Tangible common equity ratio is a financial figure that is used to show financial stability of a bank or some other financial institute. This figure show the amount of loss a bank or other financial institute can bear before the entire stockholder equity is wiped out from the bank. In order to find out the tangible common equity ratio we need to have two financial figures one is the total equity of the company and the other one is the amount of intangible assets.
To calculate tangible common equity ratio we subtract intangible assets, goodwill and preferred stock of the company from the total equity of the company. The resultant figure is then divided by total value of the tangible assets of the company. Tangible assets can be calculated by subtracting good will and intangible assets from the total assets.
This ratio was widely used in 2008 during the credit crunch time when recession hit most of the banks and financial institutions. The approach used to implement tangible common equity ratio is called conservative approach with the help of this approach it is very easy for the investors to evaluate the future and the worst case scenarios for their investments in the most accurate and risk free way. This ratio enables the investors to find out the percentage of common stock received by the shareholders of the company in case of liquidation of the company. The formula of this ratio can be shown as under:-
Tangible Common Equity = Total Equity – Intangible Assets – Good will – Preferred Stock
Tangible Common Equity Ratio = Total Common Equity/ Total Assets
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