Recently, I was reviewing how banks assess the financial health of companies and I came across something quite interesting: the guarantee ratio is probably one of the most underestimated indicators by retail investors.

Most people know the liquidity ratio (the one that measures if a company can pay short-term debts), but the guarantee ratio goes much further. While liquidity tells you if a company can survive the next year, the guarantee ratio shows if it has the real financial muscle to cover ALL its debts, regardless of when they mature.

The formula is ridiculously simple: divide total assets by total liabilities. That's it. Total assets / Total liabilities. If the result is below 1.5, we're talking about a highly leveraged company. Between 1.5 and 2.5 is normal. Above 2.5, there’s probably poor resource management.

Let’s take Tesla as an example. Its balance sheet showed total assets of $82.34 billion versus liabilities of $36.44 billion. The calculation gives 2.259. It sounds high, but for a tech company, it makes sense: they need capital for research and development. Meanwhile, Boeing showed 0.896 (assets of $137.10 billion against liabilities of $152.95 billion). That’s problematic.

Here’s the important part: the guarantee ratio isn’t an isolated metric. You need to look at each company’s historical trend and understand its industry. Boeing collapsed after COVID because airplane demand plummeted, but that doesn’t mean it always had solvency issues. Tesla appears overvalued in this ratio, but that’s because the tech business model requires massive investment.

A striking case was Revlon. In September 2022, just before bankruptcy, it had a guarantee ratio of 0.5019. Its liabilities ($5.02 billion) nearly quadrupled its assets ($2.52 billion). It was mathematically impossible for it to get out of that.

What became clear to me is that if you combine the guarantee ratio with the liquidity ratio, you get a pretty comprehensive diagnosis of a company’s health. The first tells you if it can survive long-term, the second if it has immediate oxygen. Together, they are a fairly reliable compass to detect troubled companies before the market punishes them.

That’s why I always say: before investing money in any company, check these numbers. You don’t need to be an accountant. Assets and liabilities are right there, on the balance sheet, waiting for you to read them.