CFA Level I · CFA Level I Exam · Analyzing Income Statements
An analyst converts each line of a company's income statement into a percentage of revenue so that she can compare the company with a larger competitor. This technique is best described as:
The technique is vertical common-size analysis. Each income statement line is divided by revenue for the same period, which removes differences in company size and lets an analyst compare a small firm with a larger competitor on a like-for-like percentage basis.
- Ahorizontal common-size analysis.
- Bvertical common-size analysis.Correct
- Ctrend analysis using a base year index.
Explanation
Vertical common-size analysis expresses each income statement item as a percentage of revenue in the same period, which removes the effect of size and allows comparison across companies. Horizontal analysis instead expresses items relative to a base-year value across time, so it is not what is described.
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