I just reviewed a topic that many investors overlook: how to truly assess if a company can pay its debts. It’s not just about looking at random numbers; there’s a specific metric that banks and analysts constantly use for this.

We’re talking about the guarantee ratio, the indicator that shows whether a company has enough assets to cover everything it owes. It’s different from other metrics you might already know. While the liquidity ratio tells you if the company can pay in the short term, the guarantee ratio is much more ambitious: it evaluates the overall financial health, regardless of timeframes.

The formula is surprisingly simple. You just need to divide total assets by total liabilities. That’s it. Total assets divided by total liabilities. If you have access to published balance sheets (which are public for listed companies), you can calculate it in seconds.

Look, banks know this well. When you request a small loan with annual renewal, they focus more on the liquidity ratio. But if you’re asking for long-term financing, machinery, real estate, or industrial leasing, they will focus on whether you have a solid guarantee ratio. That makes sense: if they need money over years, they want to be sure you won’t go bankrupt.

Now, what do the numbers mean? Here’s where most people fail. If the ratio is below 1.5, that’s a red flag. The company has too much debt and a risk of insolvency. Between 1.5 and 2.5 is normal, the range where most healthy businesses should be. Above 2.5, you might be looking at a company that isn’t using its borrowing capacity efficiently, although it depends on the sector.

Let’s take Tesla as an example. Its guarantee ratio is around 2.259, quite high. But that’s not bad for a tech company. Tech firms need a lot of funding for research, and if they can do it with their own capital, even better. Boeing, on the other hand, showed 0.896 at one point, a worrying figure reflecting the blow the aerospace industry took.

The most extreme case I remember is Revlon. By September 2022, before declaring bankruptcy, its guarantee ratio was just 0.5019. Assets of $2.52 billion against liabilities of $5.02 billion. Impossible to pay. And worst of all, it was getting worse each quarter.

The important thing is not to take this metric as an absolute truth. You need to combine it with the business context, the industry, and how the ratio has evolved over the years. A company with a high ratio isn’t always poorly managed; it depends on whether that capital is generating returns or being wasted.

This guarantee ratio formula is one of those tools that seems simple but is brutally effective. All companies that went bankrupt had a compromised ratio before falling. If you combine it with the liquidity ratio and some other indicators, you get a pretty clear view of whether a company deserves your money or not.