Definition of Tangible Common Equity Ration (TCER)
Tangible common equity ratio is the difference between common shareholder’s equity and intangible assets to the difference between total assets and intangible assets. In other words, it is the ratio of tangible equity to tangible assets. It can be calculated by the following formula:
TCER = (Common Shareholder’s Equity – Intangible Assets) / ( Total Assets – Intangible Assets)
Explanation of Tangible Common Equity Ration (TCER)
The tangible common equity ratio is essentially a measure of leverage. A low ratio indicates possible overleveraging and a high ratio indicates less leverage compared to tangible assets.
For example, assume a bank as a TCE ratio of 5%. If the value of all of the bank’s assets fell by 5%, theoretically stockholders would no longer have a claim on the bank’s tangible assets.
Another way of thinking about the TCE ratio of 5% is that the remaining 95% of the bank’s tangible assets have been purchased using loaned funds that the bank must repay.