Identify strengths and/or weaknesses in this paragraph below. Do you agree with the pros and cons presented? Is there a better way to analyze the performance measurements?
Common Size Analysis presents asset line items as a percentage of total assets and liability and shareholders’ equity line item as a percentage of total liability and shareholders’ equity. A company can use this analysis to make simple comparisons. For example, a company may want to analyze cash as a percentage of total assets if the company’s liquidity is a concern. Common Size Analysis is useful to companies because it allows the company to observe trends in accounts receivables and express cash inflows as a percentage of total revenue. It is most useful when comparing a company to a similar company of different size. It is also called the one hundred percent statement.
The Pro’s of the Common Size Analysis are: easy to understand, helpful for time series analysis, and helpful in analyzing structural comparison.
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The Con’s of the Common Size Analysis are: no standard ratio, does not recognize the change in price level, and seasonal fluctuations. The formula: Net Income/ Sales= Common Size Analysis.