Common-size statements and trends
Turn three years of a real retailer's accounts into percentages and index numbers to see what changed, and check what each figure is a percentage of.
FinanceReading the accounts like an analystAbout 9 min: 9 readingUpdated
General education, not financial advice.
- Express each income statement line as a % of revenue and build a trend index
- Spot when a year's length, a one-off item or a company's own definitions distort the comparison
- Write up a common-size view as a short briefing
Builds toward: Judge a company. Read a company's accounts, apply Graham's tests, and make a rough valuation.
Reading the accounts like an analyst: lesson 2 of 5
- Reading the accounts like an analyst
- The three statements and how they link 10 min
- Common-size statements and trends 9 min
- Profitability ratios: margins, ROA and ROE 9 min
- Efficiency ratios and the cash conversion cycle 9 min
- DuPont analysis: where ROE comes from 10 min
Pairs with any financial statement analysis text (the chapter on analysis tools: horizontal and vertical analysis)
Mission
From: the head of the retail research team Due: tomorrow, before Target's results call
I need a one-page common-size view of Target for the last three years: what each cost takes out of every dollar of sales, how the lines have moved, and anything that makes the years hard to compare. Use the 10-K for the year ended 31 January 2026 (filed 11 March 2026). Keep it to the five or six points that matter.
The documents (Target's 10-K; millions of dollars; Target calls its total revenue "net sales"):
| Income statement | 2023 | 2024 | 2025 |
|---|---|---|---|
| Net sales | 107,412 | 106,566 | 104,780 |
| Cost of sales | 77,828 | 76,502 | 75,511 |
| SG&A expenses | 21,462 | 21,969 | 21,535 |
| Depreciation and amortisation (1) | 2,415 | 2,529 | 2,617 |
| Operating income | 5,707 | 5,566 | 5,117 |
| Net interest expense | 502 | 411 | 445 |
| Net earnings | 4,138 | 4,091 | 3,705 |
(1) Excluding depreciation included in cost of sales.
From the notes and MD&A:
- 2023 had 53 weeks; 2024 and 2025 had 52.
- Within net sales, merchandise sales were 105,803, 104,820 and 102,717; advertising revenue 522, 649 and 915.
- 2025 SG&A includes a gain of 593 from interchange fee settlements and 250 of business transformation costs. Target's own "adjusted" figures exclude both: adjusted operating income 4,775 (4.6% of net sales).
- Target's footnote: "All rates are calculated by dividing the applicable amount by Net Sales."
What it is
The toolkit for this job.
Common-size (vertical) analysis turns every line into a percentage of one total: income statement lines as a % of revenue; balance sheet lines as a % of total assets.
Trend (horizontal) analysis compares each line with the same line in earlier years, as a % change or an index: base year = 100, later years = this year ÷ base year × 100.
Check the base. A percentage is only as good as what it divides by. Before comparing, ask:
- Is the denominator the same in every year and every company (total revenue, or only part of it)?
- Are the periods the same length?
- Are there one-off items inside a line?
- Are you comparing the company's own "adjusted" figures with someone else's reported ones?
How an analyst approaches it
- Read the footnote on the base before calculating: what does the company divide by, and is it the same every year?
- Build the percentages and the index.
- Find the lines that moved most against sales.
- Ask whether each move is real or the base: a longer year, a one-off inside a line, an acquisition, a change of definition. Read the note on every line that moved.
- Rank the points by what they mean for profit, and write only the five or six that matter.
Why it matters
Raw figures are hard to compare: is 21.5 billion of overheads a lot? Common-size figures let you compare a company with itself over time and with rivals of very different size. Trend figures show which lines grow faster than the business. Together they point to the questions worth asking on the call.
Worked example
Maple Kitchens, an imaginary kitchen fitter (thousands):
| Year 1 | % | Year 2 | % | |
|---|---|---|---|---|
| Revenue | 800 | 100% | 1,000 | 100% |
| Cost of sales | 480 | 60% | 620 | 62% |
| Gross profit | 320 | 40% | 380 | 38% |
| Selling and admin | 200 | 25% | 230 | 23% |
| Operating profit | 120 | 15% | 150 | 15% |
| Interest | 20 | 2.5% | 40 | 4% |
| Profit before tax | 100 | 12.5% | 110 | 11% |
- Revenue rose 25% but profit before tax only 10%.
- Gross margin fell from 40% to 38%: each sale earns less after materials and labour.
- Overheads, which are partly fixed, were spread over more sales: down from 25% to 23% of revenue, so operating margin held at 15%.
- Interest doubled (index 200): the company has probably borrowed more, or is paying higher rates.
Common mistake
Reading a falling percentage as a falling amount. Maple's overheads fell from 25% to 23% of revenue but rose from 200 to 230 in money. A common-size figure can move because the line changed, because the base changed, or both. Always look at the money figures too.
Key terms
- common-size statement
- each line shown as a % of revenue (income statement) or of total assets (balance sheet)
- vertical analysis
- another name for common-size analysis within one year
- horizontal analysis
- comparing the same line across years, as a % change or index
- trend index
- a line's value each year ÷ its base-year value × 100
- adjusted (non-GAAP) figure
- a company's own measure that leaves out items it considers unusual; it must be reconciled to the reported figure
Practise the key terms
Tap a card to turn it over. 5 cards.
| Front | Back |
|---|---|
| common-size statement | each line shown as a % of revenue (income statement) or of total assets (balance sheet) |
| vertical analysis | another name for common-size analysis within one year |
| horizontal analysis | comparing the same line across years, as a % change or index |
| trend index | a line's value each year ÷ its base-year value × 100 |
| adjusted (non-GAAP) figure | a company's own measure that leaves out items it considers unusual; it must be reconciled to the reported figure |
Task
Write the one-page briefing for the head of retail research:
- a common-size table for the three years (cost of sales, gross margin, SG&A, depreciation, operating margin, net margin);
- an index of net sales and net earnings (2023 = 100);
- the five or six points that matter, each with the evidence;
- what makes the years hard to compare, and how you dealt with it;
- two questions for the results call.
