Tangible Common Equity Ratio

Category

Ratios

Units

Percent

Formula

(Common Equity − Goodwill − Other Intangible Assets) / (Total Assets − Goodwill − Other Intangible Assets)

Reference

Regulation G and Regulation S-K Item 10(e) (non-GAAP financial measures)

Source

Calculated by GeminIQ from figures reported in SEC filings

The tangible common equity ratio divides a company's tangible common equity by its tangible assets. Tangible common equity is shareholders' equity minus preferred stock, goodwill, and other intangible assets, and tangible assets are total assets minus the same goodwill and intangibles. It measures how much loss-absorbing capital common shareholders provide against the company's physical and financial assets.

The ratio is used mainly for banks and other financial institutions, where it offers a conservative view of capital strength. A higher percentage means a larger cushion before common shareholders' capital would be wiped out.

The ratio is not a US GAAP measure. Its inputs are calculated from balance-sheet figures reported in SEC filings: parent stockholders' equity, tagged StockholdersEquity in XBRL, less the carrying value of preferred stock, and total assets, tagged Assets, with goodwill, tagged Goodwill, and other intangibles, often tagged IntangibleAssetsNetExcludingGoodwill, removed from both. Many banks present the ratio in their earnings releases and filings, and when they do, the SEC's non-GAAP rules under Regulation G and Regulation S-K Item 10(e) require a reconciliation to the most directly comparable GAAP measures.

Definitions vary between institutions. Some banks leave mortgage servicing rights in the asset base rather than deducting them with other intangibles, and some net the deferred tax liabilities associated with intangibles against the deduction. Those choices can move the ratio noticeably, so compare figures calculated on the same basis. The ratio is also distinct from regulatory capital ratios such as the common equity tier 1 ratio, which divide capital by risk-weighted assets and apply further regulatory adjustments.

Investors pay attention to the tangible common equity ratio because it strips out assets that are hard to sell in a crisis and removes capital that ranks ahead of common shareholders. It gained prominence during the 2008 financial crisis as a simpler check on bank balance sheets than regulatory measures. Because it ignores the riskiness of assets, a bank holding mostly government securities and one holding riskier loans can show similar ratios, so it is best read alongside risk-based capital figures.