I just reviewed something that many investors underestimate: how a company can have short-term liquidity but be bankrupt in the long run. This is exactly what the guarantee ratio helps you identify.

Look, if you know the liquidity ratio, you already understand it measures the ability to pay in the short term. But here’s where it gets interesting: the guarantee ratio goes much further. This indicator shows you whether a company has enough total assets to cover all its debt, regardless of when it matures. It’s basically the question every creditor asks: if everything goes south, does this company have what it takes to respond?

The formula is ridiculously simple: total assets divided by total liabilities. That’s it. Total assets over total liabilities. If the result is 2, it means that for every dollar of debt, it has two dollars of assets. Easy.

Now, how to interpret this is where most fail. Generally, if your guarantee ratio is below 1.5, we’re talking about a company with too much debt and a real risk of bankruptcy. Between 1.5 and 2.5 is the normal range where healthy companies operate. And if it exceeds 2.5, then it probably has excess unused assets, which could indicate poor resource management.

Let’s take two real cases that contrast perfectly. Tesla showed a guarantee ratio of 2.259, which at first glance seems overvalued. Boeing, on the other hand, was at 0.896, practically on the edge. But here’s where you need to be smart: Tesla is a tech company that requires aggressive financing for research. Its business model allows it. Boeing suffered greatly during the pandemic; aircraft demand plummeted.

The most dramatic case I remember is Revlon. In September 2022, it had liabilities of $5.02 billion but only $2.52 million in assets. Its guarantee ratio was 0.5019. Basically impossible to recover. Bankruptcy came shortly after and was predictable if you looked at these numbers.

What I’ve learned is that you should never rely solely on this guarantee ratio. You need to combine it with the company’s history, understand the sector, and yes, also the liquidity ratio. When you see both deteriorate together, that’s a serious red flag.

If you invest in stocks or any asset, this should be on your checklist. It’s a tool that works; all the companies that went bankrupt previously had a compromised guarantee ratio. It’s not rocket science; it’s basic math that most ignore.