Tangible equity or tangible common equity is a measure used to evaluate the strength of a financial institution. It is considered a conservative measure of total company value. The measure is calculated by subtracting preferred equity and intangible assets from total book value. Intangible assets are non-physical assets that still carry value. Preferred equity is a common capital-raising tool for banks, because institutions with a high level of preferred equity are considered to have a low risk for default.
Research intangible assets for the financial institution using its annual report. Intangible assets are not physical or tangible. The values will be listed on the balance sheet. Examples of intangible assets include patents, trademarks, copyrights, goodwill and business processes, or brand equity. For example, the annual report might say that it estimates intangible assets to be valued at $5 million.
Find preferred equity on the balance sheet. Preferred equity is considered to have attributes of both debt and equity. Preferred equity for this example is valued at $15 million.
Research the company's book value. Book value is the same as stockholders' equity on the balance sheet. For this example, assume book value is $25 million.
Calculate tangible equity. Subtract intangible assets (including goodwill) and preferred equity from book value. The calculation is $25 million minus $5 million minus $15 million equals $5 million.
- ROTCE | legal definition of ROTCE by Law Insider
- INTANGIBLE | definition in the Cambridge English Dictionary
- Goodwill Industries International, Inc. - Goodwill Industries International
- Congressional Research Service. "Costs of Government Interventions in Response to the Financial Crisis: A Retrospective," Summary Page. Accessed Aug. 26, 2020.
- Board of Governors of the Federal Reserve System. "Dodd-Frank Act Stress Test 2020: Supervisory Stress Test Results," page 1. Accessed Aug. 26, 2020.
- Bank of America. "2019 Annual Report," page 101. Accessed Aug. 26, 2020.
James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.