The tangible common equity (TCE) ratio measures a firm's tangible common equity in terms of the firm's tangible assets. It can be is used to estimate a bank's sustainable losses before shareholder equity is wiped out. The tangible common equity (TCE) ratio is calculated by first finding the value of the firm's tangible common equity, which is the firm's common equity less preferred stock equity less intangible assets. The tangible common equity is then divided by the firm's tangible assets, which is found by subtracting the firm's intangible assets from total assets. Depending on the firm's circumstances, patents might be excluded from intangible assets for this equation since they, at times, can have a liquidation value.
Breaking Down Tangible Common Equity (TCE) Ratio
Tangible common equity (common equity - preferred stock - intangible assets) is thought of to be an estimation of the liquidation value of a firm. Since intangible assets will often have very low liquidation values, the intangible assets are subtracted from this figure. Tangible common equity is what might be leftover for distribution to shareholders if the firm were liquidated. The tangible common equity ratio can be used as a measure of leverage. High ratio values indicate less leverage and a larger amount of tangible equity compared to tangible assets. This ratio became popular when evaluating banks during the credit crisis in 2008. It has been used as a measure of how well capitalized a bank is compared to its liabilities.