Comparative statement analysis

When trying to compare the performance of a company in relation to its competitor or historical performance, there may be a great difficulty in properly assessing its performance. This is due to the difference in size between the companies, or possible differences in size between different periods of time for the same company. To solve this problem, a comparative financial statement analysis was devised. In a comparative financial statement, each item of the income statement or balance sheet is stated as a percentage of a relevant base amount such as sales or total assets respectively.

Comparative financial statements can be either vertical or horizontal analysis. Vertical analysis is also called common sized financial statements. A common size financial statement is when each item in the income statement and statement of financial position are stated as a percentage of sales and total assets respectively. In order to make companies of different sizes comparable, a common size financial statement should be utilized. The main purpose of a common size financial statement is to make it possible for the analyst to compare the performance of companies of different sizes during the same period of time.

Horizontal analysis on the other hand is also called trend analysis. It is when the current financial statements of a company as well as historical financial statements of the same company are stated as a percentage of a relevant base year; then a comparison is made for the company over a period of time. Now let’s take a closer look at each of these types of financial statements.

Vertical common size financial statements

A common size financial statement as earlier discussed is a financial statement covering a period of one year’s operating results and expenses, and expressing each of the components as a percentage of a total. In a common size financial statement, items in the income statement are usually expressed as a percentage of sales, while items in the statement of financial position are usually expressed as a percentage of total assets. Although sales and total assets are the common base amount used, any item in each of the statements might be chosen as the base amount depending on the specific analysis the analyst is trying to carry out.

Example of a common size financial statement.

Income statement for company XYZ

Period Ending	27-Dec-11	% of TR
	$’ Million
Total Revenue (TR)	66,683	100%
Cost of Revenue	30,884	46%
Gross Profit	35,799	54%
Operating Expenses
Research Development	–
Selling General and Administrative	26,126	39%
Non Recurring	–
Others	92	0.14%
Total Operating Expenses	–
Operating Income or Loss	9,581	14.37%
Income from Continuing Operations
Total Other Income/Expenses Net	85	0.13%
Earnings Before Interest And Taxes	9,666	14%
Interest Expense	909	1.36%
Income Before Tax	8,757	13.10%
Income Tax Expense	2,199	3.30%
Minority Interest	-45	-0.07%
Net Income From Continuing Ops	6,513	10%
Non-recurring Events
Discontinued Operations	–
Extraordinary Items	–
Effect Of Accounting Changes	–
Other Items	–
Net Income	6,513	10%
Preferred Stock And Other Adjustments	–
Net Income Applicable To Common Shares	6,513	10%

Horizontal index- Number trend series analysis.

As the name implies, the horizontal trend analysis is used to evaluate trends over a period of several years for a single business. In a trend analysis, the current year serves as the base year, and amounts of subsequent years are presented as a percentage of the base year amount; with the base year assigned a value of 100% or 100. For example, each year’s current asset is stated as a percentage of the base year’s current asset, and each year’s fixed asset is stated as a percentage of the base year’s fixed asset.

In analyzing the income statement through a trend analysis, changes in expenses as a percentage of sales over time can be used to analyze the effectiveness of a company’s efforts to reduce costs, improve operational processes and avoid wastage.

Example of horizontal index- number trend analysis

Income statement for company ABC

Period Ending	27-Dec-11	% of TR	28-Dec-12	% of TR
	$’ Million		$’ Million
Total Revenue (TR\)	66,683	100%	66,415	100%
Cost of Revenue	30,884	46%	31,243	47%
Gross Profit	35,799	54%	35,172	53%
Operating Expenses
Research Development	–		–
Selling General and Administrative	26,126	39%	25,357	38%
Non Recurring	–		–
Others	92	0.14%	110	0.17%
Total Operating Expenses	–		–
Operating Income or Loss	9,581	14.37%	9,705	15%
Income from Continuing Operations
Total Other Income/Expenses Net	85	0.13%	97	0.15%
Earnings Before Interest And Taxes	9,666	14%	9,802	15%
Interest Expense	909	1.36%	911	1.37%
Income Before Tax	8,757	13.10%	8,891	13.40%
Income Tax Expense	2,199	3.30%	2,104	3.20%
Minority Interest	-45	-0.07%	-47	-0.07%
Net Income From Continuing Ops	6,513	10%	6,740	10%
Non-recurring Events
Discontinued Operations	–		–
Extraordinary Items	–		–
Effect Of Accounting Changes	–		–
Other Items	–		–
Net Income	6,513	10%	6,740	10%
Preferred Stock And Other Adjustments	–		–
Net Income Applicable To Common Shares	6,513	10%	6,740	10%