How to Calculate Percentage Change in Comparative Balance Sheet
Understanding the financial health of a company is crucial for investors, creditors, and management. One of the key ways to assess this is by analyzing the percentage change in a comparative balance sheet. This article provides a step-by-step guide on how to calculate percentage change in comparative balance sheets, helping you gain valuable insights into a company’s financial performance over time.
Step 1: Gather Comparative Balance Sheets
To calculate the percentage change in a comparative balance sheet, you first need to gather the balance sheets for the two periods you are comparing. These balance sheets should be for the same company and should cover the same fiscal year or period. Make sure that the balance sheets are in a standardized format, such as the common size balance sheet, which presents all items as a percentage of total assets.
Step 2: Identify the Items to Compare
Next, identify the specific items on the balance sheet that you want to compare. This could be assets, liabilities, equity, or any other financial metric. It’s essential to compare items that are relevant to your analysis and that have changed over the periods.
Step 3: Calculate the Change in the Item
Once you have identified the items to compare, calculate the change in the item between the two periods. This can be done by subtracting the value of the item in the earlier period from its value in the later period. For example, if you are comparing the total assets of a company, you would subtract the total assets of the earlier period from the total assets of the later period.
Step 4: Calculate the Percentage Change
To calculate the percentage change, divide the change in the item by the value of the item in the earlier period and multiply by 100. This formula can be expressed as:
Percentage Change = (Change in Item / Value in Earlier Period) 100
For instance, if a company’s total assets increased from $1 million in 2020 to $1.2 million in 2021, the percentage change would be:
Percentage Change = (($1.2 million – $1 million) / $1 million) 100 = 20%
Step 5: Interpret the Results
After calculating the percentage change, it’s essential to interpret the results in the context of your analysis. A positive percentage change indicates an increase, while a negative percentage change indicates a decrease. By comparing the percentage changes of different items, you can identify trends and potential areas of concern or opportunity for the company.
Conclusion
Calculating the percentage change in a comparative balance sheet is a valuable tool for analyzing a company’s financial performance over time. By following these steps, you can gain a better understanding of how various financial metrics have changed and make more informed decisions about your investments or business strategies.
