![]() Calculating Return on Tangible Equityįinancial institutions often disclose RoTE in their financial statements, as their management widely uses this metric as a key performance indicator. If we exclude intangible assets from equity, it is easier to compare acquisitive companies with peers who have grown organically. Secondly, the goodwill generated during acquisitions is not subject to amortization, so acquisitions typically inflate total equity and suppress return on equity. So, RoTE allows us to assess how efficiently management allocates their regulatory capital base. ![]() However, adjusting the capital measure to exclude intangible assets has two benefits firstly, this is more consistent with how regulatory capital is calculated. Therefore, return on shareholders’ equity is a helpful metric when appraising management’s historic investment decisions. Return on shareholders’ equity is a more comprehensive measure of performance as it includes all shareholders’ equity used by management for investment in the business. So which metric gives a better measure of performance? The answer is…it depends! Deducting intangible assets from shareholders’ equity gives a capital measure closer to regulatory capital and allows comparison with peers that have grown organically.Īnalysts typically use both return on tangible equity and return on shareholders’ equity for assessing the performance of banks and insurance companies.RoTE compares profits generated for equity investors relative to the amount of equity capital excluding intangible assets.Return on tangible equity (RoTE) helps us assess a company’s performance and is frequently used when analyzing banks and insurance companies.MSC Global Investment Banking Take the first step towards a rewarding finance career today.Felix: Learn & Analyze Continued education, eLearning, and financial data analysis all in one subscription.
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