What is the formula for Total Liabilities to Tangible Net Worth?

• A. Total Liabilities / Tangible Net Worth
• B. Total Liabilities / Net Worth
• C. Liabilities / Total Assets
• D. Tangible Net Worth / Total Liabilities

Answer: (A)

This measures leverage by comparing what a company owes to the tangible equity available to back those obligations. The formula is Total Liabilities divided by Tangible Net Worth. Tangible Net Worth equals equity minus intangible assets (like goodwill), so this focuses on the solid, real equity that can absorb losses. In credit analysis, a lower ratio indicates a bigger tangible cushion to cover liabilities, while a higher ratio signals greater leverage and potential risk. The other options don’t fit because using Net Worth includes intangible assets, which can inflate the denominator; Liabilities divided by Total Assets is a broader debt-to-asset measure rather than the specific liabilities-to-tangible-equity ratio; and Tangible Net Worth divided by Liabilities would invert the relationship, altering the interpretation.