How To Prepare a Common-Size Income Statement Analysis

If an income statement is a big pot of chili, the dollar amounts are the beans. Helpful, sure.
But a common-size income statement analysis tells you how spicy it isbecause it converts
each line item into a percentage of sales (or total revenue). That way, you can compare a
company to itself over time, and also compare two companies that are wildly different sizeslike a neighborhood
coffee shop and a global caffeine empire with a loyalty program that knows your birthday.

In this guide, you’ll learn how to prepare a common-size income statement (also called
vertical analysis) step by step, spot what the percentages are really saying, and avoid the
classic “I divided by the wrong revenue number and now my margins are haunted” situation.

What a common-size income statement is (and why people call it “vertical analysis”)

A common-size income statement restates every income statement line as a percentage of a base amountmost
commonly net sales (or total revenue) set to 100%. The result is a
“percent-of-sales” view of performance.

Think of it as turning the income statement into a recipe:
revenue is the whole pizza (100%), and every expense line is a slice. The big question becomes:
Which slices are getting bigger, and are they worth it?

Before you start: get the right data (and make it comparable)

Common-size analysis is simple math, but the setup matters. Gather:

• At least 2–3 periods of income statements (annual is fine; quarterly is fine if seasonality matters).
• Notes/MD&A context if available (one-time charges, accounting changes, segment mix shifts).
• Peer statements if you’re benchmarking (competitors, industry averages, or a close substitute).

Then do a quick “apples-to-apples” cleanup:

• Align line items: One company’s “Cost of revenue” might be another’s “Cost of goods sold.” Map them consistently.
• Separate unusual items where possible: restructuring, impairment, litigation settlements, large one-offs.
• Confirm the revenue base: net sales vs total revenue vs net revenue (especially if returns/allowances are material).
• Choose a consistent statement format: multi-step statements (gross profit, operating income) are usually easier to interpret.

Step-by-step: how to prepare a common-size income statement

Step 1: Pick your base line (usually Net Sales = 100%)

For most operating companies, set Net Sales (or Total Revenue) to 100%.
That’s the standard because it lets you see how much of each revenue dollar is “consumed” by costs and expenses.

When might you pick a different base?

• Multiple revenue lines: Use total revenue as the base, then show each revenue stream as a percent of total.
• Financial institutions: Analysts often use net interest income or total net revenue depending on the business model.
• Expense deep-dive: Sometimes you’ll set total operating expenses to 100% to analyze the mix (SG&A vs R&D, etc.).

Step 2: Build a clean layout (dollars + percent columns)

Create a table with:

• A column for line item names
• One or more columns for raw dollar amounts (by year/quarter)
• Matching columns for common-size percentages (each line item ÷ revenue)

Keeping dollars and percents side-by-side helps you avoid a classic trap:
percentages can improve because costs fellor because revenue rose fasteror because both moved in opposite directions.
You want to see the whole story.

Step 3: Calculate each line item as a percentage of sales

The core formula is:

Common-size % = (Income statement line item ÷ Net Sales) × 100

Use the same base revenue number for every line item in that period. If you’re working in Excel/Sheets, use an
absolute reference for the denominator so formulas copy cleanly.

Step 4: Add (and verify) key subtotals

A common-size statement shines when you include meaningful subtotals:

• Gross profit = Sales − COGS (Gross margin %)
• Operating income = Gross profit − operating expenses (Operating margin %)
• Pre-tax income = Operating income ± non-operating items
• Net income (Net margin %)

Quick logic check: if Sales is 100%, and your COGS is 62%, gross profit should be 38%. If it isn’t, something is misclassified
or the math references the wrong cells. (Or you discovered negative revenue, in which case… good luck and godspeed.)

Step 5: Prepare comparisons (time + peers)

You’ll usually do common-size analysis in two directions:

• Company vs itself across multiple periods (trend in margins and cost structure)
• Company vs competitors (benchmarking efficiency and business model differences)

If you compare peers, try to:

• Use the same period (or trailing twelve months) to reduce seasonality distortion.
• Normalize for major accounting presentation differences (especially around cost of sales and depreciation placement).
• Call out business model differences (subscription vs transaction, manufacturing vs software, etc.).

A worked example (with real “percent-of-sales” insight)

Here’s a simplified two-year example for a fictional company, Sunset Snacks, Inc.
Notice how the percentages make margin compression obvious even if revenue grew.

What changed?

• COGS rose from 60% to 62%: gross margin slipped (materials, freight, pricing pressure, or production inefficiency).
• SG&A jumped from 17.6% to 21%: overhead grew faster than sales (hiring, marketing, admin bloat, or strategic investment).
• Operating margin fell from 20% to 14%: the company grew, but profitability got thinner.
• Net margin dropped from 13.5% to 9%: even with lower tax %, the operating slide dominated.

Without common-size percentages, you might shrug and say, “Revenue went up!” With common-size analysis, you say,
“Revenue went up… and it brought expensive friends.”

How to interpret your common-size income statement

1) Start with the “three-margin storyline”

• Gross margin (gross profit %): pricing power, production efficiency, product mix
• Operating margin (operating income %): overhead discipline, go-to-market efficiency
• Net margin (net income %): financing decisions, taxes, one-time items

A simple diagnostic:
if gross margin is steady but operating margin falls, overhead is expanding.
If gross margin collapses, look at pricing, input costs, and product mix first.

2) Analyze the cost structure (where the money actually goes)

Common-size statements excel at answering questions like:

• Is SG&A trending higher as a percent of sales?
• Is R&D consistent with the business model (and peers)?
• Are selling costs rising faster than revenue (customer acquisition getting pricier)?
• Is the company scaling, or just getting bigger and messier?

