The ratios often are expressed as percentages of the reference amount.Common size statements usually are prepared for the income statement and balance sheet, expressing information as follows: Income statement items - expressed as a percentage of total revenue, sales etc.
Common-size Balance Sheet
|Dec 31 2015||Dec 31 2014|
|Total Current Assets||547,000||911.667%||753,000||1448.077%|
|Property, Plant, and Equipment, net||853,000||1421.667%||877,000||1686.538%|
|Total Liabilities & Equity||$1,400,000||2333.333%||$1,630,000||3134.615%|
|Total Revenue 2015||60,000|
|Total Revenue 2014||52,000|
Even by looking at the numbers we can predict that something has happened with the company over last year. If we look closely we see current assets have decreased mainly due to decrease in inventory and account receivables. Which might indicate at a lot of things maybe company has decided a leaner approach or they have sold of some part of their business, or company having a slow year etc. But numbers can't tell the answers they do help you raise important questions. Same is the case with current liabilities and shareholder's equity.
By doing Common-size statement analysis we can identify areas where significant change has happen. Now the onus is on us to identify the reason behind it by asking questions.
Common-size Income Statement
|Cost of Goods Sold||800,000||48.780%||725,000||46.061%|
If we look at this income statement first thing we see is that net income has decreased from last year. But how has it happened, we can see sales have increased from last year, shouldn't it increase the net income as well. Well not necessarily, Although sales have increased so is the cost of raw materials. which has lead to decrease in profit. Company could have not been efficient enough or production incurred lot of wastage or it might have happened due to increase in price of raw material or change of vendor etc. There can be numerous possibilities and as I have always said assuming something is very dangerous. The correct approach in this case would be to seek more information to understand why it has happened.