Financial Management: Principles and Applications, 13/e

4.2 Common-Size Statements: Standardizing Financial Information

It is meaningless to compare the individual entries in a firm’s financial statements with those of firms that are not the same size. For example, the inventory balance for Walmart (WMT) would dwarf that of a small retail store. However, we can standardize each firm’s inventory balance by dividing it by the firm’s total assets, resulting in a percentage for each firm that we can then compare. One way to enable such comparisons on a broader scale is by converting the firms’ financial statements to what are referred to as common-size financial statements.

A common-size financial statement is a standardized version of a financial statement in which all entries are presented in percentages. ...