Tangible Common Equity

What is Tangible Common Equity?

Tangible Common Equity refers to a firm’s Capital in physical form which is used to examine the ability of the firm to deal with any potential losses. The type of firm that usually employs this measurement are financial companies. Since a firm owns both tangible and intangible assets, this method is important.

Using TCE as a measurement is useful when a firm holds large amounts of preferred stocks. For example, banks in the U.S received money for a Bailout in the 2008 financial crisis. In exchange for those funds, the banks issued preferred stock to the government. Remember that a Bank can increase TCE by converting preferred shares to common shares.

Using TCE can also help in calculating the capital adequacy ratio. This is another measurement of examining the solvency of a bank and is also considered as a conservative measure.

Note that TCE is not important for GAAP or bank regulations. It is basically used on the internal front as a form of capital indicator.

Tangible Common Equity Ratio Formula

Tangible Common Equity Ratio = (Total shareholder's Equity - Total Intangible Assets - Preferred Stock) / (Total Assets - Total Intangible Assets)

Return on Tangible Common Equity

The return in tangible common equity is calculated by dividing the annualised net Earnings of a firm of common shareholders by the average monthly common shareholders’ equity.

The tangible common shareholders’ equity will be equal to the total shareholders’ equity less preferred stock, intangible assets not identified and goodwill.

Tangible Common Equity Vs Tier 1 Capital

The difference is mentioned below: