CFA Level I Exam · Financial Analysis Techniques

Common-Size and Trend Analysis for CFA Level I

Updated 7 October 2026 · Fact-checked

Common-size analysis restates each financial statement line as a percentage of a base figure: revenue for the income statement, total assets for the balance sheet. Vertical analysis does this within one period. Horizontal analysis and trend analysis express items relative to a base year to show change over time. Divide, compare, then explain the difference.

Understand Common-Size and Trend Analysis

Raw financial statements are hard to compare. A company with revenue of $5 billion and one with $500 million cannot be compared line by line in currency terms. Common-size analysis fixes this by removing size.

Vertical common-size analysis expresses every line in one period as a percentage of a base figure. On the income statement the base is usually revenue (sales). On the balance sheet the base is total assets. On the cash flow statement the base is usually total revenue, or sometimes total cash inflows and outflows by category. Each line then reads as a share of that base, such as cost of goods sold at 62% of revenue.

Horizontal common-size analysis (often called trend analysis) looks across periods. You pick a base year, set each line in that year to 100, and express later years as an index of the base. If revenue was $400 million in the base year and $460 million later, the index is 115. You can also compute year-over-year percentage changes.

The two tools answer different questions. Vertical analysis shows structure: what makes up the statement, and how a company compares with peers of different size. Horizontal analysis shows direction: what grew, what shrank, and how fast. Combine them. Rising revenue with a rising cost-of-goods-sold percentage means margins are being squeezed.

Common-size data does not explain why a number moved. It points you to the questions to ask. Also check that accounting policies, currencies and period lengths are consistent before comparing companies. Different inventory methods or IFRS vs US GAAP choices can distort peer comparisons.

Key formulas to remember

Vertical common-size item: Common-size % = Line item ÷ Base item × 100; Base is revenue for the income statement and total assets (or total liabilities and equity) for the balance sheet.
Trend index (horizontal): Index = Value in year t ÷ Value in base year × 100; The base year equals 100. Choose a normal, representative year as the base.
Year-over-year change: Change % = (Value t − Value t−1) ÷ Value t−1 × 100; Index minus 100 gives the cumulative percentage change since the base year.
Common-size cash flow base: Item % = Cash flow item ÷ Total revenue × 100; An alternative is to express items as a share of total cash inflows or outflows. Use the base the question states.

How to solve Common-Size and Trend Analysis questions

Use this method for any common-size or trend question, whether it asks for a calculation or an interpretation.

1Identify the type: vertical (one period, share of a base) or horizontal/trend (several periods, relative to a base year).
2Choose the base: revenue for the income statement, total assets for the balance sheet, unless the question says otherwise.
3Divide each required line by the base and multiply by 100. For trend, divide each year by the base-year value.
4Check your result: balance sheet percentages should sum to 100% on each side, and income statement subtotals should reconcile.
5Compare across periods or against peers. Look at which percentages moved most.
6Link the change to a cause: margin pressure, a change in financing mix, an acquisition, or a different accounting policy.
7Pick the option that matches the calculation and the logical interpretation. Discard options that confuse vertical with horizontal.

Quickest way: Ratio-to-base shortcut

When to use it: Use when options are close and you only need a direction or one or two percentages.

Compute only the line asked about, not the whole statement.
Use the calculator: enter line item ÷ base × 100. On the TI BA II Plus, key 180 ÷ 600 × 100 = to get 30.
For a trend index, key later value ÷ base value × 100 =.
Estimate first: if the item is just under a quarter of the base, the answer is just under 25%. Remove options far from that.
If asked whether a ratio rose or fell, compare fractions directly without computing all years.

Common mistakes in Common-Size and Trend Analysis

Using the wrong base, such as dividing balance sheet items by revenue.
Students remember that revenue is the base but forget it applies only to the income statement.
Fix: Say it aloud: income statement over revenue, balance sheet over total assets.
Mixing up vertical and horizontal analysis.
The words sound like direction on the page, not what they measure.
Fix: Vertical means within one period, as a share of a base. Horizontal means across periods, as a change from a base year.
Reading an index of 120 as a 120% increase.
The index level and the percentage change look the same.
Fix: Subtract 100. An index of 120 means a 20% rise from the base year.
Concluding that rising absolute profit means improving profitability.
Students ignore the revenue base. Profit can rise while its percentage of revenue falls.
Fix: Check the common-size margin. Compare profit growth with revenue growth.
Comparing peers without checking accounting differences.
Percentages look comparable even when policies are not.
Fix: Check inventory methods, depreciation, IFRS vs US GAAP, and fiscal year ends before drawing a conclusion.

Worked examples

Example 1

A company reports revenue of $800 million, cost of goods sold of $520 million, operating expenses of $160 million and net income of $64 million. What are the common-size cost of goods sold and net profit margin? Options for COGS share: A) 20%, B) 65%, C) 80%.

Show the solution

The base for the income statement is revenue: $800 million.
COGS percentage = 520 ÷ 800 × 100 = 65%.
Net margin = 64 ÷ 800 × 100 = 8%.
Check: gross margin is 35%, operating expenses are 20% of revenue, which leaves 15% before interest and tax. Net income of 8% is plausible after those.

Answer: Common-size COGS is 65% (option B) and the net profit margin is 8%.

Example 2

A company's revenue was $250 million in Year 1 (base year), $275 million in Year 2 and $330 million in Year 3. Operating income was $25 million, $27.5 million and $29.7 million. What is the Year 3 revenue index and what happened to operating margin? Options for the revenue index: A) 110, B) 132, C) 152.

Show the solution

Year 3 revenue index = 330 ÷ 250 × 100 = 132.
Revenue is therefore 32% above the base year.
Operating margin Year 1 = 25 ÷ 250 = 10.0%.
Operating margin Year 2 = 27.5 ÷ 275 = 10.0%.
Operating margin Year 3 = 29.7 ÷ 330 = 9.0%.
Revenue grew strongly but margin fell by one percentage point. Operating income rose in currency terms but declined as a share of revenue.

Answer: The Year 3 revenue index is 132 (option B). Operating margin fell from 10.0% to 9.0%, so growth came with weaker profitability.

Exam tips

Read the base in the stem. If it says total assets or revenue, use that exactly.
On three-option questions, first eliminate options that compute the wrong ratio, such as dividing by the wrong base.
Expect interpretation items: a percentage rose or fell, and you pick the likely cause or the correct conclusion.
Remember that index 100 is the base year. Convert index values to percentage change by subtracting 100.
Do not overread common-size data. It shows where to look, not why a change happened.

Practice questions from Financial Analysis Techniques

Common-Size and Trend Analysis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Common-Size and Trend Analysis: frequently asked questions

What is the difference between common-size and trend analysis?

Common-size (vertical) analysis expresses each item as a percentage of a base within one period, such as revenue. Trend analysis (horizontal) tracks the same item across periods relative to a base year. The first shows structure and the second shows change.

What base do you use for common-size statements?

For the income statement the base is usually revenue. For the balance sheet it is total assets, which equals total liabilities plus equity. For cash flow statements the base may be revenue or total inflows and outflows, so follow the question.

Why is common-size analysis useful for comparing companies?

It removes the effect of size. A small firm and a large firm can be compared by margins and cost structure instead of absolute currency amounts. You should still check that their accounting policies are consistent.

How do you calculate a trend index?

Divide each year's value by the base-year value and multiply by 100. The base year is 100. An index of 135 means the item is 35% above the base year.