Common Size Analysis is a great method of fundamental analysis that puts a company’s numbers in perspective and gets all players on equal ground for comparisons. This analysis is performed by identifying a “total” value, and then expressing all related values as a percentage of that total value.

For example, when looking at an Income Statement, the company’s revenue is typically used as the total value and all other numbers, such as operating income or net income, are expressed as a percentage of the revenue. For Balance Sheets, the Total Assets and Total Liabilities are typically used as the total values. This method can be applied many different ways depending on what you are interested in comparing, the key is to use a common total value and then compare metrics as a percent of that total value.

There are two main variations where Common Size Analysis gets used: comparing different companies and comparing the same company over a certain amount of time.

Common Sized Analysis is beneficial for comparing different companies because it can take different sized companies and put them on level ground to get a true comparison as if they were of equal size. It is also beneficial as a quick way to directly measure each metric against each other, such as their operating margin or tax expense as a percent of revenue, to see which one is ‘better’.

Common Sized Analysis is beneficial for comparing the same company over time because it can help you understand how the business is changing. Putting each time period on equal grounds, and looking at the changes in each metric as a percent of revenue, separates the effects of growing or shrinking sales with the rest of the business operations. For example, a company’s revenue may be growing, so all Income Statement numbers appear to be growing too, but a Common Sized Analysis can expose that the operating income is shrinking as a percent of revenue, indicating that the company’s operating margin is actually getting worse over time and may be cause for concern.

Now we’ll take a real world example of a Common Size Analysis comparison between the Income Statements of LMT and GD from 2021. These companies are different sizes, LMT is brings in almost twice the revenue of GD, but we can see that their metrics are quite similar when compared as a percent of revenue, indicating that these companies operate in a very similar manner despite the difference in size.

Next we’ll take a look at TGT over time to identify changes in the business. You can clearly identify here that the operating margin is improving, even compared to the increasing revenue. That improvement in operations is also being carried through to the net profit margin, which is also improving every year.