How to Build Common-Size Financial Statements

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Balance sheets are usually prepared at the end of a financial period. In short, a balance sheet is useful, but it’s only one piece of the puzzle. The coffee shop owner puts together a balance sheet to check finances as of December 31, 2024. Follow this simple step-by-step guide to complete the main sections of the balance sheet. It also adds retained earnings, which are profits you’ve kept instead of paying out.

Equity

Current assets amount to $3 million, long-term investments total $2 million, and property, plant, and equipment is valued at $5 million. Expressing these figures as percentages of total assets, current assets constitute 30%, long-term investments represent 20%, and PP&E accounts for 50%. A high equity percentage indicates a strong capital base and lower financial risk, while a lower percentage may reflect a more aggressive, debt-funded growth strategy. Changes in retained earnings also highlight profitability and dividend policies, offering clues about long-term financial health. Explore the common size balance sheet formula, its mechanics, and how it aids in analyzing financial health through percentage-based insights. Each line item on a balance sheet, statement of income, or statement of cash flows is divided by revenue or sales.

A common-size balance sheet is useful because it allows for easier comparison between companies of different sizes, as it presents financial information relative to a company’s total assets. A common-size balance sheet takes the amounts listed on a traditional balance sheet and converts them into percentages of the total assets. For example, if a company has $100,000 in assets and $70,000 in liabilities, its common-size balance sheet would show liabilities as 70% of assets. Obtain the balance sheet of the company or companies we want to analyze. We can find balance sheets in annual reports, financial statements, or online databases.

Because it is impossible to know exactly how long an asset will last, estimates are used. They are based on past experience with similar items or IRS guidelines for assets of that type. Notice that, through 2018, Delicious Desserts has taken a total of $16,000 in depreciation on its bakery equipment. Along with the balance sheet, the income and cash flow statements make up the trio of core financial statements. While a common-size balance sheet provides valuable information, it may not capture all relevant aspects of a company’s financial health. Additional analysis is often necessary for a comprehensive understanding of the financial condition.

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• For instance, a higher percentage of current assets relative to total assets indicates strong liquidity, which is essential for meeting short-term obligations.
• To convert the balance sheet’s values into percentages, divide each element by the total assets value, and multiply by 100.

It shows what your company owns, its debts, and shareholder equity. Accordingly by producing a balance sheet at the end of each accounting period, it is possible to monitor changes in each line item over time. For example, the following shows the vertical common size analysis for two accounting periods. The fourth column shows the bank’s common-size percentages as a percentile of the peer group’s percentages. 66% of the peer group (100% – 34%) have more net loans and leases than them as a percentage of total assets. This could be a weakness if loans provide excellent risk-adjusted returns.

We can also use the common-size balance sheet to compare the current ratio, debt-to-equity ratio, asset turnover, and other liquidity, solvency, and efficiency ratios of different companies. Common-size analysis can be applied to both the income statement and the balance sheet. For the income statement, the common base is usually the total revenue or sales, and for the balance sheet, it is usually the total assets or the total equity. By expressing each line item as a percentage of the common base, we can compare the relative proportions of different components of the financial statements across companies and over time.

To analyze changes in the balance sheet of the business over time

By looking at this common size income statement, we can see that the company spent 10% of revenues on research and development and 3% on advertising. Owners’ equity is the owners’ total investment in the business after all liabilities have been paid. For sole proprietorships and partnerships, amounts put in by the owners are recorded as capital. In a corporation, the owners provide capital by buying the firm’s common stock.

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• By expressing each line item as a percentage of the common base, we can compare the relative proportions of different components of the financial statements across companies and over time.
• Current assets represent short-term assets which you can use or convert to cash within a year.
• Another commonly cited ratio is net income as a percentage of revenue.
• When in doubt, please consult your lawyer tax, or compliance professional for counsel.

Another advantage of a balance sheet is that it can help identify areas of a company’s financial position that may need attention. Similarly, if a company has a high percentage of debt in relation to its assets, it may be over-leveraged and at risk of financial distress. Common size balance sheets alone aren’t sufficient to make investment decisions because they lack an approved benchmark for comparison. Hence, it’s essential to also peruse other financial statements, industry standards, and non-numerical information to make smart decisions. And, just like with the income statement, we must compare our numbers with the industry’s averages or with major competitors. In assessing financial leverage, the debt-to-equity ratio is particularly useful.

What Is Common Size Financial Statement?

This is an example of competitor or industry analysis used for business environmental analysis. The most common cash flow statement format is the indirect method, which begins with net income. This basically links operational cash back to the income statement.

In this section, we will discuss how to perform common-size analysis on balance sheets and what to look for when comparing different companies. We will also provide some examples of common-size analysis applied to real-world companies. A common size financial statement is a financial report, where all figures are presented as a percentage of the most important financial metric.

The key to keeping your balance sheet “balanced” is your assets must always add up to the same total as liabilities and equity combined. There are two primary types of common size analysis, each focusing on a different financial statement. Additionally our common size balance sheet calculator is available and can be used to make the calculations and comparisons referred to above. It’s actually a part of a decomposition of how most companies do product mix analysis. Revenue can be broken down into sales units and the average price per unit. This table is the equivalent of doing a common-size product mix analysis on sales units.

This company’s debt-to-asset ratio isn’t too high, but a better test is the ratio of annual operational cash flow divided by annual common size balance sheet debt service payments. The main tools of analyzing balance sheets are common-size analysis and balance sheet ratios. We’ll go straight to the full 3-year common size balance sheet of ABC.