Capital Southwest has been treading water for the past six months, recording a small return of 1.4% while holding steady at $24.02. The stock also fell short of the S&P 500’s 8.7% gain during that period.
Is there a buying opportunity in Capital Southwest, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Capital Southwest Not Exciting?
We’re cautious about Capital Southwest. Here are two reasons why CSWC doesn’t excite us, plus one stock we’d rather own.
1. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Capital Southwest’s EPS grew at an unimpressive 7.3% compounded annual growth rate over the last five years, lower than its 27.8% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
2. High Debt Levels Increase Risk
Capital Southwest reported $29.05 million of cash and $1.13 billion of debt on its balance sheet in the most recent quarter.
As investors in high-quality companies, we primarily focus on whether a company’s profits can support its debt.
With $148.5 million of EBITDA over the last 12 months, we view Capital Southwest’s 7.4× net-debt-to-EBITDA ratio as inadequate. The company’s lacking profits relative to its borrowings give it little breathing room, raising red flags.
Final Judgment
Capital Southwest isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 11× forward P/E (or $24.02 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We’re pretty confident there are superior stocks to buy right now. Let us point you toward our favorite semiconductor picks and shovels play.
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