Comparative and common-size statements

Raw financial statements are hard to compare: a 39,000 rise in cost of sales means little until you know revenue rose too. Two simple techniques turn statements into information.

Horizontal (comparative) analysis compares each line with the prior period: change = current − prior, and % change = change ÷ prior × 100. IFRS requires comparative figures for the preceding period (IAS 1.38, carried into IFRS 18), so the data is always there. Over several years, a trend index sets a base year to 100 and expresses later years against it.

Vertical (common-size) analysis expresses every line as a percentage of a base in the same period: revenue for the income statement, total assets (or total liabilities and equity) for the balance sheet. Common-size statements remove the effect of size, so you can compare a business with itself over time or with a competitor ten times larger.

Reading the results is the point. Look for lines that grow faster than revenue (costs, receivables, inventory), shifts in the cost structure (gross margin falling while overheads fall), and changes in how the business is funded. A percentage from a tiny base can look dramatic (a cost rising from 200 to 600 is +200%), so always look at the amount too. And remember a change in accounting policy, an acquisition or a one-off item can distort the comparison — the notes tell you which.