Tangible common equity (TCE) is a measure of a company’s financial health that excludes intangible assets and only includes common equity. It is often used in conjunction with tangible common assets to determine creditworthiness and has become popular for measuring the financial health of banks. TCE ratios are used in stress tests for federally run banks and can show a company or bank’s ability to absorb losses without becoming insolvent. Altering the equation for TCE can increase the viability of some large financial institutions. Understanding TCE and similar ratios can help reveal what the government and companies are doing to stabilize failing sectors or companies.
Tangible common equity is part of several reasons for measuring the financial health of a business. It represents the part of the stockholders’ equity that is in the form of common shares, and not preferred. Tangible common equity also excludes intangible assets, such as trade secrets and leveraged possession of information.
When financial experts use tangible common equity (TCE), they often use it in conjunction with tangible common assets. The resulting equation helps show whether a company is creditworthy. This type of measurement has become popular for measuring the financial health of banks in recent years. TCE ratios became part of “stress tests” for federally run banks.
Some experts view tangible common equity primarily as a way to show how much equity a company or bank liquidation would generate. TCE measures against other securities show the ability of a company or bank to absorb losses without becoming insolvent. This type of analysis is critical when a business or bank is facing significant difficulties.
In some ways, the measure of tangible common equity is notable for what it does not include. A similar financial category called Tier 1 capital includes common equity, as well as preferred capital and tax-deferred assets. Tangible common equity only includes common equity, so it is useful in simplified or specialized accounting intended to show what happens to common stock in a given scenario.
Those looking at the current use of tangible common equity can see some simple ways to alter the equation for a company or bank. Some of these, according to recent reports, have been used to help increase the viability of some large financial institutions. One method is to switch some of the bank’s preferred shares to common shares, thereby increasing the TCE figure. Similar changes can make a balance look different for specific purposes.
Learning more about specific financial terms, such as tangible common equity, helps the individual consumer or investor see what’s happening with some of America’s largest banks and companies. As the federal government gets involved in changing the way banks are supported, the technical terminology has become somewhat more interesting to a broader number of people outside of the financial sector. Functional knowledge of TCE and similar ratios can help reveal what the government and companies are trying to do to stabilize failing sectors or companies.
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