From the course: Corporate Financial Statement Analysis

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Convert and analyze a common-size income statement

Convert and analyze a common-size income statement

From the course: Corporate Financial Statement Analysis

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Convert and analyze a common-size income statement

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The raw financial statement numbers for uncertain company and benchmark company are tough to interpret because of the scale differences. But if we just do this simple transformation, divide every number in the balance sheet, every number in the income statement by sales for the year, you get percentages, then all of a sudden, they tell you all kinds of things. Let's start by looking at the common size income statement. We see, for example, that for both companies, uncertain company and benchmark company, cost of goods sold is 40% of sales, meaning that they're about the same. The selling price of the goods is more than the cost of goods sold. Cost of goods sold is about 40% of sales in each case. There's no difference there. If we're looking for problems, don't look there. They're the same. Now let's look at wage expense. We see that wage expense for uncertain company is much larger than for benchmark company. 27% of sales compared to 23% of sales. Let's make sure we understand what…

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