Current Ratio – Formula, Meaning, Assumptions and Interpretations
The current ratio is the most popularly used metric to gauge the short term solvency of a company. This article provides the details about this ratio. Formula Current Ratio = Current Assets / Current Liabilities Meaning Current ratio measures the current assets of the company in comparison to its current liabilities. This means that the…
Introduction to Cash Flow Ratios
Once upon a time, investors and analysts used to believe in ratios that have been calculated based on the earnings that the company has stated in the Income Statement. Alas! That was once upon a time. Of late, there have been a huge number of frauds and malpractices that have come to the fore. All…
Cash Flow to Debt Ratio – Meaning, Formula, Assumptions and Interpretation
Formula Cash Flow to Debt Ratio = Operating Cash Flow/Total Debt Meaning The cash flow to debt ratio tells investors how much cash flow the company generated from its regular operating activities compared to the total debt it has. For instance if the ratio is 0.25, then the operating cash flow was one fourth of…
Common size statements are not financial ratios. Rather they are a way of presenting financial statements that makes them more suitable for analysis. However, analysts always use them in conjunction with ratio analysis.
In fact, financial analysts use common size statements as the starting point to help them dig deeper. Common size statements tell them what particular group of ratios deserves more attention for any given set of financial statements.
Common size statements are financial statements expressed in percentage form. Therefore a common size income statement would consider the sales figure as 100%. Every expense in the income statement will then be expressed as a percentage of the sales figure. Similarly in common size balance sheet the total assets figure is considered to be 100%. Everything else is expressed as a percentage of the same.
The logic behind creating common size financial statements is that they are easily comparable. Analysts can compare the COGS across two companies and state which one has lower COGS without any calculation! Thus, using the common size statements the analysts look step by step at the financial statements and compare them with other companies. This helps them understand how the company has a different asset structure and cost structure in comparison to its competitors and whether it is favorable or unfavorable for the organization.
Trend analysis is analysis which entails comparison with the company’s own past performance. The problem in conducting this analysis is that all the numbers keep changing and there is no fixed base.
With the help of common size statements, the base gets fixed at 100% and all the numbers can be compared across years. Thus with the help of this trend analysis, a company can figure out whether its advertising costs have gone up compared to last year and if so why?
Sample of a typical common size income statement:
| Particulars | Percentage |
| Sales | 100% |
| Less: COGS | 38% |
| Gross Profit | 62% |
| Less: SGA | 14% |
| EBIDTA | 48% |
| Less: Depreciation | 10% |
| EBIT | 38% |
| Less Interest | 6% |
| PBT | 32% |
| Less: Taxes | 11% |
| PAT | 21% |
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Cash Flow to Debt Ratio – Meaning, Formula, Assumptions and Interpretation
April 3, 2025
