total assets while inventory represents 12%. In the liabilities section, accounts payable is 15% of total assets, and so on. There should also be huge concern about the difference in the selling, general and administrative expenses. Each kind of analysis gives different insights into business performance. The analyses help you make sense of your comparative profit and loss statement and see patterns. Gross profit tells you your business’s profitability after considering direct costs but before accounting for overhead costs.

Step 2: Margins

The percentage of change shows how much net profit increased or decreased from one period to another. As you can see, figures are easy to compare with this type of income statement. But, it can be hard to judge performance based on the numbers alone. To get a clear picture, you might need to do some simple calculations. If your business owes someone money, it probably has to make monthly interest payments.

• The next point of the analysis is the company’s non-operating expenses, such as interest expense.
• On the other hand, the cost of goods sold has also increased, not just in absolute terms but also as a percentage of revenue.
• While they don’t tell you the whole story at a glance, they do a very good job in identifying areas of potential interest for further investigation.
• The figures will be stated as a percentage of the revenue (ie;sales).
• This analysis lets you see how effectively you’re leveraging the cash in your business, beyond just dollars flowing into and out of your bank account.
• A common size income statement is the presentation of a company’s income and expenses in percentage terms instead of dollar amounts.
• Each kind of analysis gives different insights into business performance.
• With a common size horizontal analysis, you can easily see if, for example, your expenses increased as a percentage of revenue, stayed the same or decreased among different time periods.