Traditional Analysis

Common-size statement

A common size statement standardizes financial statements using a common denominator. Common-size statements show only percentages, not absolute dollar amounts.

In a common-size balance sheet, each component is expressed as a percentage of total assets.

In a common-size income statement, each item is expressed as a percentage of sales.

They're used for cross-sectional analysis in comparing different companies or industry benchmarks, regardless of their size differences.

Financial Ratios

Financial ratio expresses mathematical relations between two or more items, and can be expressed either with :, % or $.

They are indicators of financial performance and strength. They are classified by the type of information they provide:

1. Profitability ratio: Ability to manage expenses to produce profits from sales
2. Liquidity ratios: Ability to meet short-term, immediate obligations
3. Solvency ratios: Ability to satisfy debt obligations
4. Activity ratios: Effectiveness in putting asset investment to use

Profitability ratios include:

• Return on Assets
• Return on Equity
• Profit Margins
• Liquidity
• Solvency
• Activity ratios
• Stock and Flow Equations