Common-sizing and trend analysis

Common-sizing is the simplest thing in financial analysis and one of the most powerful: express every line as a percentage of a reference line. Suddenly, two companies of different sizes are directly comparable, and trends inside one company over time become visible.

Common-sized income statement

Express every line as a % of revenue:

                    2022    2023    2024
Revenue            100.0%  100.0%  100.0%
COGS                40.0%   42.0%   44.0%
Gross profit        60.0%   58.0%   56.0%
SG&A                25.0%   24.0%   23.0%
R&D                 12.0%   13.0%   14.0%
Operating income    23.0%   21.0%   19.0%

What jumps out: COGS is rising as a share of revenue (margin pressure), SG&A is being cut (cost discipline), R&D is rising (investing for the future), and operating margin is compressing. Three years of data, four interpretations, all visible at a glance.

Common-sized balance sheet

Express every asset as a % of total assets, every liability and equity item as a % of total liabilities + equity. Lets you see where the asset base is concentrated and how it's funded.

Trend analysis

Take a single line item across multiple periods and index it (year 1 = 100). Trends become obvious — what's growing, what's flat, what's shrinking.

Revenue:   2020:100  2021:120  2022:140  2023:155  2024:165
Gross prof: 2020:100  2021:118  2022:135  2023:140  2024:142

Revenue is still growing but gross profit is plateauing — clear sign of compressing margins. The first three years had operating leverage; the last two have lost it.

Industry comparisons

The same operating margin can be excellent for one industry and disastrous for another. Compare to peers — same industry, similar scale, similar geography. Most credible analysts maintain a 'comp set' for every company they cover.