Fundamentals of Financial Analysis , Common Size Analysis, Common Size Income Statement

Fundamentals of Financial Analysis

Chapter: 9 Fundamentals of Financial Analysis

Sub Section: 3 Common Size Income Statement

An analysis of percentage on the income statement indicates what proportion of sales is absorbed by each cost or expense to arrive at the net profit. The following example is useful in understanding a common size income statement.

XYZ Company
Common size income statement
(Percent)
	2000	2001	2002	2003
Net Sales	100.0%	100.0%	100.0%	100.0%
Cost of Sales	59.8%	57.0%	56.0%	58.0%
Gross Profit	40.2%	43.0%	44.0%	42.0%

Operating Expenses
Selling and Admin. Expenses	15.2%	15.1%	15.0%	14.9%
Promotion	4.0%	4.2%	4.3%	4.2%
Rent Payment	5.0%	5.0%	5.2%	5.2%
Depreciation	2.2%	2.3%	2.4%	2.2%
Repairs and Maintenance	1.0%	1.2%	1.3%	1.5%
Total Operating Expenses	27.4%	27.8%	28.2%	28.0%

Operating Profits	12.8%	15.2%	15.8%	14.0%

Other Income
Interest and Dividend Income	0.4%	0.5%	0.7%	1.0%
Interest Expense	(1.5%)	(1.6%)	(1.7%)	(1.8%)

Net Income	11.7%	14.1%	14.8%	13.2%

The common size income statement reveals the trend of expenses and gross profit. There is slight decrease in cost of sales, resulting in an increase in gross profit. To improve the gross margin, the company may have to increase volume or price, or change the product mix or decrease the cost of purchase. In general the total operating expenses have slightly increased for the four-year period. Interest income has increased a little, as there is an increase in marketable securities. Interest expense has also risen due to increase in other long-term debt even though the cost of sales has decreased. Net income for the last year has declined as compared to previous two years, mainly due to increase in operating expenses.

Fundamentals of Financial Analysis

GCC Markets

Mutual Funds

News

Investment Tools

Sector News

Screeners

Indices & Commodities

Downloads


No Data Found


No Data Found


{{'lblNoDataFound'\|getLabel}}


No Data Found