Ratios are extracts. Common-sizing makes the whole statement comparable. There are two operations, and each answers its own question:
- Vertical: every P&L line ÷ revenue, every balance-sheet line ÷ total assets. The question is what's the structure? Where does each rupee of revenue go, and what is each asset dollar parked in? Vertical kills the size difference between a ₹2,55,000 crore company and a ₹89,000 crore one, and between the same company in 2016 and 2025.
- Horizontal: every line expressed as an index against a base year (base = 100), or as year-over-year growth. The question is what's growing faster than what? A line that outgrows revenue for years is either operating leverage arriving (good) or cost bloat and balance-sheet swelling (bad). Horizontal analysis is the earliest place either one shows up.
Can you common-size Indian and US statements directly?
A format trap comes first, and it separates India from the US. Indian Schedule III P&Ls present expenses by nature: materials consumed, employee benefits, depreciation and other expenses, regardless of function. US GAAP presents them by function: cost of goods sold, SG&A and R&D, with depreciation and wages scattered inside those lines. IFRS allows either. So "gross margin" isn't natively comparable between an Indian and a US filer. An Indian company's "materials cost" leaves out the manufacturing wages and factory depreciation that a US company carries inside its COGS. Before you common-size across the two, you've got two options. Rebuild an approximate COGS for the Indian company from the notes, as materials ± stock changes plus an estimated manufacturing share of wages and depreciation. Or compare only at lines that survive both formats: revenue, EBITDA, EBIT, PBT, PAT. This one trap invalidates half the India-vs-US margin tables you'll see on the internet.
Now the full builds. One is Indian and one is US. All figures are illustrative, modeled on ~FY24/FY25 scale, so pull the actual filings. For HUL that's the hul.co.in investor centre or BSE, and for Costco it's the 10-K from SEC EDGAR.
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Worked example: Hindustan Unilever's vertical and horizontal P&L
Build 1: Hindustan Unilever (India, Ind AS, March FY), vertical P&L, FY25
| ₹ crore | FY25 | Vertical (% of revenue) |
|---|---|---|
| Revenue from operations | 62,000 | 100.0 |
| Cost of materials (incl. traded goods, net of stock changes) | 30,500 | 49.2 |
| Employee benefits | 3,100 | 5.0 |
| Advertising & promotion | 6,200 | 10.0 |
| Other expenses | 7,750 | 12.5 |
| EBITDA | 14,450 | 23.3 |
| Depreciation & amortization | 1,240 | 2.0 |
| EBIT | 13,210 | 21.3 |
| Other income | 800 | 1.3 |
| Finance costs | 350 | 0.6 |
| Profit before tax | 13,660 | 22.0 |
| Tax | 3,470 | 5.6 |
| Profit after tax | 10,190 | 16.4 |
Read it like a machine diagram. Of every ₹100 of soap sold, ~₹49 buys inputs. Then ₹10 buys the advertising that is the moat's maintenance capex, and only ₹5 pays people because brands scale and headcount doesn't. ₹23 survives as EBITDA. Keep your eye on the A&P line. It's discretionary quarter to quarter and strategic over decades, the classic margin-management lever. Cut it and margins "improve" while the brand wears away, and horizontal analysis is how you catch that, as you're about to see.
Build 1b: HUL horizontal P&L, FY21 = 100 (illustrative)
| Index (FY21 = 100) | FY21 | FY22 | FY23 | FY24 | FY25 | FY25 vertical % |
|---|---|---|---|---|---|---|
| Revenue | 100 | 111 | 126 | 129 | 132 | 100.0 |
| Materials | 100 | 116 | 135 | 132 | 134 | 49.2 |
| Employee | 100 | 110 | 121 | 130 | 139 | 5.0 |
| Advertising | 100 | 107 | 116 | 131 | 142 | 10.0 |
| EBITDA | 100 | 102 | 111 | 122 | 122 | 23.3 |
Underlying ₹ crore figures: revenue went from 47,000 to 62,000, materials from 22,700 to 30,500, employee costs from 2,230 to 3,100, A&P from 4,380 to 6,200 and EBITDA from 11,815 to 14,450. Other expenses held at 12.5% of revenue throughout.
