Tangible Common Equity Ratio
What is the Tangible Common Equity Ratio?
How Does the Tangible Common Equity Ratio Work?
Let's say Company XYZ has $40 million of assets and $25 million of liabilities. Its common patents on the products it sells, so we must subract those. Using the formula above, Company XYZ's tangible common is $15 million - $5 million = $10 million.is $40 million - $25 million = $15 million. It has no . However, $4 million of Company XYZ's assets are intangible assets -- mostly from previous acquisitions and trademarks. Another $1 million of its assets are
To calculate the tangible common equity ratio, we then divide this $10 million by $35 million (Company XYZ's equity.
Company XYZ tangible common equity ratio = $10,000,000/$35,000,000 = 0.2857
Virtually none of Company XYZ's intangible assets have value in a event (whereby Company XYZ is no longer a going concern). Notably, however, Company XYZ's patents (which are intangible assets) may indeed have value during a liquidation and are thus generally left in the assets total.
Why Does the Tangible Common Equity Ratio Matter?
The tangible common equity ratio is a common indicator of bank risk and
Equity, in general, is the difference between a company's assets and liabilities. Intuitively, it represents what's left over if all the assets are sold and all the debts are repaid. However, some of those assets -- intangible assets -- can't really be sold for much during a even though they may contain tremendous value for their owners.