Lesson 8 of 9 · All lessons in this module
- Revenue recognition: core principle and the five-step model
- Revenue recognition in practice and what it means for analysisVideo lesson
- Expense recognition and capitalising versus expensing
- Capitalised interest and capitalised development costsVideo lesson
- Non-recurring items, discontinued operations and accounting changesVideo lesson
- Basic EPS and the weighted average number of sharesVideo lesson
- Diluted EPS: if-converted, treasury stock and antidilutionVideo lesson
- Common-size income statements and margin analysis
- Integrated cases: capitalising, restated results and gross versus net revenue
Lesson 8 of 9 · 12 min
Common-size income statements and margin analysis
Expressing every income statement line as a percentage of revenue removes the effect of size, so margins can be compared over time and across companies, and differences point to strategy and cost structure.
In short
- Vertical common-size income statement: every line ÷ revenue. Supports time-series and cross-sectional comparison.
- Key margins: gross (gross profit ÷ revenue), operating (operating profit ÷ revenue), pretax (profit before tax ÷ revenue), net (net income ÷ revenue).
- Taxes are better compared with pretax income (effective tax rate) than with revenue.
- High gross margins often reflect differentiated products (brand, quality, technology, patents), usually supported by spending on R&D and advertising.
- Margins show where profitability changed; the analyst then investigates why.
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