You can read the story straight off the indices. FY22 to FY23 was the commodity squeeze. Materials sprinted to 135 while revenue reached only 126, and vertically, materials peaked at 52.0% of revenue in FY23 against 48.3% in FY21. Advertising was cut to cushion the blow, to an index of 116 against revenue's 126. FY24 and FY25 reverse both. Inputs deflate, and A&P is rebuilt faster than revenue, 142 against 132, to defend share. The net result is an EBITDA index of 122 against revenue at 132, with margins ~1.8pp below FY21. Part of that is unrecovered inflation and part is deliberate brand reinvestment. Vertical showed you each year's structure. Only horizontal showed you the sequence: squeeze, cushion, rebuild. You need both, always.
Worked example: Costco's vertical and horizontal P&L
Build 2: Costco (US GAAP, fiscal year ends ~early September), vertical P&L, FY24
| $m | FY24 | Vertical (% of total revenue) |
|---|---|---|
| Merchandise sales | 249,200 | 98.1 |
| Membership fees | 4,800 | 1.9 |
| Total revenue | 254,000 | 100.0 |
| Merchandise costs | 222,400 | 87.6 |
| SG&A | 22,300 | 8.8 |
| Operating income | 9,300 | 3.7 |
| Interest & other, net | 500 | 0.2 |
| Profit before tax | 9,800 | 3.9 |
| Tax | 2,400 | 0.9 |
| Net income | 7,400 | 2.9 |
The vertical statement exposes the business model in two lines. Merchandise gross margin is (249,200 − 222,400) ÷ 249,200 ≈ 10.8%, roughly half a conventional supermarket's. Yet the membership line, a mere 1.9% of revenue, is 4,800 ÷ 9,300 ≈ 52% of operating income. Costco sells goods at near-cost as the customer-acquisition engine and monetizes trust as a subscription. Its "weak" gross margin is the strategy working. The KPI that matters is membership renewal (~90%+), and markup comes a long way behind. That's the engine-over-label test from peer selection, and you found it in a vertical common-size you built in ten minutes, with no broker note in sight.
Build 2b: Costco horizontal, FY20 = 100 (illustrative)
| Index (FY20 = 100) | FY20 | FY21 | FY22 | FY23 | FY24 |
|---|---|---|---|---|---|
| Total revenue | 100 | 117 | 136 | 145 | 152 |
| Merchandise costs | 100 | 117 | 136 | 145 | 150 |
| SG&A | 100 | 114 | 128 | 145 | 163 |
| Operating income | 100 | 124 | 144 | 150 | 172 |
Underlying $m: revenue went from 167,000 to 254,000, a ~11% CAGR. Merchandise costs went from 147,900 to 222,400 and SG&A from 13,700 to 22,300. Operating income went from 5,400 to 9,300, a ~14.6% CAGR.
Here's the reading. Merchandise costs tracked revenue almost in step, 150 against 152. Holding prices down is the brand, so there's no gross-margin harvesting. SG&A outgrew revenue at 163, which is deliberate wage investment. And operating income still outgrew everything at 172, because the membership annuity compounds ahead of costs. At a 3.7% operating margin, tiny structural shifts are enormous. A 1pp move in merchandise costs ≈ $2.5bn ≈ 27% of operating income. Thin-margin businesses live and die in the second decimal of the vertical statement. Build it, and don't eyeball it.
What does a common size balance sheet show?
Do the same on the balance sheet, this time dividing by total assets. Out comes the funding model, in one column, just as loudly. Take HUL first (illustrative, ₹80,000 cr total assets). Goodwill plus acquired intangibles ≈ 45,200 ≈ 56% of total assets. The 2020 GSK Consumer merger brought in Horlicks, and it stays in the sheet for good. So HUL's ROE and ROCE carry a giant acquired-intangibles denominator, and you have to read them goodwill-in and goodwill-out. Trade payables ≈ 15,200, or 19% of assets, against receivables ≈ 3,100, or 3.9%. Suppliers finance the machine, the float you met in the liquidity work. Now Costco (illustrative, $70,000m total assets). Inventory is 18,600 (26.6%) and accounts payable 19,400 (27.7%), so payables exceed the entire shelf. The membership warehouse turns its inventory before it pays for it. PP&E is 27,400 (39%), because Costco owns its warehouses. That's a deliberate anti-rent, anti-landlord position. It also mutes the lease-standard trap you'll meet in the hygiene layer. Two columns of percentages, two complete business models.