## Should I Invest in a Company with a Low Guarantee Ratio? How to Identify Solvency Risks

When analyzing a company before investing, many traders focus on prices and trends but ignore a fundamental metric: the **guarantee ratio formula**. This indicator is like a "financial thermometer" that tells you whether a company can pay its total debts or is on the brink of collapse. Let’s discover why banks and professional investors constantly monitor it.

### The Guarantee Ratio: The Metric Banks Never Ignore

The difference between a liquidity ratio and a guarantee ratio is crucial. The former only looks at short-term payment ability (less than one year), while the guarantee ratio broadens the view to the entire debt horizon. In other words, it answers a deeper question: **Does the company have enough assets to cover ALL its obligations, regardless of when they are due?**

Banks know this. When we apply for a long-term loan to acquire machinery or industrial real estate, banks don’t just check if we have cash this month. They scrutinize the guarantee ratio carefully. If a company requests industrial leasing or confirming, creditors require this ratio to be solid. Why? Because a weak balance sheet is the best predictor of future insolvency.

### The Simple Formula That Reveals Everything

Calculating the guarantee ratio is surprisingly straightforward:

**Guarantee Ratio = Total Assets ÷ Total Liabilities**

That’s the whole secret. You don’t need to be an accountant to extract these two numbers from the published balance sheet. But the meaning behind it is what matters.

### Real Cases: When Math Predicts Disaster

Let’s see what happened with Revlon, the cosmetics giant that recently collapsed. In September 2022, its numbers told a clear story:

- Total liabilities: $5.020 billion
- Total assets: $2.520 billion
- Guarantee ratio = 2.52 ÷ 5.02 = **0.50**

A ratio below 0.5 is practically a death sentence. The company had fewer assets than liabilities. Translation? It couldn’t even pay half of what it owed. Months later, Revlon declared bankruptcy. The numbers had already warned us.

Now let’s compare with two giants handling different numbers:

**Tesla**: With assets of $82.340 billion and liabilities of $36.440 billion, its ratio is 2.26. A robust indicator.

**Boeing**: With assets of $137.100 billion but liabilities of $152.950 billion, its ratio is 0.89. A delicate situation reflecting operational problems post-COVID.

### Interpreting the Numbers: What Each Range Means

Numbers without context are useless. Here’s the key:

**Ratio below 1.5**: The company is over-leveraged. It has more debt than assets can cover. High risk of collapse. Not a good candidate for investment.

**Ratio between 1.5 and 2.5**: The comfort zone. Where most healthy companies should be. Indicates it can meet its obligations while maintaining a reasonable safety cushion.

**Ratio above 2.5**: Here there are two interpretations. One positive: the company is very solvent. One negative: it might be wasting capital that it’s not investing in growth. Tesla falls into this category due to its tech business model requiring self-financing, not debt.

### Why Context Is King

You can’t apply these metrics as a universal rule without thinking. Tesla with a ratio of 2.26 isn’t the same situation as another industrial company with the same ratio. Why? Tech companies need to accumulate capital for R&D. Their intangible assets aren’t visible on the balance sheet as physical equipment. Boeing, on the other hand, has enormous physical assets (airplanes, factories), but its liabilities grew during the pandemic.

You should combine the guarantee ratio with:
- The company’s historical trend (Is the ratio improving or worsening year over year?)
- The sector (Is this ratio normal in this industry?)
- The macroeconomic trend

### Advantages of Monitoring This Ratio

This indicator has several strengths that make it indispensable:

It’s size-agnostic. It works equally well for startups and megacorporations. It doesn’t matter if it’s small cap or big cap.

It’s predictive. All companies that have gone bankrupt previously showed a deteriorated guarantee ratio. It’s like an early warning alarm.

It’s accessible. You don’t need a Bloomberg terminal. Anyone can extract it from the published balance sheet.

It’s combinable. Using it alongside other ratios like liquidity or debt ratios gives you a 360-degree view.

### The Conclusion You Should Remember

The guarantee ratio is your compass for detecting companies in danger. If it drops below 1.5, especially if it continues falling quarter after quarter, it’s a red flag. It’s not a guarantee they will collapse, but historically, it’s one of the best clues.

If you’re considering investing or trading stocks, always review this number. Banks monitor it. Hedge funds monitor it. You should too.