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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Tangible common equity equals book value minus intangible assets, goodwill, and preferred equity
Tangible common equity, (also known as "tangible equity capital," or occasionally "tangible common book value") is the book value of the company minus the value of all assets that would be worthless if the company were to liquidate, as well as all preferred equity. Specifically, this is equivalent to total equity minus Intangible assets, goodwill, and preferred equity.
Functionally, the metric is similar to tangible book value in that it removes subjective components of valuation (intangible assets and goodwill) from the calculation of a company's underlying worth. However, as tangible common equity also subtracts preferred equity from the book value, it does a better job estimating what the value of the company is to holders of specifically common stock. In this sense, tangible common equity can be considered the most conservative valuation of a company and the best approximation of the company's value should it be forced to liquidate.
The metric is particularly useful in analyzing companies with significant preferred equity. While simply discounting goodwill and intangible assets to arrive at tangible book value is effective in comparing a company's "hard assets" with those of subjective value, further subtracting preferred equity gives a more complete picture of just how much the company's "stuff" is worth to common shareholders. As such, the metric has come into use as a means of valuing banks that have issued significant preferred equity, such as those receiving government bailout money.[1]
It should be noted that for companies without preferred equity, tangible common equity and tangible book value are identical; as such, in companies with preferred stock, a significant discrepancy between these two figures might indicate an incommensurate amount of preferred equity.
In the News
On February 22nd, 2009, and February 24th, 2009 The Wall Street Journal and New York times (respectively) reported the Federal Reserve, in determining which banks were healthy and which ones required additional capital injections by the government, would "dwell on" tangible common equity as a measure of banks' health. [2][1] This makes it harder for banks with significant amounts of intangibles on its balance sheet to be classified as "healthy".
Examples
- In its most recent quarterly filing, Company XYZ reported $5 million in total assets and $3 million in total liabilities for a total book value of $2 million (5 - 3 = 2). Of the $5 million in assets, $600 thousand is in intangible assets and $400 thousand is in goodwill. The company's preferred equity is $500 thousand. Thus, the tangible book value is $1 million ($2 million book value – $.6 million intangible assets – $.4 million goodwill = $1 million) and the tangible common equity of the company is $500 thousand ($1 million tangible book value – $.5 million preferred equity = $500 thousand).
- In its most recent quarterly filing, Company ABC reported $10 million in total assets and $6 million in total liabilities for a total book value of $4 million (10 - 6 = 4). Of the $10 million in assets, $2 million is goodwill and $1 million is intangible assets. The company has no preferred equity. Thus, the tangible book value and the tangible common equity are equivalent at $1 million ($4 million book value – $2 million goodwill – $1 million intangible assets, – $0 preferred equity = $1 million).
- In its most recent quarterly filing, Company LMN reported $20 million in total assets and $8 million in total liabilities for a total book value of $12 million (20 - 8 = 12). The company carries no intangible assets or goodwill. The company's preferred equity is $2 million. Thus, the total book value and tangible book value are the same at $12 million, while the tangible common equity is $10 million ($12 million book value – $0 goodwill – $0 intangible assets – $2 million preferred equity = $10 million).
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