Question

In 200 words What tools are available to compare companies that differ in size?

Answer 1

The most important and most relevant tool to compare companies that differ in size is the “use of common size financial statements”. In the common size financial statement i.e. the horizontal analysis of the financial statement a figure of the line item is reported in the form of a percentage. This use of percentage allows the users of financial statements of different companies to analyze companies of different sizes using the same common basis. For example consider a large company with revenue of $100 billion and a small company with revenue of $10 million. The large company has an EBITDA of $35 billion and the small company has an EBITDA of $4 million. In the common size financial statement EBITDA will be reported as a percentage of sales. Thus EBITDA % of the large company = 35/100 = 35% and that of the small company = 4/10 = 40%. This makes comparison easier and we can say that the small company is more profitable on an EBITDA level.

Other tools that are used are use of ratio analysis. Companies of different sizes can be compared using ratios like current ratio, debt/equity ratio, ROA and ROE ratio, asset turnover ratio etc.

(Total = 200 words)