The Three Tools of Analysis, in Outline
Chapter Ten
Syllabus topic 3, "Study of Balance sheet and Income statement / Revenue statements in vertical form suitable for analysis ii. Relationship between items in Balance Sheet and Revenue statement iii. Tools of analysis of Financial Statements (i) Trend analysis (ii) Comparative Statement (iii) Common Size Statement"
Pages 22 to 23 of 162
In one line
Trend analysis shows direction over years, the common size statement shows structure within a year, and the comparative statement shows the change between two years in both rupees and per cent.
The three, side by side
| Trend analysis | Comparative statement | Common size statement | |
|---|---|---|---|
| Years covered | Several, usually five or more | Two | One or more |
| The base | The base year, taken as 100 | The earlier year of the two | The total of the statement itself |
| What it shows | The direction and speed of movement | The absolute and percentage change | The structure, item by item |
| Its unit | Index numbers | Rupees and percentages | Percentages only |
| Question it answers | Where is this going | What changed, and by how much | How is this business built |
| Type of analysis | Horizontal | Horizontal | Vertical |
What each looks like, in three rows
Trend analysis, taking 2023 as 100.
| Year | Sales, Rs | Trend |
|---|---|---|
| 2023 | 12,00,000 | 100 |
| 2026 | 16,00,000 | 133 |
| 2027 | 20,00,000 | 167 |
Comparative statement, 2026 against 2027.
| Particulars | 2026, Rs | 2027, Rs | Change, Rs | Change, per cent |
|---|---|---|---|---|
| Net sales | 16,00,000 | 20,00,000 | 4,00,000 | 25.00 |
| Gross profit | 4,80,000 | 6,00,000 | 1,20,000 | 25.00 |
Common size statement, each year on its own base of net sales.
| Particulars | 2026, per cent | 2027, per cent |
|---|---|---|
| Net sales | 100.00 | 100.00 |
| Cost of goods sold | 70.00 | 70.00 |
| Gross profit | 30.00 | 30.00 |
Read the three together and notice what each hides. The trend says sales are rising fast. The comparative says by how much and in rupees. The common size says the shape of the business did not change at all while it grew, which neither of the others shows.
Which tool answers which question
| The question | The tool |
|---|---|
| Is the business growing, and how fast | Trend analysis |
| Which item grew fastest between last year and this | Comparative statement |
| Is the growth in sales bigger than the growth in costs | Comparative statement |
| Has the cost structure changed | Common size statement |
| Is this company's cost structure like its rival's | Common size statement, because it removes size |
| Which item is out of line over five years | Trend analysis |
The last row is where trend analysis earns its place. Sales up 67 per cent and administrative expenses up 140 per cent over the same five years is a finding no single year's statement can produce.
The one strength each has that the others lack
Trend analysis: it sees a run. Two years can be a fluke; five years is a direction.
Comparative statement: it keeps the rupees. A 200 per cent rise in a figure of Rs 5,000 matters less than a 4 per cent rise in a figure of Rs 50,00,000, and only this tool shows both.
Common size statement: it removes size. A company with sales of Rs 20,00,000 and one with sales of Rs 2,000 crore cannot be compared in rupees at all, and can be compared exactly in percentages of their own sales.
The Three Tools of Analysis, in Outline
The one weakness each has
| Tool | Weakness |
|---|---|
| Trend analysis | A bad base year distorts every later figure, and a percentage on a small base is meaningless |
| Comparative statement | Two years only, so a fluke cannot be told from a trend |
| Common size statement | It shows proportion, never size, so a business halving in size with an unchanged structure looks unchanged |
Module II works each of these in full, with the preparation, the arithmetic and the interpretation. This chapter is the map.
What it does NOT mean
They are not alternatives. A full analysis uses all three, and MU's own Module II topic asks for a "comparative evaluation" of them for exactly that reason.
None of them is ratio analysis. Ratios are Module III, and they relate one item to another rather than to a base year or a total.
None of them needs anything the published statements do not carry. All three are external analysis, which is why they are the tools an outsider can use.
Quick revision
| Trend | Several years; base year = 100; direction |
| Comparative | Two years; rupee change and percentage change; what moved |
| Common size | Each item as a percentage of a total; structure |
| Horizontal | Trend and comparative |
| Vertical | Common size |
| The base of a common size revenue statement | Net sales |
| The base of a common size balance sheet | The total of the balance sheet |
Test yourself
- Which of the three is vertical analysis, and why?
- Which tool would you use to compare a small company with a very large one?
- What does the comparative statement show that the common size statement cannot?
- Why is five years better than two?
- What is the base of a common size revenue statement?
Answer in one sentence
1. The common size statement, because it compares items within one statement at one date rather than the same item across periods.
2. The common size statement, because expressing everything as a percentage of the company's own total removes the difference in size entirely.
3. The absolute change in rupees, which tells you whether a large percentage movement is on a figure big enough to matter.
4. Because two years can be a fluke and five show a direction.
5. Net sales, taken as 100.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.