How to Create a Common Size Balance Sheet

How to Create a Common Size Balance Sheet

Creating acommon size balance sheetis a useful tool for businesses and investors to evaluate a company’sfinancial health. This type of balance sheet expresses each line item as a percentage of total assets, which allows for easier comparison between companies of different sizes. In this article, we will discuss the steps to create a common size balance sheet and how it can be used forinvestment decisions.

Step 1: Gather Financial Statements

The first step to creating a common size balance sheet is to gather a company’s financial statements, including the balance sheet and income statement. These statements can typically be found in the company’s annual report or on their website. It’s important to ensure that the statements are for the same time period to ensure accurate comparisons.

Step 2: Calculate Percentages

Once the financial statements have been gathered, the next step is to calculate thepercentagesfor each line item. This is done by dividing each line item by the total assets and multiplying by 100. For example, if a company has total assets of $1,000 and inventory of $200, the percentage for inventory would be 20% (calculated as $200/$1,000 x 100).

Step 3: Evaluate the Results

After calculating the percentages for each line item, it’s important to evaluate the results. This can include comparing the percentages to industry averages or to the company’s own historical data. Thisanalysiscan provide insight into areas where the company may be performing well or areas that may need improvement.

Investment Implications

Common size balance sheets can be useful for investors when evaluating potential investment opportunities. By comparing the percentages of different companies, investors can gain insight into which companies may be more financially stable or have better growth potential. Additionally, investors can use the analysis of a company’s common size balance sheet to identify potential red flags, such as high levels of debt or inefficient use of assets.

Conclusion

Creating a common size balance sheet can provide valuable insights into a company’s financial health. By calculating percentages for each line item and evaluating the results, businesses and investors can make informed decisions about future investments and strategies. Utilizing the common size balance sheet as a tool for analysis can help identify areas of strength and areas that may need improvement, ultimately leading to better financial outcomes.