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Tangible common equity is part of various ratios for measuring the financial health of a business. It represents the share of the stockholder equity that is in the form of common, and not preferred, stock. 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 to show whether a business is solvent. This kind of measurement became popular for measuring the financial health of banks in recent years. Ratios involving TCE became part of the “stress tests” for banks administrated by the federal government.
Some experts see tangible common equity primarily as a way to show how much equity would result in a liquidation of the company or bank. Measures of TCE against other values show a company or bank’s ability to absorb losses without becoming insolvent. This kind of analysis is critical when a company or bank is facing significant hardship.
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 equity and tax deferred assets. Tangible common equity only includes the common equity, and so it is useful in simplified or specialized accounting intended to show what happens to common stock in a given scenario.
Those who are 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 in order to help increase viability for some large financial institutions. One method is to change over some of the bank’s preferred stock into common stock, thus bumping up the TCE figure. Similar changes can make a balance sheet look different for specific purposes.
Knowing more about specific financial terms like tangible common equity helps the individual consumer or investor to see what is happening with some of America’s largest wealth holding banks and companies. As the federal government gets involved in changing the ways that banks are supported, technical terminology has become somewhat more of interest to a wider number of those outside of the financial sector. Functional knowledge of TCE and similar ratios can help reveal what government and business attempt to do to stabilize failing sectors or businesses.
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