 Common-sized financial statements are the next logical step in vertical analysis. Using vertical analysis, income statements and balance sheets are converted from dollars to percentages. This makes it much easier to compare companies of different sizes. For example, Target and Walmart are competitors. Most think of one of these two companies when they think about discount retailers. However, as you can see by the numbers reported on the slide, Walmart is more than five times bigger than Target when we look at revenue. When we compare the income statements of the two companies, there's no comparison really. Walmart has significantly higher revenue and operating income. But this is exactly why we need common-sized financial statements, because otherwise the larger company would always look like the better performer. In order to create common-sized financial statements for Target and Walmart, we'd take the vertical analysis formula to determine the percentages of key income statement items. Then we can compare the two companies and remove the impact of the size differential. In fact, now these companies seem much closer and more comparable as you might have otherwise expected. Finally, common-sized financial statements are frequently used in a process called benchmarking. Benchmarking compares a company to some standards set by others, which could be a key competitor or an industry average. The goal of benchmarking is to create goals for improvement.