2. Bhavesh Stewart
Kaveshna
Vikas
GROUP
MEMBERS Monit Arif
Sorabh Chaitali
Smith
3.
4. What is?
Common size ratios are used to compare financial statements of different size
companies or of the same company over different periods.
By expressing the items in proportion to some size-related measure,
standardized financial statements can be created, revealing trends and
providing insight into how the different companies compare.
5. The common size ratio for each line on the
financial statement is
calculated as follows:
Item of Interest
Common Size ratio = *100
Reference Item
6. For example
For example, if the item of interest is inventory and it is referenced to total assets
(as it normally would be), the common size ratio would be:
Inventory
Common Size Ratio for Inventory= *100
Total Assets
7. NATURE
Year-to-year comparisons are useful in understanding an organization’s
performance.
But as the size of an organization changes, year-to-year comparisons of
amounts can be misleading.
Comparisons with competing organizations of different sizes are also
difficult to interpret with amounts.
Thus, to adjust to size differences, analysts and accountants have
developed common-size financial statements.
8. PURPOSE
Common-size statements which are also known as
“component percentage” or “100 percent”
statements enable analyst to:
Comprehend or visualize the changes in individual items
that have taken place from year to year in relation to
the total assets, total liabilities and owners’ equity or total
net sales.
Compare statements of two or more companies or
statement of one company with the statements for an
entire industry and evaluate their current financial
position and operating results.
Point out efficiencies and inefficiencies that might
otherwise go unnoticed.
9. FEATURES OF COMMON SIZE STATEMENT
A common size statement analysis indicates the relation of each
component to the whole.
In case of a Common Size Income statement analysis Net Sales is taken as
100% and in case of Common Size Balance Sheet analysis total funds
available/total capital employed is considered as 100%.
It is used for vertical financial analysis and comparison of two business
enterprises or two years financial data.
10. Contd…………..
A common size analysis is a type of ratio analysis where in case of income
statement sales is the denominator (base) and in case of Balance Sheet
funds employed or total net assets is the denominator (base) and all items
are expressed as a relation to it.
In case of common size statement analysis the absolute figures are
converted to proportions for the purpose of inter-firm as well as intra-firm
analysis.
Absolute figures from the financial statement are difficult to compare but
when converted and expressed as percentage of net sales in case of
income statement and in case of Balance Sheet as percentage of total net
assets or total funds employed it becomes more meaningful to relate.
11. Guidelines in the Interpretation of
Common-size balance sheet
A common-size balance sheet shows the percent of total
assets that has been invested in each type or kind of asset.
These percentages may be compared with those of a
competitor or the industry to determine whether the firm
has over or underinvested in one or more of its assets.
The common-size statement will also show the distribution
of liabilities and equity, i.e..the sources of the capital
invested in the assets.
The percentage of current assets may also be related to
the percentage of current liabilities to determine debt-
paying capacity of the company.
12. Limitations
As with financial statements in general, the interpretation of common size
statements is subject to many of the limitations in the accounting data used
to construct them.
For example:
1. Different accounting policies may be used by different firms or within the same
firm at different points in time.
Adjustments should be made for such differences.
2. Different firms may use different accounting calendars, so the accounting
periods may not be directly comparable
13. Comparisons Between Companies
(Cross-Sectional Analysis)
Common size financial statements can be used to compare multiple
companies at the same point in time.
A common-size analysis is especially useful when comparing companies of
different sizes.
It often is insightful to compare a firm to the best performing firm in its
industry(benchmarking).
A firm also can be compared to its industry as a whole.
To compare to the industry, the ratios are calculated for each firm in the
industry and an average for the industry is calculated.
Comparative statements then may be constructed with the company of
interest in one column and the industry averages in another.
The result is a quick overview of where the firm stands in the industry with
respect to key items on the financial statements
14. • Focuses on the
Vertical relationships
analysis among financial
statement items
at a given point
in time.
• It is a vertical analysis Common
in which each size
financial statement
item is expressed as a statements
percentage.
16. A)Shareholders funds
Borrowed funds
Sources
of
Share capital
Add: reserves and surplus Secured loans
Less: Fictitious assets Unsecured loans
Funds
17. Fixed assets
Long term Investments
Application
Tangible
Working capital of
Intangible
Current assets
Funds
Less: Current
liabilities
18. Let Us Study The
Vertical Common Size Balance Sheet Of
HDFC
Mutual Fund
For The
Financial Year
2011 And 2012
19. As on march 2011 As on march 2012
Particulars
Rs. %age Rs. %age
A)Sources of funds:
1)share capital 14,761.18 15.52% 17.4%
add: reserves and surplus
unit premium reserves 3,038.41 3.20% 3.11%
other reserves 77,281.08 82.28 79.45
(A) 95080.67 100 86,346.31 100%
2)Borrowed Funds (B) - - - -
Total capital employed=(A+B) 95080.67 100 86,346.31 100
20. As on march 2011 As on march 2012
Particulars
Rs. %age Rs. %age
B)Application of funds:
1)Fixed Assets (C) - - - -
2)Investments
• equity shares 92,088.93 96.85% 82,028.28 95%
• other debentures and 132.91 0.14% 134.05 0.16%
bonds
(D) 92,221.84 97% 82,162.33 95.15%
21. As on march 2011 As on march 2012
Particulars
Rs. %age Rs. %age
3)working capital
Current Assets
• cash and bank balance 2580.44 2.71% 384.28 0.44%
• CBLO/reverse repo lending 1,161.75 1.22% 4335.33 5.02%
• others 44.73 0.04% 32.11 0.04
(e) 3786.92 3.99% 4751.72 5.50%
Less: Current Liabilities
• Other current liabilities and
provisions (f) (877.09) 0.92% (567.74) 0.65%
(e-f)=G 2909.83 3.06% 4183.98 4.84%
Total Asset Employed=(C+D+G) 95,080.67 100% 86,346.31 100%
22. Comments:
Share capital was in increased by 1.88% in 2012 as compared to 2011.
Unit premium decreased by 0.09% in 2012 as compared to 2011.
other reserves decreased by 2.83% in 2012 as compared to 2011.
Investment decreased by2.15% in 2012 as compared to 2011.
Current assets increased by 1.51% in 2012 as compared to 2011.
Current liabilities increased by 1.78% in 2012 as compared to 2011.
