Question

Analyze the following common size income statements for 3T Company:

	2015	2014
Net sales	100%	100%
COGS	89	87
Gross margin	11%	13%
Selling, general and administrative	7	9
Restructuring, asset impairments and other charges	0	9
Income/(loss) from operations	4%	(5)%
Interest expense	(1)	(2)
Income/(loss) before taxes	3%	(7%)
Provision for/(benefit from) income taxes	1	0
Income/(loss) after taxes	2%	(7)%
Discontinued operations, net	6	1
Net income (loss)	8%	(6)%

Answer 1

The common size income statement is a very useful document for analysing the position and performance of a company.

In the given statement we can see that the cost of goods sold has increased from 87 % in 2014 to 89% in 2015. This has brought down the gross margin from 13 % to 11% during this period. The selling and general and administrative expenses however have reduced from 9 % to 7%. There are no restructuring, asset impairment and other charges in 2015 due to which there is an income from operations 4% instead of a loss from operations in 2014.

The interest expense has reduced which indicates repayment of some amount of debt. This has again converted the loss before taxes to Income before tax of 3% in 2015. A provision for income taxes has been made to the tune of 1%. Due to this the income after taxes is 2% in 2015 rather than a loss of 7% in 2014. There is income from discontinued operations to the amount of 6% in 2015 which has brought the net income to 8% in 2015 rather than a net loss of 6% in 2014.

Thus overall the profitability position of the company has improved.