Common Size Balance Sheet Overview
A common size balance sheet includes a column that notes the percentage of the total assets (for asset line items) or the percentage of total liabilities and shareholders' equity (for liability or shareholders' equity line items). This format is useful for comparing the proportions of assets, liabilities, and equity between different companies, particularly as part of an industry analysis or an acquisition analysis.
It is extremely useful to construct a common size balance sheet that itemizes the results as of the end of multiple time periods, in order to construct trend lines to ascertain changes over longer time periods.
For example, if you were comparing the common size balance sheet of your company to that of a potential acquiree, and the acquiree had 40% of its assets invested in accounts receivable versus 20% for your company, that may indicate that aggressive collection activities could reduce the acquiree's receivables if your company were to acquire it (subject to the existence of any special problems with the customers of the acquiree).
Another possible use of this format is within a benchmarking study. A company could benchmark its financial position against that of a best-in-class company by using common size balance sheets to compare the relative amounts of their assets, liabilities, and equity. Any significant differences would trigger a detailed review of the reasons for the differences, which may lead to the implementation of best practices to bring the financial position of the company into alignment with that of the best-in-class company.
The common size balance sheet is not required under GAAP or IFRS. However, being a useful document for analysis purposes, it is commonly distributed within a company for review by management, and may be found as a standard report template in many commercially-available accounting software packages.
There is no mandatory format for a common size balance sheet, though percentages are nearly always placed to the right of the normal numerical results. If you are reporting balance sheet results as of the end of many periods, you may even dispense with numerical results entirely, in favor of just presenting the common size percentages.
Common Size Balance Sheet Example
Here is an example of a common size balance sheet that contains the balance sheet as of the end of a company's fiscal year for each of the past two years, with common size percentages to the right:
Statement of Financial Position
|Total current assets||$9,600||$7,200||60.8%||56.7%|
|Total fixed assets||6,200||5,500||39.2%||43.3%|
|Total current liabilities||$3,680||$2,760||23.3%||21.7%|
|Total liabilities and equity||$15,800||$12,700||100.0%||100.0%|