Recently, I was reviewing company balances and came across something many investors overlook: the guarantee ratio. It's interesting because while everyone talks about short-term liquidity, few pay attention to whether a company can actually pay its debts in the long term. And that's precisely what this indicator measures.

You see, the guarantee ratio is basically a way of asking: Does this company have enough assets to cover all its debt? It doesn't matter if it's 30-day debt or 5-year debt; what matters is the total. It's different from the liquidity ratio, which only looks at what can be paid in the short term. Here, we're talking about the company's overall financial health.

Banks know this well. When they lend you money for machinery or real estate, the first thing they check is the guarantee ratio. If you request a renewable line of credit every year, they look more at liquidity. But for serious long-term commitments, you need to demonstrate financial strength.

The calculation is simple: divide total assets by total liabilities. That's all. Let's take a real example. Tesla recently had assets worth $82.34 billion and liabilities of $36.44 billion. Its guarantee ratio was 2.26, meaning it has enough assets to cover its debt with a margin. Boeing, on the other hand, showed assets of $137.10 billion but liabilities of $152.95 billion, giving it a ratio of 0.89. That's problematic because it has more debt than assets.

Now, what do these numbers mean? A guarantee ratio below 1.5 is a warning sign: the company has too much debt relative to its assets, and the risk of bankruptcy is real. Between 1.5 and 2.5 is considered normal; most healthy companies should be in this range. Above 2.5 could indicate that the company is underutilizing its borrowing capacity, although this depends on the sector.

Tesla appears to be over-leveraged with that 2.26, but here’s the detail: it’s a tech company. It needs massive capital for research and development. If that money came from third parties, it would be a problem. But in its business model, this excess of assets is consistent.

A case that illustrates the problem well is Revlon. In September 2022, before filing for bankruptcy, it had liabilities of $5.02 billion but only assets worth $2.52M. Its guarantee ratio was 0.50. Impossible to pay. And the worst part is that the situation worsened each quarter: more debt, fewer assets. Eventually, it declared bankruptcy.

What’s interesting about the guarantee ratio is that it works the same for large and small companies. You don’t need to be an accountant to get the numbers; they’re in any balance sheet. And here’s the most important part: all companies that have gone bankrupt previously showed a compromised guarantee ratio. It’s a fairly reliable predictor.

What I’ve learned is that you can’t look at this ratio in isolation. You need to see the company's historical trend, compare it with its sector, understand its business model. Boeing had ugly figures during the pandemic because airplane demand plummeted, but that’s temporary. Revlon, on the other hand, had a structural problem.

If you combine the guarantee ratio with other indicators like the liquidity ratio, you get a pretty clear view of whether a company is well-managed or not. It’s the solid foundation for making more informed investment decisions.