Common-Size Analysis of Financial Statements
Read section 13.2. When you are dealing with many numbers of comparatively large magnitudes, it becomes difficult to distinguish important features or attributes of those numbers. With common size analysis, you reduce numbers to percentages and then compare percent difference. For example if you have a company that has $450,000 in profit on sales of $2,220,000, while another has profit of only $375,000 on sales of $1,500,000, how do you compare these numbers? This is the strength of common size analysis, which is also known as vertical analysis.