Lesson 5 of 6 · 13 min
Common-size balance sheets
Dividing every balance sheet line by total assets strips out size, so the composition of assets and financing can be compared across companies and over time, revealing liquidity, solvency and strategy.
In short
- Liquidity = ability to meet short-term obligations (turning assets into cash). Solvency = ability to meet longer-term obligations (financial structure).
- Vertical common-size analysis: each balance sheet item as a % of total assets. (Horizontal analysis states items relative to a base-year value.)
- Use it for time-series analysis (one company over time) and cross-sectional analysis (against peers or industry data).
- Read the mix: high cash and securities with low current liabilities → liquid; high liabilities as a % of assets → solvency risk; goodwill → past acquisitions; heavy PP&E → capital-intensive or in-house production.
- Industry norms differ widely, so judge a company against its own sector.
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