Common-size analysis is a simple way to make financial statements of different firms comparable. What are possible shortcomings of comparing two different firms using common-size analysis?
Common Size Statement, also known as a component percentage statement, is a financial tool for studying the key changes and trends in the financial position and operational result of a company. Here, each item in the statement is stated as a percentage of the aggregate, of which that item is a part. For example, each line item in the income statement may be expressed as a percentage of revenue.
The limitation of common sizing, while comparing two firms are:
The shortcomings of comparing two different firms using common sizing are: