Question

Imagine you are comparing two companies, one with $1 million in assets and the other with $100,000 in assets. Both had common-size cash percentages of 15% in year 1 and 14% in year 2. Do you consider the two changes in account balance to be equivalent? Or do you regard the change for one company differently from the change for another?

Answer 1

Answer: Yes; these are equivalent.

The company having $1 million (or $1,000,000) in total assets is much bigger than the company having $100,000 in total assets. Therefore, the amount of cash must match with the volume of business; the percentages of cash give such matching figures.

	Company 1		Company 2
Total assets	1,000,000		100,000
	Year 1	Year 2	Year 1	Year 2
Cash amount	1,000,000 × 0.15 = 150,000	1,000,000 × 0.14 = 140,000	100,000 × 0.15 = 15,000	100,000 × 0.14 = 14,000
Percentage change	---	(-10,000 / 150,000) × 100 = - 6.67%	---	(-1,000 / 15,000) × 100 = - 6,67%

The equivalent change (between the years) among the two companies is (- 6.67%). Cash decreases because of increasing operation.