Recently, I was reviewing how financial entities actually assess a company's health, and I discovered that everything revolves around a metric that many investors overlook: the guarantee or solvency ratio. This is one of those numbers that tells you whether a company can breathe in the long term, not just in the short term.

The difference with other ratios is important. While the liquidity ratio focuses on whether the company can pay in the next 12 months, the guarantee ratio broadens the full view. Here we are asking: does this company have enough assets to cover all its debt, regardless of when it matures? It’s essential because you can find companies that look good today but are built on an unsustainable mountain of debt.

Now, how the guarantee ratio is calculated is quite straightforward. The formula is simple: divide total assets by total liabilities. That’s it. You don’t need to be an accountant to understand this. If you want to know how the guarantee ratio is calculated in practice, you just need to access the company’s balance sheet and extract those two numbers.

Let’s take Tesla as an example. With total assets of $82.34 billion and liabilities of $36.44 billion, the result is 2.259. That means for every dollar of debt, Tesla has $2.26 in assets. Sounds good. Now compare that to Boeing a few years ago: $137.10 billion in assets but $152.95 billion in liabilities, giving a ratio of 0.896. Here, the company owes more than it owns. That’s a problem.

The interpretation is where things get interesting. If the ratio is below 1.5, we’re talking about an over-indebted company with a real risk of bankruptcy. Between 1.5 and 2.5 is the range considered normal in most industries. Above 2.5, you might be facing inefficient resource management, although this depends on the sector.

But here’s what many forget: these numbers don’t tell the whole story. You need to understand what the company does. Tesla appeared to have a high ratio, which in theory would suggest overvaluation, but its tech business model requires massive investment in research. It’s equity capital, not third-party debt. Boeing, on the other hand, suffered a brutal drop during the pandemic when aircraft demand disappeared. The numbers plummeted, but that doesn’t mean the company was destined for permanent failure.

A case that perfectly illustrates why how the guarantee ratio is calculated matters is Revlon. In September 2022, this cosmetics company had $2.52 billion in assets but $5.02 billion in liabilities. The resulting ratio was 0.5019. Basically, the company owned less than half of what it owed. It was no surprise when it declared bankruptcy shortly after.

What’s valuable about this indicator is that it works equally well for large and small companies. It doesn’t require advanced accounting knowledge. And most importantly: all companies that went bankrupt previously showed a compromised guarantee ratio. It’s like an early warning indicator.

If you really want to analyze a company before investing, combine this ratio with the liquidity ratio. Together, they give you a view of both the short and long term. That’s the true power of fundamental analysis.