Common size analysis (or vertical analysis) is a type of financial analyses used by financial analysts or managers to evaluate financial statements. The idea of a common size analysis is to express all line items on financial statements as a percentage of a base item for the same period. It helps analysts better understand the impact and contribution of each line item to the profitability.
A common size analysis is usually performed with the following formula:
Percentage of Base = Amount of Individual Item / Amount of Base Item x 100
A common size analysis can be performed on the income statement, balance sheet, or cash flow statement to analyze the impact in a single year or the trends across multiple years. The latter is often referred to as horizontal analysis, where common size analysis is used to compare ratios and line items across a certain time period.