Tangible equity (total equity minus intangibles and goodwill) divided by tangible assets. Strips out goodwill and intangibles to reveal the hard-asset equity cushion. Above 30% is strong; below 10% suggests the balance sheet relies heavily on intangible assets that may be impaired in a downturn.
Formula
Description
Strips goodwill and intangible assets from both equity and total assets to reveal the hard-asset equity cushion. This is a more conservative view of financial health because goodwill can be impaired during downturns, wiping out paper equity. Banks and regulators often focus on tangible equity.
Interpretation
Above 30% is strong. Between 10-30% is moderate. Below 10% means the balance sheet relies heavily on intangible assets - if goodwill gets written down, equity could vanish quickly. Serial acquirers often have low tangible equity ratios.
Related Quality Indicators
The percentage of revenue left after paying all operating expenses but before interest and taxes. This shows how efficiently the core business runs. Above 15% is generally strong. Consistently expanding margins signal improving business quality.
The percentage of every revenue dollar that becomes bottom-line profit after all expenses. Above 10% is strong for most industries. Persistently high net margins often indicate a company has a competitive moat protecting its business.
Profitability before the effects of debt, taxes, and depreciation. Useful for comparing companies across different tax jurisdictions and capital structures. Above 20% is generally strong. Often used in merger and acquisition analysis.
The percentage of revenue that converts to free cash flow. This is arguably the most honest profitability metric because free cash flow is difficult to manipulate. Above 10% is strong. Capital-light businesses like software companies tend to have the highest FCF margins.
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