Analyze A Common Size Balance Sheet, Income Statement and Other Financial Statements – Common Size Analysis

What is the Difference Between a Common Size Balance Sheet and a Regular Balance Sheet?

Common Size Analysis of Financial Statements involves looking at the numbers on the financial statement as a percentage of a total rather than their absolute value. Typically investors will look at a company’s common size balance sheet and common size income statement.

This is helpful when not only looking at a single company’s financial statements, but also comparing multiple business of different sizes at one time. Let’s take a look at an example of a normal balance sheet and a common size balance sheet for several companies:

You may be comparing the financial statements of a few different companies. The companies are different sizes, and have different strengths and weaknesses in their financial strength.

Normal financial analysis would start by comparing the balance sheets of multiple businesses like this:

Whereas, a typical common size balance sheet would look like this:

In this first image, it is obvious to see that company C is much larger (by way of total assets.) But how does company C’s \$3 million in cash compare to a smaller company, such as company A, with \$1 million in cash?

This is just one example of where common size analysis of financial statements can help investors see differences in companies’ capital structures, strategies and financial standing.

It turns out, Company A’s \$1 million is just about identical to Company C’s \$3 million when looked at as a percentage to total assets.

What else could this information above tell us about Companies A, B and C?

Company B’s low cash balance may be a cause for alarm, certainly considering its total current liabilities. Company B also has a very high level of accounts receivable and inventory. Is the company having difficulty collecting money from customers? Difficulty selling its product? These numbers would warrant a much closer inspection of Company B’s business.

Company C has spent much more money on Property, Plant and Equipment (which make up 47% of its total assets). This may be showing an investment to manufacture materials in-house, or own equipment, buildings, etc. instead of leasing.

Let’s use this idea of common size financial statement analysis in a real life example.

Common Size Balance Sheet Analysis

(For our general guide at analyzing a company’s balance sheet – see our guide here: Guide to Reading a Balance Sheet)

Consider Intel’s (Ticker: INTC) balance sheet:

(click to enlarge)

Intel has divided all numbers above by 1 million to make the numbers easier to read. When importing these numbers into a spreadsheet for more in depth analysis, I like to get those million back into the numbers for consistency down the line. Also, you need several years’ worth of data for comparison. After we add an additional year and multiply by 1,000,000, the balance sheet looks something like this:

Now it starts to get a little confusing.  But analysis of a company’s financial statements should consist of looking at much more than just a couple years.

Let’s say I want to see how Intel’s balance sheet has changed over longer periods of time, so I bring in even more data:

Depending on what I am looking for, this is when the numbers start to be a little overwhelming. Especially if I then want to compare this 6 years’ worth of data to another company or the industry average. How could I easily compare some of Intel’s numbers, typically in the tens of billions of dollars, to a much smaller company who may only make tens of millions of dollars per year? Or asses how Intel’s liquidity compares to the rest of the industry? Or asses how much Intel is spending on things like research and development compared to smaller companies in the rest of the industry?

Constructing a Sample Common Size Balance Sheet

One way is to convert all of the columns shown above into a common size balance sheet (or income statement – more on that below) for easier analysis.

Simply insert columns, set up some division, and let excel work its magic:

(click to enlarge)

We want to calculate the amount that each item on the balance sheet contributes to Intel’s total assets. As you can see from the picture above, Intel’s \$3.35 billion in cash makes up 6.64% of Intel’s total assets in the year 2008.

Now we can more easily see how each component of the balance sheet contributes to the company’s financial standing.

This gives us a much better set up to see how Intel’s balance sheet has been changing over time. Has Intel become more liquid? Are they keeping as large of an inventory as other, smaller tech companies? Now it is much easier to figure out.

This data can be put into a graph to make trends in the data even clearer:

This chart below shows the common size balance sheet of Intel’s total assets. Notice the Y-axis is in percent, not dollars.

(click to enlarge)

For me, this graph is 1000x easier to read than columns and columns of numbers in the billions. Over time we are seeing Intel invest more into property, plant and equipment (looking at the income statement supports this as well – more on that below), becoming slightly less liquid and rely more heavily on acquisitions (as evidenced by the increase in Goodwill).

