What is the Tangible Common Equity Ratio?
The formula for tangible common equity ratio is:
Tangible Common Equity Ratio = (Common- Intangible Assets)/Tangible Assets
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.). that from net operating loss carryforwards are generally also subtracted from tangible common
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 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.event (whereby Company XYZ is no longer a
Why Does the Tangible Common Equity Ratio Matter?
The tangible common equity ratio is a common indicator of bank risk andin the banking industry. Essentially, it helps banks determine how much they can take in losses before the shareholder falls to zero.
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.