Common-Size Statements
These financial statements express numbers as percentages to make companies of different sizes easier to compare.
What are common-size financial statements?
Explanation: Common-size statements standardize financial information so firms of different sizes can be compared more easily.
This ratio equals Current Assets divided by Current Liabilities.
What is the Current Ratio?
Explanation:
Current Ratio = Current Assets ÷ Current Liabilities
It measures a company's ability to meet short-term obligations.
These ratios measure how efficiently a company uses its assets to generate sales.
What are Asset Management Ratios?
Explanation: They are also called asset utilization or turnover ratios.
Net Income divided by Sales calculates this profitability ratio.
What is Profit Margin?
Explanation:
Profit Margin = Net Income ÷ Sales
It shows how much profit is generated from each dollar of sales.
The DuPont Identity breaks this profitability measure into several parts to show what is driving company performance.
What is Return on Equity?
Explanation: DuPont analysis breaks down ROE so analysts can identify what is causing the company's performance.
On a common-size balance sheet, every account is shown as a percentage of this.
What are Total Assets?
Explanation: For a common-size balance sheet:
% of Total Assets = Item ÷ Total Assets
This liquidity ratio removes inventory from Current Assets because inventory may be difficult to quickly convert into cash.
What is the Quick Ratio?
Explanation:
Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities
It is also called the acid-test ratio.
Cost of Goods Sold divided by Inventory calculates this ratio.
What is Inventory Turnover?
Explanation:
Inventory Turnover = COGS ÷ Inventory
It measures how many times inventory is sold or turned over during the period.
Net Income divided by Total Assets calculates this ratio.
What is Return on Assets?
Explanation:
ROA = Net Income ÷ Total Assets
ROA measures how much profit the company generates from its assets.
Profit Margin × Total Asset Turnover × Equity Multiplier equals this.
What is ROE?
Explanation:
The DuPont Identity is:
ROE = Profit Margin × Total Asset Turnover × Equity Multiplier
On a common-size income statement, every line item is shown as a percentage of this.
What are Sales?
Explanation: For a common-size income statement:
% of Sales = Item ÷ Sales
This lets us see what happens to each dollar of sales.
A company has $200,000 in Current Assets and $100,000 in Current Liabilities. Its Current Ratio is this.
What is 2.0 times?
Explanation:
$200,000 ÷ $100,000 = 2.0
The company has $2 in current assets for every $1 in current liabilities.
If Inventory Turnover is 5 times, inventory stays in the company for approximately this many days.
What is 73 days?
Explanation:
Days in Inventory = 365 ÷ Inventory Turnover
365 ÷ 5 = 73 days
Net Income divided by Total Equity calculates this ratio.
What is Return on Equity?
Explanation:
ROE = Net Income ÷ Total Equity
ROE measures how much accounting profit the company generates for each dollar of shareholder equity.
In the DuPont Identity, Profit Margin measures this type of efficiency.
What is Operating Efficiency?
Explanation: The three DuPont components tell us:
A company has $50,000 in cash and $500,000 in total assets. On a common-size balance sheet, cash would equal this percentage of total assets.
What is 10%?
Explanation:
$50,000 ÷ $500,000 = 10%
So cash represents 10% of the company's total assets.
hese ratios measure a company's long-run ability to meet its financial obligations and are also called financial leverage ratios.
What are Long-Term Solvency Ratios?
Explanation: Long-term solvency ratios look at the company's debt position and its ability to meet long-term obligations.
Sales divided by Accounts Receivable calculates this ratio.
What is Receivables Turnover?
Explanation:
Receivables Turnover = Sales ÷ Accounts Receivable
It helps measure how quickly a company collects money from customers.
A company has $20,000 in Net Income and $100,000 in Sales. Its Profit Margin is this.
What is 20%?
Explanation:
$20,000 ÷ $100,000 = 20%
The firm earns approximately 20 cents of profit for every $1 of sales.
This ratio represents the percentage of Net Income that a company keeps and reinvests rather than paying out as dividends.
What is the Retention Ratio?
Explanation:
Retention Ratio = Addition to Retained Earnings ÷ Net Income
It is also called the plowback ratio.
The dividend payout ratio and retention ratio must add up to 100%.
Walmart and Target should not be compared using only their total sales because this major difference makes direct comparison difficult.
What is company size?
Explanation: Companies can differ substantially in size. Common-size statements solve this problem by converting dollar amounts into percentages.
EBIT divided by Interest Expense calculates this ratio.
What is Times Interest Earned?
Explanation:
Times Interest Earned = EBIT ÷ Interest
It measures how many times a company's operating earnings can cover its interest payments.
For example, a TIE of 5 means EBIT covers interest expense five times.
A company has $1,000,000 in Sales and $2,000,000 in Total Assets. Its Total Asset Turnover is this.
What is 0.50 times?
Explanation:
Total Asset Turnover = Sales ÷ Total Assets
$1,000,000 ÷ $2,000,000 = 0.50
This means the firm generates 50 cents in sales for every $1 invested in assets.
Price per Share divided by Earnings per Share calculates this common market value ratio.
What is the Price-Earnings Ratio?
Explanation:
PE Ratio = Price per Share ÷ EPS
A higher PE is often associated with stronger expected future growth, although a high PE can also occur when current earnings are very low.
This growth rate shows how quickly a company can grow using retained earnings and additional debt while maintaining a constant debt ratio.
What is the Sustainable Growth Rate?
Explanation: Sustainable growth allows the company to use:
Retained Earnings + New Debt
The formula is:
Sustainable Growth Rate = (ROE × b) ÷ (1 − ROE × b)
where b = retention ratio.
The sustainable growth rate is normally higher than the internal growth rate because the company has borrowing as an additional source of financing.