Scenario presets
Balance Sheet Equity, Debt & Intangibles
Primary Solvency & Bank Covenant Metrics
Tangible Net Worth (TNW)
$15,000,000
Compliant with Covenant
Debt-to-TNW Multiple
1.20x
Capped at 3.00x
Bank Covenant Headroom Buffer
+$3,000,000
20.0% Equity Cushion
Intangible Asset Haircut
11.8%
$2.0M Intangibles Deducted
Leverage & Covenant Sensitivity Stress-Testing
Matrix 1: Debt-to-TNW Multiple vs Liabilities & TNW
Varying Total Liabilities (±20%) vs Tangible Net Worth (±20%).
Matrix 2: Covenant Headroom Buffer ($) vs Equity & Bank Floor
Surplus hard equity remaining across balance sheet earnings shocks.
Comprehensive Tangible Equity & Covenant Waterfall Schedule
Step-by-Step Worked Calculation Example
Follow this end-to-end mathematical walkthrough using our baseline parameters to audit each intermediate metric.
- Deduct Intangible Assets from Total Stockholders' Equity:
Base Tangible Net Worth = Total Equity ($17,000,000) - Intangible Assets ($2,000,000) = $15,000,000. - Adjust for Eligible Subordinated Debt:
Effective Tangible Net Worth = Base TNW ($15,000,000) + Eligible Subordinated Notes ($0) = $15,000,000. - Calculate Debt-to-Tangible-Net-Worth Leverage Multiple:
Debt to TNW = Total Liabilities ($18,000,000) / Tangible Net Worth ($15,000,000) = 1.20x. This is well below the bank maximum covenant ceiling of 3.00x. - Calculate Bank Covenant Headroom Buffer:
Covenant Headroom = Tangible Net Worth ($15,000,000) - Bank Covenant Floor ($12,000,000) = +$3,000,000.
Covenant Cushion Percentage = ($3,000,000 / $15,000,000) × 100% = 20.00%. - Evaluate Intangible Asset Haircut:
Intangible Haircut Ratio = ($2,000,000 / $17,000,000) × 100% = 11.76%. Only 11.8% of reported book equity consists of unrecoverable intangibles.
Interactive Concept Self-Check Quiz
1. Why do commercial lenders strip goodwill and intangibles when computing net worth?
2. If a company with $20M equity and $6M goodwill suffers an $8M goodwill impairment, how does TNW change?
3. A borrower has $10M equity, $2M intangibles, and $24M total liabilities. What is its Debt-to-TNW multiple?
4. What constitutes a breach of a Minimum Tangible Net Worth loan covenant?
Frequently Asked Questions
Tangible Net Worth (TNW) measures the net hard physical and financial equity value of a business after eliminating all intangible assets: Tangible Net Worth = Total Stockholders' Equity - Intangible Assets (Goodwill, Patents, Trademarks, Customer Lists, Capitalized Software). It represents the liquidating baseline equity available to creditors if the firm ceases operations.
Commercial lenders enforce Minimum Tangible Net Worth covenants to prevent borrower insolvency and excessive leverage. Because intangible assets (such as goodwill or brand equity) can rapidly lose value or become worthless in bankruptcy, banks stipulate a hard equity floor that the borrower must maintain to protect senior debt recovery.
The Debt-to-Tangible-Net-Worth ratio measures total liabilities (or funded senior debt) relative to tangible equity: Debt-to-TNW = Total Liabilities / Tangible Net Worth. Commercial banks typically require this multiple to remain below 2.5x to 4.0x. A ratio exceeding 4.0x indicates an undercapitalized balance sheet with inadequate hard asset protection for lenders.
When a company completes an acquisition paid above book value, goodwill is created on the balance sheet, increasing total accounting equity but leaving Tangible Net Worth unchanged (or reducing it if funded with debt). Conversely, subsequent goodwill write-downs reduce accounting equity but have zero impact on TNW, proving TNW's stability as a true metric of physical solvency.