Recently, I was analyzing the balance sheets of some large companies and I noticed something interesting: Tesla and Boeing have completely different stories reflected in a single number. One is at 2.25 and the other at 0.89. What am I talking about? The guarantee ratio, the indicator that banks and analysts use to determine if a company can really pay what it owes.

The thing is: there are two ways to look at a company's financial health. The first is short-term (can it pay its debts in the next few months?), but there is another, more important one that many investors overlook: can the company pay everything it owes regardless of the time? That is exactly what the guarantee or solvency ratio measures.

A key difference from other indicators: while the liquidity ratio only looks at what the company can sell quickly, the guarantee ratio considers all assets (including properties, machinery, vehicles) and all debts regardless of when they are due. It’s like comparing what you actually have versus everything you owe.

Now, how is it calculated? The formula for the guarantee ratio is surprisingly simple: total assets divided by total liabilities. That’s it. You don’t need to be an accountant to do it. Take the company’s balance sheet, find the line for total assets, divide it by total liabilities, and that’s it.

Let’s look at real examples. Tesla: has $82.34 billion in assets and $36.44 billion in debts. Divide: 82.34 by 36.44 and you get 2.259. That means Tesla has $2.26 in assets for every dollar it owes. Boeing, on the other hand: $137.10 billion in assets but $152.95 billion in debts. The result: 0.896. Less than 1. That’s a serious problem.

So, how do we interpret these numbers? Here’s the important part: a guarantee ratio below 1.5 indicates a high risk of bankruptcy. Between 1.5 and 2.5 is considered normal and healthy. Above 2.5 could indicate that the company isn’t using its debt well (although this depends on the sector).

The case of Revlon is brutal and very instructive. In September 2022, this cosmetics company had $2.52 billion in assets but $5.02 billion in debts. Its guarantee ratio: 0.5019. Literally, its debts doubled its assets. Months later, it declared bankruptcy. And the worst part is that the ratio had been deteriorating for years, a warning sign that many ignored.

But here’s what you must not forget: these numbers are a tool, not absolute truth. You need to understand the business behind them. Tesla has a high ratio because it’s a tech company with a lot of research and development; that’s normal in that sector. Boeing fell due to the COVID crisis and specific operational problems. Context matters.

What works best is combining the guarantee ratio with the liquidity ratio and then looking at the historical trend. Has it improved or worsened in recent years? How does it compare with competitors in the same sector? That way, you get a real view of whether a company is solid or heading toward serious problems.

This is why banks ask for a good guarantee ratio when you apply for long-term loans. They know that if this number is compromised, recovering their money will be almost impossible. That’s why it’s also so useful for investors: if you monitor it well, you can avoid companies heading toward bankruptcy or identify opportunities in businesses that are improving their financial solidity.