Financial Education

Just as with income statements, common size balance sheets can be presented either vertically or horizontally. A horizontal common size balance sheet expresses each year’s balance sheet items as a percentage of a given base year, while a vertical common size balance sheet expresses them as a percentage of a reference item.

Typically vertical common size balance sheets are presented in reference to total assets. This format allows the investor to compare the capital structure over time and across companies. In fact, creating such a presentation allows an investor to compare two companies even if they use different currencies, as both size and currency exchange issues are negated with the conversion to common size.

For forecasting purposes, it may also be useful to prepare a vertical common size balance sheet referencing each line item to sales. This is because many current assets and liabilities (accounts receivable, inventory, accounts payable, etc.) are influenced by the company’s sales level.

For more information, see all articles on: Common Size Analysis, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Security Selection

See also:

Common Size Analysis

Vertical Common Size Income Statements

Horizontal Common Size Income Statements

Profit Margins

Ratio Analysis