Tangible common equity (TCE)

Tangible common equity, or TCE, represents a separate part of shareholder’s equity, distinguished from preferred equity and intangible assets. It is used to estimate a financial company’s capability to deal with potential losses.

Evaluating a company’s tangible common equity is considered useful when it comes to businesses with large amounts of preferred stock, such as US banks that got federal bailout money during the global financial crisis of 2008. In exchange for bailout funds, the banks issued large amounts of preferred stock to the federal government.

TCE is also used to find out how much common stock owners will get in the event of a company’s liquidation. This measure gained popularity as it helped to estimate the viability of large commercial banks. A bank can increase TCE by converting preferred shares to common shares.

When used as a ratio with tangible common assets, it helps to determine a bank’s capability to sustain losses before going bankrupt. To calculate the tangible common equity you need to subtract intangible assets (including goodwill) and preferred equity from the financial institution’s book value. 

Tangible common equity example.

For the year ended December 31, 2019, Morgan Stanley (MS) reported a total equity of $273,140m. The company’s intangible assets were $227m, goodwill was $261m, and preferred stock 8,520m.

Therefore, Morgan Stanley’s tangible common equity for the end of 2019 could be calculated as follows:

TCE = $273,140m – $227m – $261m – $8,520m = $264,132m

Many banks reveal their tangible common equity numbers in the supplemental documents for their financial statements.

Tangible common equity ratio.

The TCE ratio evaluates the company’s tangible common equity in terms of its tangible assets. If tangible common equity is considered like the measure of what might be left for distribution to shareholders if the firm becomes insolvent, the TCE ratio can be used as a measure of leverage. If the value is high, it indicates a larger amount of tangible equity compared to tangible assets.