Model answer
Show the model answer
Common-size (% of net sales)
| 2023 | 2024 | 2025 | |
|---|---|---|---|
| Cost of sales | 72.5 | 71.8 | 72.1 |
| Gross margin | 27.5 | 28.2 | 27.9 |
| SG&A | 20.0 | 20.6 | 20.6 |
| Depreciation (1) | 2.2 | 2.4 | 2.5 |
| Operating margin | 5.3 | 5.2 | 4.9 |
| Net margin | 3.9 | 3.8 | 3.5 |
Index (2023 = 100): net sales 99.2 and 97.5; net earnings 98.9 and 89.5.
Target: three years of thinner margins · Source: Form 10-K, year to 31 January 2026
1. Sales are slipping, less than the headline suggests. Net sales fell 2.4% over two years, but 2023 had an extra week, which the 10-K says contributed 1.7 billion. On 52 weeks 2023 was about 105,700, so 2025 is about 0.9% below it. 2. The core business shrank; other revenue grew, led by advertising. Merchandise sales fell 2.0% in 2025, while advertising revenue rose 41% (649 to 915). Small, but it's the growing part. 3. Gross margin barely moved (27.5–28.2%): most of the pressure is below gross profit. 4. Overheads took a bigger share. SG&A rose from 20.0% to 20.6% of sales, and depreciation from 2.2% to 2.5%, while sales fell: costs that don't shrink with sales. 5. 2025's reported margin flatters. SG&A includes a one-off 593 gain from interchange fee settlements, partly offset by 250 of transformation costs. Without both, SG&A is 20.9% of sales and operating margin 4.6%, not 4.9%: the lowest of the three years. 6. Net earnings fell faster than sales: index 89.5 against 97.5, because the margin loss lands on a thin profit.
Questions for the call: How much of the higher overhead and depreciation share is fixed, and what happens to margins if sales keep falling? Will the advertising business keep growing at this rate, and what does it earn?
How the expert gets there. They read the footnote on the base before calculating (Target divides by total net sales, so their own rates match ours). They look for anything that changes the length or content of a year (the 53rd week, the settlement gain) and show both versions. They separate the parts of revenue that move differently. Then they rank the points by what they mean for profit.
What a reviewer would flag:
- A trend that ignores the 53-week year, overstating the sales decline.
- Using Target's adjusted 4.6% next to another retailer's reported margin.
- Calling the 593 gain "cost savings".
- Points without evidence ("costs went up") or with no "so what".
Practice
Transfer: check the source on someone else's draft. A colleague's draft says: "Home Depot is growing: net sales rose from 152.7 billion to 164.7 billion over two years (+7.9%), while operating margin slipped from 14.2% to 12.7%." The figures are from Home Depot's Form 10-K for the year to 1 February 2026 (net sales 152,669, 159,514 and 164,683; operating income 21,689, 21,526 and 20,890, for fiscal 2023, 2024 and 2025). Before it goes out, check it against the 10-K's MD&A. In three sentences: is the growth what it looks like, and what would change your mind?
A model answer
The growth was bought. The acquisitions of SRS (June 2024) and GMS (September 2025) added about 6.3 billion of incremental sales in fiscal 2025, and comparable sales, which strip them out, were −1.8% in 2024 and +0.3% in 2025. The calendar doesn't affect this two-year comparison (2023 and 2025 both had 52 weeks), though fiscal 2024's 53rd week (about 2.5 billion) makes 2025 against 2024 look slower than it was. So the existing business was roughly flat; the margin decline may partly reflect the mix of acquired distribution businesses, so check the segment note before blaming the stores. What would change my mind: comparable sales growing for several quarters, or the acquired businesses' margins rising towards the stores'.
How the expert gets there: when sales jump in a year of deals, they look for the company's own "comparable" measure and the length of each year before accepting a growth figure.
What a reviewer would flag: accepting total growth without comparable sales; blaming the 53rd week for a comparison it doesn't touch; explaining the margin fall without checking the segment note.
In short
- Common-size: lines as a % of revenue (or of total assets).
- Trend: compare each line with earlier years, as a % change or index.
- Check the base: same denominator, same length of year, no hidden one-offs.
- Separate parts of revenue that move differently.
- A falling percentage can hide a rising amount; look at the money too.
Check yourself
Answer in your head first, then open the answer. Nothing is saved.
Why might a 2% fall in sales after a 53-week year not be a real decline?
Show answer
The longer year had about one extra week of sales (about 1.9% more), so on a like-for-like basis sales may be roughly flat.
A company's SG&A fell from 21% to 19% of sales in a year with a large legal settlement gain booked in SG&A. What would you do?
Show answer
Recalculate SG&A and operating margin without the gain, and show both.
Cost of sales rose by 5% in money but fell as a share of sales. What must be true?
Show answer
Sales grew by more than 5%.
Further reading
- Target Corporation, Form 10-K for the year ended 31 January 2026 (SEC EDGAR): consolidated statements of operations, note 2 (net sales), and the reconciliation of non-GAAP measures.
- Corporate Finance Institute, Reading Financial Statements (course notes), on vertical and horizontal analysis.
- On this site: The three statements and how they link.
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