3) Don’t ignore “below operating income”

Interest expense as a percent of sales can signal leverage risk, rising rates, refinancing pressure, or a deliberate
capital strategy. Taxes (as a percent of sales or compared to pre-tax income) can shift due to geographic mix, credits,
valuation allowances, or one-time adjustments.

4) Separate recurring vs. non-recurring items (the “one-time” detective work)

Common-size analysis can highlight strange spikeslike restructuring costs suddenly eating 6% of revenue.
The next step is to ask: Is this a new normal or a temporary mess?

Practical approach:

• Flag unusually large swings in any line item’s percent-of-sales.
• Check if management describes it as non-recurring (then verify whether it “non-recurs” every year anyway).
• Consider creating an “adjusted” common-size view in addition to the GAAP view, clearly labeled.

Common pitfalls (aka “how analysts accidentally prank themselves”)

• Wrong denominator: using gross revenue one year and net revenue the next will scramble trends.
• Mix changes: if revenue shifts from product to services, margins can change even if operations are fine.
• Classification differences: peers may place certain costs in COGS vs operating expensesaffecting gross margin comparability.
• One-time items hiding in “normal” lines: a lawsuit settlement inside SG&A will distort your view.
• Ignoring scale effects: some costs are fixed; percent-of-sales can drop simply because revenue rose, not because efficiency improved.
• Not pairing with dollar trends: percent looks stable, dollars explode (or vice versa). Always check both.

Pro tips for Excel or Google Sheets (fast, clean, and less error-prone)

1. Use absolute references for the base:
   If revenue is in cell B2, your formula for COGS percent in B3 might be =B3/$B$2.
2. Format as percentages with one decimal place for readability (e.g., 21.0%).
3. Add a “variance” column:
   Year 2 % − Year 1 % shows what truly changed in the cost structure.
4. Create a consistent mapping tab for line items when comparing peers (especially if you’re pulling from filings).
5. Build a quick chart:
   A stacked bar of major expense categories (% of sales) makes cost structure differences instantly visible.

Make the analysis stronger by pairing it with other methods

Horizontal analysis (trend analysis)

Common-size analysis answers “how much of each revenue dollar,” while horizontal analysis answers “how fast did this change.”
Used together, you can spot situations like: revenue up 12%, SG&A up 25%, operating income down 10%. That’s a storyline.

Ratio analysis

Your common-size statement naturally leads to ratios:
gross margin, operating margin, net margin, interest coverage (when paired with EBITDA/operating income),
and effective tax rate (tax ÷ pre-tax income).

Cash flow cross-check

A company can show nice margins and still struggle with cash if working capital is ugly.
Use cash flow to validate whether the income statement improvements are translating into cash generation.

Practical experiences and lessons from the field (about )

People usually expect common-size analysis to be a neat “plug-and-play” technique. In practice, finance teams and analysts
often describe it as more like assembling furniture: the concept is simple, but the first time you do it, you realize half the
parts are labeled differently and one screw looks suspiciously optional.

One common experience: the denominator drives the mood. When revenue swings sharplysay, after a major price
increase, a demand shock, or a discontinued product linepercent-of-sales moves can look dramatic even if the underlying cost
behavior hasn’t changed much. Analysts often handle this by adding context columns like volume, average selling price, or segment
revenue mix. The common-size statement becomes the “dashboard,” and the operational metrics become the “why.”

Another recurring theme is cost classification debates, especially around what belongs in cost of sales versus
operating expenses. In some industries, companies allocate depreciation and certain labor costs into cost of revenue; in others,
those costs sit in operating expenses. The practical lesson: when benchmarking, don’t just compare gross margin percentages and
declare a winner. Compare gross margin and also operating margin, and read the footnote/MD&A explanations
when margins don’t line up with the business reality.

Analysts also talk about the moment they realize common-size analysis is great at spotting “slow leaks”.
For example, SG&A creeping from 18% to 19% to 20% doesn’t always trigger alarms in dollar form if revenue is growing.
But as a percent-of-sales trend, it’s a pattern: maybe marketing costs are rising to maintain growth, maybe customer support is
scaling faster than the customer base, or maybe administrative overhead just… expanded into the available space (like a cat).
The best practice is to break SG&A into meaningful sub-bucketssales & marketing, G&A, fulfillmentso you can see
which slice is getting bigger.

A particularly useful real-world tactic is creating a “clean” view and a “reported” view. Teams often keep the
official reported common-size statement (GAAP as presented) and then a second version that isolates unusual itemsrestructuring,
impairment, large legal settlements, major acquisition-related costs. This prevents one-off events from polluting the trend line,
while still preserving transparency. The discipline here is labeling: “Adjusted” must be clearly marked, consistently defined,
and not used as a creative writing exercise.

Finally, many practitioners point out that common-size analysis is most powerful when it becomes a conversation starter,
not a final verdict. A change in COGS percent might mean vendor prices increasedor it might mean a shift toward lower-margin products
that strategically grows market share. A jump in R&D percent could be a warning signor an investment that drives future moats.
The common-size statement tells you where to look. Your job is to investigate, connect it to business drivers, and decide whether the
trend is a problem, a strategy, or a temporary detour.

Conclusion

Preparing a common-size income statement analysis is one of the fastest ways to turn a dense profit-and-loss statement
into something you can actually compare, explain, and use. By converting each line item into a percentage of sales,
you reveal the company’s cost structure, margin profile, and the trends that matterespecially when you lay multiple periods and peers
side by side.

Keep it clean (consistent line items), keep it honest (call out one-time items), and keep it useful (pair it with trend and cash flow checks).
Do that, and your income statement stops being a list of numbersand becomes a story you can defend.