The Case of the Growing Bakeries: Understanding Common Size Analysis

In the town of Prosperia, two bakeries—Sweet Bites and Golden Crust—were in fierce competition. Both had been growing rapidly, and investors were eager to determine which bakery was financially healthier.

Enter Aisha, a financial analyst known for simplifying complex financial statements. She was hired by two investors, Ravi and Meera, who were considering investing in one of the bakeries.

"Looking at their income statements isn’t enough," Aisha said. "We need to compare them in a way that makes sense, regardless of size."

The Common Size Approach

She explained:

"A Common Size Income Statement expresses each line item as a percentage of revenue. This helps compare businesses of different sizes fairly."

She pulled out the financials:

Sweet Bites Income Statement

  • Revenue: ₹1,00,00,000
  • Cost of Goods Sold (COGS): ₹50,00,000
  • Operating Expenses: ₹30,00,000
  • Net Profit: ₹20,00,000

Golden Crust Income Statement

  • Revenue: ₹2,00,00,000
  • COGS: ₹1,20,00,000
  • Operating Expenses: ₹50,00,000
  • Net Profit: ₹30,00,000

Ravi was quick to say, "Golden Crust has a higher net profit, so it must be better!"

Aisha smiled, "Not so fast. Let’s convert these into percentages of revenue."

COGS Percentage=COGSRevenue×100\text{COGS Percentage} = \frac{\text{COGS}}{\text{Revenue}} \times 100
Operating Expenses Percentage=Operating ExpensesRevenue×100\text{Operating Expenses Percentage} = \frac{\text{Operating Expenses}}{\text{Revenue}} \times 100
Net Profit Percentage=Net ProfitRevenue×100\text{Net Profit Percentage} = \frac{\text{Net Profit}}{\text{Revenue}} \times 100

Common Size Income Statements

ItemSweet Bites (%)    Golden Crust (%)
COGS50%60%
Operating Expenses30%25%
Net Profit20%15%

What the Numbers Reveal

Meera analyzed the table:

"Sweet Bites has a lower revenue but a higher profit margin—20% vs. Golden Crust’s 15%. That means it’s more efficient at turning revenue into profit!"

"Exactly!" Aisha nodded. "Even though Golden Crust earns more in absolute terms, its costs are higher. Common Size Analysis helps us see this clearly."

The Takeaway

✅ Common Size Analysis makes financial comparison easy, no matter the size
✅ It helps spot trends in cost structure and profitability
✅ Investors use it to compare businesses in the same industry

With their newfound knowledge, Ravi and Meera made a smart investment decision, not just based on big numbers, but on real financial efficiency.

[Finance]

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