What it means
Ordinary book value takes everything the balance sheet records as an asset and subtracts everything it records as a liability. The trouble is that some assets are accounting entries more than real things, especially goodwill, which appears when a company pays more than the book value of a business it buys.
Tangible book value removes those, leaving physical and financial assets such as cash, property, equipment and loans. The measure matters most when you want a conservative floor.
If a company ran into trouble, goodwill and many intangibles could be worth very little, so tangible book value gives a harsher view of what is truly backing each share. Analysts often compare the share price with tangible book value per share to see whether the market is paying a large premium for future earnings.
It is especially common in banking. Banks are valued partly on how much real capital supports their loans, and heavy acquirers can carry large amounts of goodwill that would vanish in a crisis.
Looking at tangible equity strips out that cushion and shows how well the bank could absorb losses. The calculation requires judgement about what to remove.
The usual deductions are goodwill and other intangible assets such as acquired customer lists and licences, and some analysts also remove capitalised software or deferred tax assets. If a company has preferred shares, they are typically removed too, because they rank ahead of ordinary shareholders.
The measure has limits. Many valuable things, such as a strong brand, a patent portfolio or a skilled workforce, are intangible and still earn money for years.
For asset-light businesses such as software or consulting, tangible book value can be tiny and tells you little about real worth. A common use is the price-to-tangible-book ratio.
A bank trading at 1.0 times tangible book is valued at roughly the hard capital it holds, while a ratio well above that signals that investors expect strong future returns.
In practice
Real-world examples
Example 1
A regional bank has grown by buying smaller banks and carries a lot of goodwill. Analysts quote its tangible book value per share, not its ordinary book value, when judging whether its $14 share price is fairly valued.
Example 2
A private equity buyer considers purchasing an engineering firm. The deal team compares the price with tangible book value to see how much of the purchase price relies on assets that could be sold if the plan fails.
Example 3
A credit analyst at a lender reviews a manufacturer asking for a loan. She deducts intangible assets from equity to see how much real value would stand behind the debt if the company defaulted. A thin tangible cushion leads her to ask for security over the company's equipment.
Think of it
Think of tangible book value like buying a used house. The total book value might include the sentimental value the seller places on the family memories inside. Tangible book value strips that away, looking only at the market value of the bricks, mortar, and land.
Formula
Calculation
Tangible book value = Total assets - Total liabilities - Goodwill - Other intangible assets - Preferred equity
Tangible book value per share = Tangible book value / Ordinary shares outstanding
A company has total assets of $50,000,000 and total liabilities of $30,000,000, so book value is $20,000,000. It holds goodwill of $6,000,000 and other intangible assets of $2,000,000, and has no preferred shares. Tangible book value = 20,000,000 - 6,000,000 - 2,000,000 = $12,000,000. With 4,000,000 ordinary shares in issue, tangible book value per share = 12,000,000 / 4,000,000 = $3.00.Case study
Seen in the real world
Stonebridge Holdings is an illustrative, fictional group that grew by buying six smaller distribution companies in four years. Its reported equity was $85,000,000, which looked healthy to the board.
The new finance director pointed out that $52,000,000 of that equity was goodwill and acquired customer lists. Removing them left tangible book value of only $33,000,000.
When a major customer left and one acquired business had to be written down, the board saw why the finance director had stressed the smaller figure. In this illustrative story, Stonebridge slowed its acquisitions and built up cash to restore its tangible capital. The board also began reporting tangible book value per share in every quarterly pack, next to the ordinary figure.
Watch out
Common mistakes
- Using ordinary book value for acquisitive companies, which can overstate their true cushion because of large goodwill balances.
- Assuming tangible book value is what the company would fetch in a sale, when physical assets can sell for more or less than their recorded values.
- Applying the measure to asset-light businesses, where most of the value sits in intangible assets that the calculation ignores.
Questions
People also ask
What is the difference between book value and tangible book value?
Book value includes intangible assets such as goodwill, while tangible book value removes them to show a more cautious figure.
Why do investors use it for banks?
Banks carry loans and capital that regulators watch closely, and goodwill cannot absorb losses, so tangible equity shows the real buffer.
Can tangible book value be negative?
Yes, if goodwill and intangibles are larger than the equity, which is a warning sign that the company relies heavily on acquired assets.