How to Calculate Average Tangible Equity

Banks with high tangible equity generally have a low risk of default.

Tangible equity is a measure of a financial institution's strength and is calculated by subtracting intangible assets and preferred equity from the company's book value. Intangible assets are those assets which aren't physical in nature. They include government licenses, goodwill, patents, business methodologies and copyrights, while preferred equity is considered a debt for purposes of calculating tangible equity. The higher a company's tangible equity, the stronger the institution's financial position.

Things You'll Need

• Financial institution's annual report
• Financial institution's balance sheet

Instructions

1. Locate the company's book value, or stockholder's equity, on the balance sheet. For example, stockholder's equity may be listed as $50 million.

2. Find the preferred equity on the balance sheet, and then deduct that figure from the amount found in step 1. For example, preferred equity may be listed on the balance sheet as $25 million so $50 million - $25 million = $25 million.

3. Deduct the value of intangible assets on the financial institution's annual report from the figure you calculated in step 2. For example, the annual report may list intangible assets at $10 million, so $25 million - $10 million = $15 million.

4. Repeat steps 1 through 3 for as many years as you want to find the average for. For example, if you wanted to find a bank's average tangible equity for the last five years, perform steps 1 through 3 for the last five years' worth of annual reports and end-of-year balance sheets. To figure out the average, add the figures together and then divide by the number of years you researched. For example, if you found tangible equity of $25 million, $10 million, $15 million, $40 million and $5 million then the average would be (25 + 10 + 15+ 40 + 5) / 5 = $19 million.

Tips & Warnings

• Annual reports and balance sheets are often available on company websites or may be requested directly from the financial institution.

References

• Scotsman Guide; Calculate Tangible Balance-Sheet Equity...; Richard C. Reimer; May 2005
• CliffsNotes: Intangible Assets
• Reuters; U.S. Looks to Tangible Common Equity in Stress Tests; Karey Wutkowski, et al.; April 22, 2009