Corporate Solvency: Discover the Guarantee Ratio and Its Optimal Value in Financial Analysis

When evaluating a company’s strength, one of the most decisive indicators is the guarantee ratio, a metric that allows us to determine whether a company has sufficient assets to cover all of its financial obligations. Unlike other measures that focus on short-term periods, this ratio provides an overall view of the organization’s response capacity in the long term.

The fundamental difference: liquidity versus solvency

Although they are often confused, liquidity and solvency are distinct concepts. The first measures the ability to pay in the short term (up to one year), while solvency or guarantee ratio extends the analysis to the entire debt horizon. A company may have good short-term liquidity but lack the financial strength necessary to meet its medium- and long-term commitments.

The simplified calculation formula

The guarantee ratio is obtained through a simple operation: dividing total assets by total liabilities. This ratio provides a number that should be interpreted according to established parameters.

Guarantee ratio = Total assets / Total liabilities

To access this data, simply consult the income statement of any company, where they are clearly differentiated.

Interpreting the optimal value: when is a company healthy?

There are reference ranges that analysts use to classify financial situation:

• Below 1.5: Indicates an excessive debt burden and a high risk of insolvency
• Between 1.5 and 2.5: Represents the optimal value, indicating balanced resource management
• Above 2.5: Suggests excess assets not being properly utilized, possible operational inefficiency

Practical cases that reveal reality

Let’s look at two contrasting situations. Tesla reported a ratio of 2.26 in its latest reports, while Boeing showed 0.89. What does this mean? Tesla operates within normal parameters, although slightly elevated due to its technology business model that requires significant reinvestment. Boeing, on the other hand, had assets below its liabilities, a situation that worsened after 2020.

The most dramatic case was Revlon. In September 2022, this cosmetics company had assets of $2.52 billion against liabilities of $5.02 billion, resulting in a ratio of 0.50. This metric accurately predicted its subsequent bankruptcy declaration, demonstrating that the indicator acts as an early warning system.

Why do banks rely on this ratio

Financial institutions apply this analysis differently depending on the product type:

• For revolving credits and leasing, they prioritize liquidity
• For loans longer than a year, acquisition of fixed assets, factoring, and industrial leasing, a solid guarantee ratio is required

Comparative advantages of the indicator

This ratio has several strengths:

• Applicable to companies of any size without losing validity
• Easy to calculate without requiring advanced accounting knowledge
• Historically accurate: all bankrupt companies previously showed compromised ratios
• When combined with other indicators, it allows detecting short-term operation opportunities

The importance of sector context

However, the optimal value should be contextualized within the specific industry. Technology companies often present higher ratios because their model requires considerable financing in research and development. The key is to compare the historical trajectory and sector behavior.

Conclusion: an essential tool

The guarantee ratio is a reliable compass for assessing an organization’s financial solidity. Its true power emerges when combined with liquidity analysis and examined over time. For any serious investor, these two indicators provide an almost definitive reading of business management quality and the actual insolvency risk.