Recently, I was reviewing some balances and came across a topic that many investors overlook: how to truly know if a company can pay its debts. I'm not talking about short-term liquidity, but the actual capacity of a company to cover everything it owes. That is exactly what the guarantee ratio measures.

The difference with other ratios is key. While the liquidity ratio tells you if a company can pay in the next year, the guarantee ratio shows you the full picture: does it have enough assets to cover all its debt, regardless of when it matures? It’s the difference between having money today and having real equity.

Banks know this well. When you request a revolving credit, they look at your liquidity. But when you apply for a multi-year loan for machinery or real estate, the first thing they review is your guarantee ratio. It’s their way of ensuring you won’t disappear in the medium term.

The formula is simple: divide total assets by total liabilities. That’s all. Take a company's balance sheet and perform this division. For example, with Tesla, the numbers were solid: 82.34 divided by 36.44 equals 2.26. With Boeing, the story was different: 137.10 divided by 152.95 results in 0.89. Two completely different stories.

Now, what do these numbers mean? This is where most people get lost. A guarantee ratio below 1.5 is a red flag: the company has too much debt and a risk of bankruptcy. Between 1.5 and 2.5 is normal, the range where most healthy companies should be. Above 2.5 can also be concerning because it suggests the company isn’t using its borrowing capacity well, having too many idle assets.

But here’s the important part: you can’t just rely on the number. Tesla seemed over-leveraged, but it’s a tech company. These types of companies need capital for research. If they borrowed everything, they’d be at real risk. Boeing, on the other hand, had a low guarantee ratio due to demand drops after COVID, not because of an inherently risky business model.

Revlon is the perfect example of what can go wrong. In September 2022, it had $5.02 billion in debt but only $2.52 million in assets. Its guarantee ratio was 0.50. That’s not just a number; that’s a death sentence. The company couldn’t even pay half of what it owed. And of course, months later, it went bankrupt.

The advantage of this ratio is that it works equally well for large and small companies. You don’t need to be an accountant to calculate it. And most importantly: all the companies that went bankrupt had a compromised guarantee ratio before falling. It’s an effective indicator.

My advice: don’t use it alone. Combine it with the liquidity ratio, look at the company’s historical trend, compare it with its sector. But if you see a guarantee ratio deteriorating year after year, that’s a sign you can’t ignore. It’s the safest way to detect solvency problems before they turn into disasters.