Comparing a R50 million company to a R5 billion one seems
pointless until you convert everything to percentages.
Common-size analysis strips out the scale differences and shows
you the underlying economics of how businesses operate.
You'll learn to create common-size income statements where every
line item becomes a percentage of revenue, and common-size
balance sheets where everything's a percentage of total assets.
Suddenly you can see that two companies in the same industry
have completely different cost structures, or that one carries
way more inventory relative to sales than its competitors.
Patterns emerge quickly
This technique reveals things absolute numbers hide. A company
growing revenue by twenty percent sounds impressive until
common-size analysis shows gross margin compressed from 42% to
38%—they're buying growth by cutting prices. Another company
might show stable revenue but SG&A expenses creeping from
18% to 23% of sales, eroding profitability.
We cover both vertical analysis, comparing line items within a
single period, and horizontal analysis, tracking percentage
changes across time periods. You'll practice identifying which
metrics matter for different business models and industries.
The course includes extensive work with retail, manufacturing,
and service companies because their common-size profiles look
completely different. Retailers typically show thin margins with
high inventory turnover. Software companies have gross margins
above 80% but heavy R&D spending. Understanding these
patterns helps you spot outliers and anomalies.
Industry benchmark databases
You'll learn to use Risk Management Association and other
sources for industry-standard ratios
By the end, you can take any set of financial statements and
quickly assess whether the company's cost structure, asset base,
and capital allocation align with industry norms or deviate
significantly.
