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Outbyte PC Repair FREERepair Windows errors before they cause bigger problemsFix Now →Outbyte Driver Updater FREEScan for outdated or missing drivers - takes under a minuteDriver Scan →Return on tangible equity (ROTE) measures how much profit a company earns relative to the tangible part of its shareholders’ equity, meaning the equity left after intangible assets such as goodwill are removed. The most common formula is net income divided by average tangible equity, multiplied by 100. Analysts and investors use it most often for banks, where acquired goodwill and intangibles can sit heavily on the balance sheet. The ratio is only meaningful once you know exactly which earnings and equity figures the company used.
What ROTE tells you
ROTE answers one narrow question: for each unit of tangible shareholders’ equity, how much profit did the company generate? The Techopedia reference page on the measure describes it as a profitability metric and says analysts and investors commonly use it in banking.
Because intangible assets are excluded from the equity base, ROTE can show profitability without the full effect of acquired goodwill and other intangibles in the denominator. That makes it useful when a company has grown through acquisitions and its reported equity is large relative to the business that operates on it.
Calculating ROTE step by step
The common form is:
ROTE = net income ÷ average tangible equity × 100
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A free scan shows the junk files, broken settings and background clutter dragging Windows down - then fixes them in one click.Free scan · Windows 10 & 11Three inputs determine the result. Each one can be defined differently by different issuers.
Step 1: Choose the earnings figure
Start with the net income the company reports, and check whether it is the figure attributable to common shareholders. Some issuers also adjust earnings. For example, TD Bank Group adjusts income for after-tax amortization of acquired intangibles in its return-on-tangible-common-equity (ROTCE) calculation. An adjusted figure can be higher or lower than reported net income, so compare like with like.
Step 2: Remove intangibles from equity
Begin with total shareholders’ equity, or common shareholders’ equity if the issuer reports on that basis. Then subtract goodwill and other intangible assets. Methods vary at this point. TD’s SEC-filed materials deduct goodwill and specified acquired intangibles net of related deferred tax liabilities, so the deduction is smaller than a simple goodwill-plus-intangibles subtraction would be.
Step 3: Average the equity and annualize the earnings
Many issuers use average tangible equity over the period rather than a single period-end balance. A common approach is to average the opening and closing balances. If you use a quarter’s net income, annualize it so it matches the equity measure. Always confirm which method the issuer states, because a period-end denominator gives a different answer from an average one.
Rank #3
ROTE versus ROE
Return on equity (ROE) divides net income by shareholders’ equity, including goodwill and intangibles. ROTE uses a smaller denominator because it removes those intangibles. The table shows the practical differences.
| Feature | Return on equity (ROE) | Return on tangible equity (ROTE) |
|---|---|---|
| Numerator | Net income | Net income, sometimes adjusted by the issuer |
| Denominator | Shareholders’ equity, including goodwill and intangible assets | Shareholders’ equity less goodwill and other intangible assets |
| Effect of large acquired goodwill | Goodwill stays in the base and lowers the ratio | Goodwill is removed, so, all else equal, the ratio is higher |
| Standard definition | Net income divided by shareholders’ equity | No single standard; the issuer’s definition applies |
A worked example (hypothetical numbers)
Consider a hypothetical bank, not a real company. It earns net income of 120 million for the year. Its tangible equity averages 1,000 million over the year, and its goodwill and intangibles are a steady 600 million, so its average total shareholders’ equity is 1,600 million.
Rank #4
- ROTE: 120 ÷ 1,000 × 100 = 12.0%
- ROE: 120 ÷ 1,600 × 100 = 7.5%
The gap between the two figures comes entirely from the 600 million of intangibles. The earnings are the same in both calculations, so the difference shows how much the denominator choice matters.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How banks report ROTE in practice
Banks often report ROTE or ROTCE in their investor materials, and their definitions differ. Two examples show the range.
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TD Bank Group
TD’s Q1 2026 Report to Shareholders, filed with the U.S. Securities and Exchange Commission as Exhibit 99.1, labels ROTCE a non-GAAP measure. The filing defines tangible common equity by deducting goodwill and specified acquired intangibles, net of related deferred tax liabilities, and adjusts income for after-tax amortization of acquired intangibles. This is one bank’s method, not a universal formula.
BBVA
BBVA’s alternative performance measure (APM) methodology, published with its 4Q24 Report APMs, defines ROTE by building on an accounting return on shareholders’ funds, adding accumulated other comprehensive income, and excluding intangible assets. BBVA states that its numerator and denominator follow its own ROE-related conventions. Those conventions are specific to BBVA and do not transfer automatically to other banks.
Comparing ROTE across companies
Before ranking two or more companies by ROTE, align these four points:
- Numerator: reported or adjusted net income, and whether acquired-intangible amortization is added back.
- Denominator: average or period-end equity, and which intangibles and related tax effects are removed.
- Period: the same reporting period, with quarterly figures annualized the same way.
- Reconciliation: whether the ratio is an issuer-defined non-GAAP measure, and whether the company reconciles it to reported figures.
If the definitions do not match, the difference you see may reflect accounting choices rather than performance.
Quick Recap
Limits of the measure
- It is one lens. ROTE does not by itself establish a company’s risk, growth quality, or valuation.
- There is no universal target. The Techopedia page includes historical company results and management targets attributed to third parties. Those examples are dated and illustrative, not current benchmarks. The page was last updated on 21 July 2024.
- Definitions drive the answer. A figure from one bank’s investor materials cannot be assumed to match another’s ROTE without checking both definitions.
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