Recently, I was reviewing the balances of some companies and I came across something interesting: many investors completely ignore how to measure a company's true solvency. Everyone talks about short-term liquidity, but no one stops to think about a company's actual ability to pay all its debts. That’s exactly what the guarantee ratio is for.

The difference between the liquidity ratio and the guarantee ratio is fundamental. The first tells you if a company can pay what it owes in the next 12 months. The second, on the other hand, shows you if it has enough assets to cover all its debt, regardless of when it matures. It’s the difference between having money to pay next month and having the real capacity not to go bankrupt in the future.

The formula for the guarantee ratio is quite simple: divide total assets by total liabilities. That straightforward. If a company has 100 million in assets and 50 million in debt, its guarantee ratio is 2. But here’s the important part: what does that number mean?

What I’ve observed in years of analysis is that a guarantee ratio below 1.5 is a red flag. It means the company is over-leveraged and has a fairly high risk of bankruptcy. Between 1.5 and 2.5 is normal, the range where most healthy companies operate. If it’s above 2.5, then either the company is very well capitalized or it has management problems, accumulating assets without profitability.

Let’s take real examples. Tesla has a guarantee ratio of 2.259, indicating it’s in a safe territory but with quite a bit of leverage. That makes sense for a tech company that needs constant financing for research and development. Boeing, on the other hand, showed a ratio of 0.896 at one point, which is concerning. And indeed, the company faced huge difficulties after the pandemic.

The most revealing case was Revlon. When it declared bankruptcy in 2022, its guarantee ratio was just 0.5019. Liabilities far exceeded assets. The company was doomed from a financial standpoint. That’s what the guarantee ratio tells you when it becomes truly critical.

Now, you can’t just look at the guarantee ratio at a specific moment and make decisions. You need to see the historical trend. A company might have a high ratio today but be deteriorating rapidly. Revlon is a perfect example: its assets were decreasing while its debts were growing, an unsustainable pattern that ended in collapse.

What I like about the guarantee ratio is that it works the same for large and small companies. You don’t need to be an expert accountant to calculate it. The data is in any published balance sheet. And most importantly: all companies that have gone bankrupt previously had a compromised guarantee ratio. It’s no coincidence.

The best strategy is to combine the guarantee ratio with the liquidity ratio. That way, you get a complete view: short-term liquidity and long-term solvency. If both are deteriorating, you have a company in real trouble.

In conclusion, if you’re analyzing companies to invest, don’t ignore this indicator. The guarantee ratio tells you if a company has the financial foundations to survive tough times. It’s one of those numbers that doesn’t lie.