Lesson 2 of 8 · 13 min
Common-size, trend analysis and graphs
Common-size statements, trend comparisons, graphs and regression turn raw financial data into patterns that show the structure of a company and how it is changing.
In short
- A vertical common-size balance sheet divides every item by total assets; a vertical common-size income statement divides by revenue (sometimes total assets, e.g. for financial institutions).
- A horizontal common-size statement expresses each item relative to a base-year amount or as a % change from the prior year.
- Look at both percentage and absolute changes: a big % change in a small item may matter less than a small % change in a big one.
- Compare growth across statements: receivables or inventory growing faster than revenue, or CFO falling while profit rises, are warning signs.
- Pie graphs show composition; line graphs show changes over time for a few items; stacked column graphs show composition and change together. Regression identifies relationships such as sales vs GDP.
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