Notice we are just looking at assets, this type of balance sheet analysis can be used to check out the company’s liabilities as well. What percent of Intel’s liabilities is short term debt? What percent of Intel’s liabilities are long term borrowings? All this can be answered very simply by common size balance sheet analysis.

Common Size Income Statement Analysis

(For our general guide at analyzing a company’s income statement – see our guide here: Guide to a Company’s Income Statement)

This type of analysis of financial statements can be used on more than just the balance sheet. For example, the last 6 years of Intel’s income statement could also be used:

(click to enlarge)

In this chart above we are looking at how items on Intel’s Income Statement compare as a percentage of the company’s net revenue.

Here we can easily see that Intel’s gross margin has fallen over the last couple years, that may be something we want to look into. Are they building up staff to grow? Are they funneling money into new equipment, factories or technology? Or are they just having to lower prices due to competition?

When Revenue is changing so much (Intel went from \$38 billion in 2008 to \$52 billion in 2012) we would expect certain costs to rise in tandem with Intel’s total revenue. But it is hard to see if all of the company’s numbers are moving in unison by just glancing at the Income Statement. By breaking Intel’s numbers down into a common size income statement, it becomes much clearer and easier to see.

Conclusion – Why Use Common Size Financial Statements for Analysis?

You can get incredibly specific with this type of analysis, or use it to quickly analyze a company from a much broader view. Feel free to get creative in setting up your analysis. You could break up income by certain operating segments of the company (Operating income, income from selling off assets, income from trading securities, etc), or in combination with Return on Assets (ROA) or Return on Equity (ROE) to determine the assets that are increasing fastest (Are income producing tangible assets increasing? Or intangible assets that may be susceptible to management playing games with the balance sheet)? Or use the Statement of Cash Flow and break down the company’s use of cash.

This type of analysis allows investors to see the company’s financial statements in a different light. We used Intel in the examples for this article, but this type of analysis would be very good for looking at much faster growing companies where balance sheets are changing much more dramatically.

Like any type of analysis, this is hardly an “end all, be all” analysis. But it may help narrow where to focus in a company’s recent 10-q or 10-k statements for clarification. The charts above show Intel’s cash balance dropping and goodwill increasing, but it does not tell you the reason. Is the company using cash for acquisitions? Or is the company just failing to write down the value of its goodwill and just not generating enough cash from its operations? Further insight is required, but this analysis has clearly shown the changes in the company’s financial condition and should point you where to research further.

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1. Cosette says:

Hi Matt! This has been very useful for me with my financial class. I am having trouble calculating the percentages when converting from the consolidated statement of income to the common size balance sheet. Could you email me the spreadsheet you used to come up with graph specifically 2013? Thank you!

2. Hi Cosette,

Thanks for reading and thanks for the comment. I just sent you an email, let me know if there is anything else you need.

Thanks again!

Matt

Hey Matt
The first article, after many, that explains what I was looking for in detail! Thank you! Do you by any chance offer online one on one classes?

Thanks for the comment. I don’t have any offering like that currently. What other topics are you looking for help on?

4. Ramesh V says:

Hi Matt, Thanks for the wonderful content. Would you be able to send the spreadsheet to my email id.
I have a question on Warren Buffets Look-Through Earnings valuation, would you be able to provide a sample valuation of any stocks using this method. Thank you in advance.

1. Hi Ramesh V,

Thanks for the comment. I just sent the spreadsheet to you via email.
I think the method will work for many other companies, let me know what you find!

Matt

5. Salman says:

Hey Matt!
can you please share some samples of comments (in text, word) with respect to the above statements. I’ve a project regarding a certain company. I’ve already calculated the common-size percentages. Now i gotta comment on the significant changes over time and come up with recommendations. Need a li’l bit of idea. Thanks!

1. Hi Salman,
In my opinion, easiest items to identify would be looking at changes of the percentages over time, and commenting on that.

Just for example:
Are SG&A (Selling, General, and Administrative) expenses decreasing as a % of revenue? This could show company being more efficient (or less if declining).

Are accounts receivable larger percent of assets than they were 1 or 2 years ago? That could be a sign customers are slow to pay (That may be interesting right now as coronavirus hits)

Is a much larger % of debt current this year than last? That may mean the company may need to raise cash (through debt or share issuance), if what is on hand is not sufficient.

etc.