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:
At the time Warren’s investing style, taught by Ben Graham, was to look for “cigar butt” stocks – stocks that were dirt cheap, but provided a “free puff” to investors willing to make the investment. Berkshire certainly could have filled that criteria, here is how Buffett tells the tale:
Breaking Down a Company’s Asset Growth With Analysis of the Changes in its Balance Sheet
Generally, increasing assets are a sign that the company is growing, but everyone can relate to the fact that there is much more behind the scenes than just looking at the assets. The goal is to determine how the asset growth of a company is financed.
To do so all we need is the last few years of a company’s balance sheet and the most basic financial statement equation:
The assets of a company are what the company owns. Typical examples of assets are; equipment to make a product, buildings owned, raw materials to create a product, inventory of the product to sell and cash in the bank.
Think of your household. Your car, your home, your furniture, TVs, Computers, bank accounts etc.
Generally, increasing assets are a sign that the company is growing, but everyone can relate to the fact that there is much more behind the scenes than just looking at the assets. Back to our household example:
Imagine watching a neighbor pull a sparkling brand new BMW into their driveway, getting out dressed in his fancy Italian suit, talking on the latest smartphone, and coming over to ask if you can watch his house for 2 weeks while he travels to sail in the Caribbean. You may think he is making it big, right? Maybe he got a big bonus from work, or a promotion…
That may very well be the case, or he may be racking up debt (liabilities) to finance these assets.
You may never find out which option applies to your neighbor, but thankfully the SEC requires publicly traded companies to be a little more transparent with their financials than your neighbors. [continue reading…]
10 Questions to Ask Before You Buy Your Next Stock
How do you determine whether a stock is a worthy long term investment? Here are a few questions to ask yourself before you make that next purchase. [continue reading…]
