What it means
Ordinary book value includes intangible assets such as goodwill created by past acquisitions, brand values and capitalised software. Tangible book value removes all of them, leaving property, equipment, inventory, receivables and cash, less every liability.
The reason for removing intangibles is that they are the assets least likely to be worth their carrying value if a business ever had to be wound up or rescued. Goodwill in particular is an accounting residual from a past deal, not something a buyer could sell separately.
Regulators and bank analysts rely on this version because banking capital rules already exclude goodwill from core capital. Comparing two banks on ordinary book value would flatter whichever one had made more acquisitions, which is exactly the wrong incentive.
The gap between price to book and price to tangible book is itself informative. A large gap means the balance sheet is stuffed with intangibles, so a future impairment, a write down when an acquisition disappoints, could remove a large slice of stated equity overnight.
The measure has limits, too. Tangible assets are held at depreciated historical cost, which can badly understate long held property, and a business with a genuinely valuable brand will look permanently expensive on a ratio that pretends the brand is worth nothing.
In practice the ratio is used as a floor rather than a target, particularly during takeovers and rescues of financial institutions. Buyers ask what they would be paying for the hard assets alone, then decide separately how much extra the franchise, the customer relationships and the licences are worth to them.
In practice
Real-world examples.
Example
An insurer that has grown by acquisition trades at 1.2 times book value but 2.6 times tangible book. An analyst uses the gap to argue that a third of stated equity is exposed to impairment if the acquired businesses underperform.
Example
A struggling lender is rescued at 0.6 times tangible book value. The buyer explicitly ignores the seller's goodwill balance, on the grounds that a failed acquisition strategy is precisely what created it.
Example
A listed hotel group looks expensive at 2.9 times tangible book until an appraiser values its freehold sites, bought thirty years earlier, at three times their depreciated carrying amount. Adjusted for current property values, the effective ratio falls closer to 1.1, and two fund managers who had avoided the shares on the headline number change their view.
Think of it
“Price to tangible book values stock against hard assets only-excluding intangibles and goodwill.
Formula
Calculation
Tangible book value = total shareholders equity - goodwill - other intangible assets
Price to tangible book ratio = market capitalisation / tangible book value
A mid sized bank reports total shareholders equity of $500,000,000, which includes goodwill of $180,000,000 and other intangibles of $70,000,000. Tangible book value is $500,000,000 - $180,000,000 - $70,000,000 = $250,000,000.
With 25,000,000 shares in issue, tangible book value per share is $250,000,000 / 25,000,000 = $10.00. At a share price of $32.00, the price to tangible book ratio is $32.00 / $10.00 = 3.2.
The ordinary price to book ratio tells a much gentler story: book value per share is $500,000,000 / 25,000,000 = $20.00, giving $32.00 / $20.00 = 1.6. The difference between 1.6 and 3.2 is entirely the $250,000,000 of intangibles sitting in the accounts.Case study
Seen in the real world.
The following is an illustrative, fictional story. Rivermouth Bancorp, an invented regional lender, spent five years buying smaller banks and reported steadily rising book value per share, which its management presented as proof of value creation.
A sceptical shareholder recalculated the numbers on a tangible basis and found that almost half of the growth in stated equity was goodwill from the acquisitions rather than retained profit. On tangible book the shares had gone from 1.8 times to 3.2 times, meaning investors were paying far more for the underlying bank than the headline ratio suggested.
When one acquisition was later written down by $120,000,000, the fictional bank's book value dropped sharply while its tangible book value barely moved, since the goodwill had never been counted there in the first place. The episode illustrates why the tangible measure is treated as the more honest one in banking.
Watch out
Common mistakes.
- Subtracting goodwill but leaving other intangibles such as capitalised software and customer lists in the calculation, which only does half the job.
- Treating a low ratio as automatically attractive without asking whether the tangible assets themselves are impaired or obsolete.
- Applying the measure to brand led or software businesses, where deliberately ignoring intangible value produces a ratio with no useful meaning.
Questions
People also ask.
How does this differ from the price to book ratio?
Price to book uses total equity, while this version first removes goodwill and other intangibles, so it is always the higher of the two ratios when intangibles exist.
Why do bank analysts prefer it?
Because banking capital rules already exclude goodwill, so tangible book is closer to the capital that actually absorbs losses.
Can tangible book value be negative?
Yes, if intangibles exceed total equity, which happens after large debt funded acquisitions and makes the ratio unusable.
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