Definition: A Common Size Balance Sheet is a financial statement that presents the assets, liabilities, and equity of a business with each line item shown as a percentage of the total category.
What Does Common Size Balance Sheet Mean?
What is the definition of common-sized balance sheet? A common size balance sheet is a refined version of the balance sheet itself, but also includes each single line item as a percentage of total assets, liability and equity apart from the conventional numeric value.
A Common-Size balancesheet scales down each element of the asset composition as per how much they contribute to the total assets (or liability and equity). It is used primarily for analysis and peer comparison. It gives investors a clear comparison of a company’s performance vis-à-vis the other players in the segment, in spite of the differences in size. This is just an analytical representation of a balancesheet and not a requirement of GAAP.
Let’s take a look at an example.
Example
For Example, Company A has $10 million in total assets, $7 million in total liabilities and $3 million in total equity. It also has $2 million in Cash. As the common-size balance-sheet reports the assets first in the order of liquidity, the top entry would be of Cash worth $2 million. Apart from this, it would also report the composition of this cash as a percentage of total assets, i.e. 20% ($2 million divided by $10 million).
Imagine comparing Company A, B and C that have their asset base as $2 million, $50 million and $1 Billion, respectively. Due to the huge differences in the asset size, the traditional way of comparing the absolute numeric figures would not be an accurate approach. Breaking down each one of them in common-size format would report every single line item as a percentage of total assets, which would much easier and logical to compare.
Summary Definition
Define Common Sized Balance Sheet: Common-sized balance sheet means a financial statement that shows each account as a percentage of the total account category.
