- So we've used common size financial statements
to analyze Uncertain Company, but will this same technique
work with a real company?
A real company like Walmart?
Well, let's take a look at Walmart's income statement.
Now, you see the income statement here in front of you.
This is good, we have three years' worth of data,
and you can see sales going up steadily,
about $15 billion a year, awesome.
Three years of side by side data are nice,
but it would be really nice to know why is income
so much lower in 2019?
We can get huge insights very efficiently
just by constructing a common size
income statement for Walmart.
And how do we do that, again?
Just divide everything in the income statement
by sales for that year.
And we see down at the bottom, in 2019,
net income as a percentage of sales, 1.4%.
We've seen that before, we call that return on sales.
In 2017, that same number is 2.9%.
Why is it so much lower in 2018?
The common size income statement tells us just like that.
The gross margin profit for each year presented
is in the 25% range.
The operating profit for each year, 4%.
But when we get down to income before taxes,
we see that in 2019, it was 2.2%, and in 2017, it was 4.2%.
Something happened between operating income
and income before taxes.
Now, looking at the items between these two numbers,
we see there was an other loss of $8.3 billion.
Notice that this loss occurred only in 2019.
Nothing in 2018, and nothing in 2017.
It seems likely that this loss was a one-time occurrence.
That is a good thing to know for next year.
Note with Walmart that their gross profit percentage
is rock solid, in the 25% range.
Their operating, selling, and general administrative
expenses don't vary much as a percentage of sales either.
Expenses are increasing each year,
but about as much as sales are increasing as a percentage.
Now let's take just a moment and look at
Target's common size income statement.
The first thing you notice is that Target's
return on sales is fairly constant
for the three-year period, at about 3.9%.
That's pretty good, especially when compared
to Walmart's return on sales, which was much lower.
Take a look at Target's gross margin percentage.
Now we start to see something.
The percentage has declined from 30.1% down to 29.3%.
I would want to know why.
Look also at selling, general, and administrative expenses.
That has increased as a percentage each year,
from 20.2% in 2017 to 20.9% in 2019.
I would want to know why.
It's easy to say expenses are going up
because sales are going up, but a common size
income statement quickly lets us see
which expenses are going up faster than sales are going up.
Finally, let's compare Target and Walmart.
You can see that with Walmart's revenues being
almost seven times larger than Target's,
a direct side by side comparison would be difficult.
But when we look at the percentages,
we can see some stark differences.
Let's just look at 2018, and avoid the
one-time loss we highlighted earlier.
We can quickly see that Target wins on every dimension.
They have a higher gross margin, a higher operating income,
a higher net income, all as a percentage of sales.
Now, if I were part of the Walmart management team,
I would be asking questions like,
"How come our gross margin isn't as high as Target's?
"What are they doing that we're not doing?"
Now, there may be very good, very reasonable
answers to those questions, but at least we have
a starting point to look for those answers.
Corporate financial statement analysis allows us
to easily compare results across time for the same company,
as we just did with Walmart, and to compare across companies
at the same point in time, as we just did
with Target and Walmart.
Common sizing the financial statements allows us
to compare apples to apples, or oranges to oranges.
Without common sizing, all we have is a fruit basket.