An easy way to spot trends in your balance sheet and income statement data from a number of years, or to compare your information with that of another company or industry group, is to use "common size" financial statements.

To create common size statements, you simply take the information from your regular statements, and express it as percentages rather than as absolute dollars. This makes it much easier to pinpoint differences from year to year, and to compare your data with that of one or more companies that may be considerably larger or smaller than yours. Moreover, if you get industry data or financial data on your competitors from a commercial service, the best way to compare the data is to express all financials in the common-size, percentage, format.

Here's an example of an income statement that shows both absolute dollar values for four years, and also common size percentages for the same four years. Note that all items on the common size part of the statement are expressed in terms of a percentage of sales. To arrive at the common size percentage for an item, we simply divided the dollar value of that item by the dollar value of sales for the period.

Here's an example of a balance sheet that shows both absolute dollar values for four years, and common-size percentages for the same four years. Notice that items normally appearing on the asset side of the balance sheet are presented as a percentage of total assets. Items normally on the liabilities and equity side of the sheet are presented as a percentage of total liabilities and equity.