Tangible common equity can be defined as the ability of an organization or a business entity to deal with its operational losses. Tangible common equity is the measure of the capital of the organization that it can use to cope with the financial challenges and the operational losses occurring in the business. In order to calculate the tangible common equity the intangible assets, goodwill and the preferred equity is subtracted from the book value of the organization.
Tangible common equity can be used to measure the ability of the organization to deal with the operational losses however it is mostly calculated for the companies that have a large number of preferred stock. For example the tangible common equity is calculated for the US banks that have received large amount of federal bailout in year 2008 when financial crises hit the economy. These US banks released a large number of preferred stock to the government in return of the bailout funds that were used to support the economy of the financial institutions. In order to boost the tangible common equity of a company or an organization by converting the preferred stock of the company into the common stock.
Tangible common ratio can be used to calculate and evaluate the solvency of a bank or other financial institution. It is also known as the conservative measure of measuring a company’s value as well. Another way of evaluating financial institution is to evaluate the first tier of the capital such as common shares, preferred shares, retained earnings and deferred tax assets.
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