From the course: Running a Profitable Business: Understanding Financial Ratios
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Common size overview
From the course: Running a Profitable Business: Understanding Financial Ratios
Common size overview
- [Instructor] Step one in our financial ratio analysis is the DuPont Framework. Very elegant, very nice. Dividing return on equity into profitability, efficiency, and leverage. Let's now go to step two, common-size financial statements, which in my opinion is such an efficient way to get more information out of the financial statements. The basic insight is this. You can't compare companies of different size. There are scale issues. Walmart has over $400 billion in sales. Target has less than $100 billion in sales. To compare those two companies you have to do some kind of adjustment for size. That's the purpose of common-size financial statements. The raw financial statement numbers for uncertain company and benchmark company are tough to interpret because of the scale differences, but if we just do this simple transformation, divide every number in the balance sheet, every number in the income statement by sales for the…
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