Saratoga Investment Corp (NYSE: SAR) and Capital Southwest Corporation (NASDAQ:CSWC) are both small-cap finance companies, but which is the better business? We will contrast the two companies based on the strength of their profitabiliy, institutional ownership, valuation, dividends, risk, analyst recommendations and earnings.

Profitability

This table compares Saratoga Investment Corp and Capital Southwest Corporation’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Saratoga Investment Corp 26.84% 8.03% 3.19%
Capital Southwest Corporation 96.98% 4.36% 3.91%

Institutional & Insider Ownership

16.2% of Saratoga Investment Corp shares are held by institutional investors. Comparatively, 62.7% of Capital Southwest Corporation shares are held by institutional investors. 32.0% of Saratoga Investment Corp shares are held by insiders. Comparatively, 5.9% of Capital Southwest Corporation shares are held by insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a company will outperform the market over the long term.

Analyst Recommendations

This is a summary of current ratings and recommmendations for Saratoga Investment Corp and Capital Southwest Corporation, as reported by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Saratoga Investment Corp 0 0 0 0 N/A
Capital Southwest Corporation 0 1 2 0 2.67

Capital Southwest Corporation has a consensus target price of $20.67, suggesting a potential upside of 28.21%. Given Capital Southwest Corporation’s higher possible upside, analysts clearly believe Capital Southwest Corporation is more favorable than Saratoga Investment Corp.

Dividends

Saratoga Investment Corp pays an annual dividend of $1.88 per share and has a dividend yield of 8.8%. Capital Southwest Corporation pays an annual dividend of $0.84 per share and has a dividend yield of 5.2%. Saratoga Investment Corp pays out 119.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Capital Southwest Corporation pays out 51.2% of its earnings in the form of a dividend.

Valuation and Earnings

This table compares Saratoga Investment Corp and Capital Southwest Corporation’s top-line revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Saratoga Investment Corp $33.96 million 3.75 $9.43 million $1.58 13.50
Capital Southwest Corporation $23.47 million 11.00 $11.81 million $1.64 9.83

Capital Southwest Corporation has higher revenue, but lower earnings than Saratoga Investment Corp. Capital Southwest Corporation is trading at a lower price-to-earnings ratio than Saratoga Investment Corp, indicating that it is currently the more affordable of the two stocks.

Volatility & Risk

Saratoga Investment Corp has a beta of 0.5, indicating that its stock price is 50% less volatile than the S&P 500. Comparatively, Capital Southwest Corporation has a beta of -0.49, indicating that its stock price is 149% less volatile than the S&P 500.

Summary

Capital Southwest Corporation beats Saratoga Investment Corp on 10 of the 15 factors compared between the two stocks.

Saratoga Investment Corp Company Profile

Saratoga Investment Corp. is a specialty finance company. The Company is an externally managed, closed-end, non-diversified management investment company. The Company invests primarily in leveraged loans and mezzanine debt issued by private middle-market companies in the United States. Its investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments. It purchases mezzanine debt and makes equity investments in middle market companies. It may invest in other investments, such as investments in distressed debt, including securities of companies in bankruptcy, foreign debt, private equity, securities of public companies that are not thinly traded and structured finance vehicles, such as collateralized loan obligation funds. Its leveraged loan portfolio consists primarily of first lien and second lien term loans. The Company’s investment activities are externally managed and advised by Saratoga Investment Advisors, LLC.

Capital Southwest Corporation Company Profile

Capital Southwest Corporation is an investment company that specializes in providing customized financing to middle market companies in a range of industry segments located primarily in the United States. The Company is a specialty lending company. Its principal investment objective is to produce risk-adjusted returns by generating current income from debt investments and capital appreciation from its equity and equity related investments. It focuses on partnering with business owners, management teams and financial sponsors to provide financing solutions to fund growth, changes of control, or other corporate events. In allocating future investments, it focuses on investing in senior and subordinated debt securities secured by security interests in portfolio company assets, coupled with equity interests. It targets senior and subordinated investments in the lower middle market and private loan transactions, as well as first and second lien syndicated loans in middle market companies.

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