Guarantee Ratio Formula: Essential Interpretation for Assessing Business Strength

When investors analyze a company’s stability, one of the key indicators they consult is the guarantee ratio. This solvency parameter is part of the balance sheet ratios and provides a clear perspective on a company’s actual ability to meet its total financial obligations.

Understanding the Guarantee Ratio Concept

The guarantee ratio represents the relationship between a company’s total assets and its total liabilities. Unlike the liquidity ratio, which only assesses the short-term financial position (within one year), this indicator covers the entire time horizon, including long-term debts.

Essentially, it answers a critical question: Does the company have enough assets and resources to meet all its contracted obligations regardless of their maturity date?

Direct Calculation of the Guarantee Ratio Formula

The mathematical expression is straightforward:

Guarantee Ratio = Total Assets / Total Liabilities

To obtain these values, the published financial statements of the company in question are consulted. In international accounting formats, data from “Total Assets” divided by “Liabilities” are used.

Let’s see how it works in practice with two companies in the industrial sector:

Case Tesla Inc.:

• Total Assets: 82.34 billion
• Total Liabilities: 36.44 billion
• Guarantee Ratio = 82.34 / 36.44 = 2.259

Case Boeing:

• Total Assets: 137.10 billion
• Total Liabilities: 152.95 billion
• Guarantee Ratio = 137.10 / 152.95 = 0.896

Interpretation of Guarantee Ratio Results

The obtained value provides crucial information about credit health:

Indicator below 1.5: The company shows excessive indebtedness, significantly increasing the risk of insolvency. Creditors have less protection against potential default.

Indicator between 1.5 and 2.5: Considered the optimal range. The company maintains a balanced capital structure, demonstrating the capacity to fulfill its debts without overly relying on external financing.

Indicator above 2.5: May suggest that the company is not optimizing its financial structure properly. There is an excess of assets not leveraged through third-party financing, which could be an opportunity for capital management improvement.

Application in Banking Financing Decisions

Financial institutions use this guarantee ratio selectively depending on the type of product requested:

When required:

• Loans longer than one year for machinery or real estate acquisition
• Factoring or confirming lines
• Long-term financial leasing

When not a priority:

• Revolving credit lines renewed annually (here liquidity ratio takes precedence)
• Commercial discounts
• Short-term operational leases

Why This Ratio Differs Across Sectors

It is crucial to recognize that interpretation cannot be uniform. For example, technology companies require substantial investments in research, often exhibiting ratios above 2.5 without indicating poor management. Business models and industry characteristics heavily influence the assessment.

Tesla exemplifies this reality: its 2.259 ratio reflects the capital-intensive nature of the electric automotive sector, not a dangerous overvaluation.

The Boeing Case: When the Ratio Signals Alarm

Boeing presented a ratio of 0.896, an obvious indicator of structural weakness. This figure was not accidental: the decline resulted from the global pandemic that drastically reduced aircraft demand. Liabilities grew while assets contracted, creating a dangerous solvency gap.

This scenario illustrates the importance of analyzing historical trends, not just single figures.

Real Warning: The Collapse of Revlon

Cosmetics company Revlon declared bankruptcy after disastrous financial management. As of September 30, 2022:

• Total Assets: 2.52 billion
• Total Liabilities: 5.02 billion
• Guarantee Ratio = 0.5019

With a ratio below 0.6, the company was clearly insolvent. Its obligations exceeded twice its available resources, rendering it unable to survive financially.

Practical Advantages of Monitoring This Ratio

This indicator offers significant benefits for analysts and investors:

• Universality: Works for small and large companies without distortion
• Accessibility: The required data are publicly available in financial reports
• Historical accuracy: All bankrupt companies have previously shown compromised guarantee ratios
• Potential combination: When paired with other solvency ratios, it helps identify fragile situations for specialized investment strategies

Final Recommendations

The guarantee ratio should be used as an initial diagnostic tool, never as the sole method. The most effective strategy involves:

1. Analyzing the ratio’s evolution over recent years
2. Comparing it with the liquidity ratio for short- and long-term perspective
3. Contextualizing it within the norms of the specific industry sector
4. Complementing it with qualitative analysis of the business model

By combining these approaches, investors can make informed decisions about the financial quality and management capacity of the target company.