Comparative Balance Sheet Analysis

A comparative balance sheet analysis is a method of analyzing a company's balance sheet over time to identify changes and trends. Public companies are required to include the information needed for a comparative balance sheet analysis in their quarterly and annual reports to the SEC, though it can be useful to pull together more data on your own for a longer-term analysis.

How to complete a comparative balance sheet analysis

The first step to complete a comparative balance sheet analysis is to get organized. Locate the company's balance sheet data and arrange it in a table such that each account is shown side by side over time. Make sure the data is in regular time intervals for consistency. In its most basic form, this could be as simple as two quarterly snapshots, side by side. In other cases, it may be more informative to compare more snapshots over time. A farming company with distinct seasonal activities, for example, may require that you review 12 consecutive monthly balance sheets in order to understand how its seasonality impacts the balance sheet's inventory, accounts receivable, and accounts payable.

Next, compare how each account has changed over time. Did cash go up, down, or remain constant? What about inventory, accounts receivable, or accounts payable? Continue working down the balance sheet, noting how the different accounts interact and change together over time. For example, if the company shows an increase in real estate assets, do you see a corresponding increase in debt or equity capital? Can you formulate an educated guess as to how the company was likely to have funded the real estate purchase?

More advanced techniques to compliment a comparative balance sheet analysis

To take your analysis to the next level, you can add additional techniques to make the comparative balance sheet analysis even more powerful. For example, you can show each of the balance sheet accounts as a percentage of the company's total assets. By comparing how these numbers change over time, you can see not just how the balance sheet is changing, but also how its composition is shifting on a common-sized basis.

Another common technique is to include additional financial ratios related to the balance sheet in the comparative analysis. A bank, for example, may require a company to maintain a maximum debt to equity ratio. By including that ratio in the comparative analysis, an equity analyst can monitor the company's balance sheet to ensure there is minimal risk of tripping that restriction.

The key in each case is to consider the numbers over time to understand and identify changes and trends.

An example of a comparative balance sheet analysis

Let's consider the following hypothetical balance sheet, with common-sized calculations already included.

In this example, we start our comparative balance sheet analysis by examining how each account changed from the first year to the second. In this case, the company's cash has increased quite a bit, alongside a steep decline in inventory. The decline in inventory is greater than the increase in cash, driving a decrease in total assets.

Reviewing the common-sized figures gives even more context to the changes. Cash increased from 19% of total assets to over 73%, while inventory ended year two at just 12%.

The company's accounts payable decrease sharply as well on the liabilities side, while its other short-term debt declined, but to a much lesser degree. Together, those accounts drove total liabilities lower, while shareholders' equity increased from $75 to $130.

The common-sized numbers on this side of the balance sheet are even more informative, here. In year one, the company was considerably leveraged with liabilities at 86% of total assets. In year two, that number is much lower, at just 68%.

Without the income statement, statement of cash flows, and the ability to ask management questions, we can't know for sure what drove these changes to the company's balance sheet. This company could be winding down operations, it could be going out of business, or it may have tripped a loan covenant and been forced to deleverage quickly. Whatever the case, our comparative analysis revealed major changes across the entire balance sheet.

Now it's your turn

Performing a comparative balance sheet analysis is a straightforward and highly effective method for analyzing a company's balance sheet. As you follow the company over time, the trends and changes will become even easier to spot with more familiarity.

Remember, though, that the company's balance sheet is just a snapshot in time. It's equally important to consider its income statement and statement of cash flow. And, at the end of the day, the company's financial statements are just a report of how the company has performed over time. Always take the time to take what you've learned from the numbers and apply it to what's actually happening at the company. That last step is the key to taking a financial analysis and translating it into an actionable investment decision.

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