Common Size Income Statement

Common-Size Income Statement A common-size income statement expresses each line item as a percentage of total revenue (sales). It is a form of vertical analysis that standardizes financial statements so you can compare performance across periods, companies, or industries regardless of size. Definition
* Each line item on the income statement (COGS, operating expenses, taxes, net income, etc.) is shown as a percentage of total revenue.
* These percentages reveal the relative weight of each component and simplify trend and cross-company comparisons.
Why it’s useful
* Highlights what drives profitability and how costs scale with sales.
* Facilitates comparisons across companies and time periods, even when revenue levels differ.
* Reveals meaningful changes in cost structure (e.g., rising COGS or SG&A as a share of sales).
* The same approach can be applied to balance sheets and cash flow statements.
How to prepare a common-size income statement
1. Select total revenue (sales) as the base (100%).
2. For each income statement line item, divide the line amount by total revenue and multiply by 100:
3. Common-size % = (Line item / Total revenue) × 100
4. Present a column of amounts and a column of percentages (or only percentages for comparison).
Relationship to margins Common-size percentages are equivalent to commonly used margins:
- Gross margin = (Gross profit / Revenue) × 100
- Operating margin = (Operating income / Revenue) × 100
- Net profit margin = (Net income / Revenue) × 100 Explore More Resources

Example Assume a company with:
- Revenue = $100,000
- Cost of goods sold (COGS) = $50,000
- Selling & general administrative (SG&A) = $10,000
- Taxes (21%) on pre-tax income Calculated amounts:
- Gross profit = $50,000 → 50% of revenue
- Operating profit = $40,000 → 40% of revenue
- Net income = $31,600 → 31.6% of revenue Explore More Resources

Presented as a common-size income statement:
- Revenue: 100.0%
- COGS: 50.0%
- Gross profit: 50.0%
- SG&A: 10.0%
- Operating profit: 40.0%
- Taxes: 8.4%
- Net income: 31.6% Interpreting results
* Stable percentages over time suggest a consistent cost structure and business model.
* Increasing expense ratios (e.g., SG&A as a percent of revenue) may indicate rising overhead or weakening pricing power.
* Comparing common-size statements to peers highlights competitive strengths and weaknesses.
Limitations
* Does not show absolute size or scale—use with dollar amounts for full context.
* One-time items can distort percentages for a single period.
* Differences in accounting policies can affect comparability across firms.
Key takeaways
* A common-size income statement standardizes each line item as a percent of revenue, aiding comparison and trend analysis.
* It directly produces familiar margins (gross, operating, net).
* Use it alongside absolute-dollar statements and ratio analysis for a complete financial assessment.