Capital Southwest (CSWC)
We aren’t fans of Capital Southwest. Its decelerating revenue growth and even worse EPS performance give us little confidence it can beat the market.― StockStory Analyst Team
1. News
2. Summary
Why We Think Capital Southwest Will Underperform
Originally founded in 1961 as a venture capital investor that helped launch Texas Instruments, Capital Southwest (NASDAQ:CSWC) is a business development company that provides debt and equity financing to middle-market companies primarily in the United States.
- Annual earnings per share growth of 7.9% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- On the plus side, its market share has increased this cycle as its 28.1% annual revenue growth over the last five years was exceptional
Capital Southwest is skating on thin ice. Our attention is focused on better businesses.
Why There Are Better Opportunities Than Capital Southwest
Capital Southwest’s stock price of $21.85 implies a valuation ratio of 9.7x forward P/E. Capital Southwest’s valuation may seem like a great deal, but we think there are valid reasons why it’s so cheap.
Cheap stocks can look like a great deal at first glance, but they can be value traps. They often have less earnings power, meaning there is more reliance on a re-rating to generate good returns - an unlikely scenario for low-quality companies.
3. Capital Southwest (CSWC) Research Report: Q3 CY2025 Update
Business development company Capital Southwest (NASDAQ:CSWC) announced better-than-expected revenue in Q3 CY2025, with sales up 16.9% year on year to $56.95 million. Its GAAP profit of $0.44 per share was 22.3% below analysts’ consensus estimates.
Capital Southwest (CSWC) Q3 CY2025 Highlights:
Company Overview
Originally founded in 1961 as a venture capital investor that helped launch Texas Instruments, Capital Southwest (NASDAQ:CSWC) is a business development company that provides debt and equity financing to middle-market companies primarily in the United States.
Capital Southwest operates as an internally managed BDC (Business Development Company), a specialized type of investment firm regulated under the Investment Company Act of 1940. The company focuses on providing customized financing solutions to businesses with annual earnings between $3 million and $25 million—the middle market segment that often falls between traditional bank lending and larger institutional investment.
The firm's investment strategy centers on first lien senior secured debt, though it also provides second lien loans, subordinated debt, and occasionally makes equity co-investments. Capital Southwest typically invests between $5 million and $25 million per transaction across diverse industries including healthcare, business services, consumer products, and industrial manufacturing. A typical client might be a family-owned business seeking growth capital for expansion or a company requiring financing for an acquisition.
For example, a regional healthcare services provider might partner with Capital Southwest to secure $15 million in debt financing to acquire a complementary business, allowing them to expand their service offerings and geographic reach without diluting family ownership.
Capital Southwest generates revenue primarily through interest income on its debt investments and potential capital appreciation on equity positions. The company operates under BDC regulations that require it to distribute at least 90% of taxable income to shareholders, resulting in relatively high dividend yields compared to other financial stocks. As a publicly traded BDC, Capital Southwest provides retail and institutional investors access to private credit investments that would otherwise be unavailable to them.
4. Specialty Finance
Specialty finance companies provide targeted lending or financial services for specific industries or needs. They benefit from expertise in particular sectors, often reduced competition in specialized niches, and tailored underwriting that can yield higher margins. Challenges include concentration risk in specific industries, difficulty achieving scale efficiencies, and potential vulnerability during sector-specific downturns affecting their specialized markets.
Capital Southwest competes with other publicly traded business development companies including Ares Capital (NASDAQ:ARCC), Main Street Capital (NYSE:MAIN), and Golub Capital (NASDAQ:GBDC), as well as private credit funds managed by large asset managers.
5. Revenue Growth
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Capital Southwest grew its revenue at an incredible 28.1% compounded annual growth rate. Its growth beat the average financials company and shows its offerings resonate with customers.
Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. Capital Southwest’s annualized revenue growth of 19.1% over the last two years is below its five-year trend, but we still think the results suggest healthy demand. 
Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.
This quarter, Capital Southwest reported year-on-year revenue growth of 16.9%, and its $56.95 million of revenue exceeded Wall Street’s estimates by 2.2%.
6. Pre-Tax Profit Margin
Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For Specialty Finance companies, we look at pre-tax profit rather than the operating margin that defines sectors such as consumer, tech, and industrials.
Interest income and expenses play a big role in financial institutions' profitability, so they should be factored into the definition of profit. Taxes, however, should not as they are largely out of a company's control. This is pre-tax profit by definition.
Over the last four years, Capital Southwest’s pre-tax profit margin has risen by 7.7 percentage points, going from 52.2% to 44.5%. Expenses have stabilized more recently as the company’s pre-tax profit margin was flat on a two-year basis.
Capital Southwest’s pre-tax profit margin came in at 59.7% this quarter. This result was 15.5 percentage points better than the same quarter last year.
7. Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
Capital Southwest’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.
Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.
Sadly for Capital Southwest, its EPS declined by 5.2% annually over the last two years while its revenue grew by 19.1%. This tells us the company became less profitable on a per-share basis as it expanded.
Diving into the nuances of Capital Southwest’s earnings can give us a better understanding of its performance. A two-year view shows Capital Southwest has diluted its shareholders, growing its share count by 63.3%. This has led to lower per share earnings. Taxes can also affect EPS but don’t tell us as much about a company’s fundamentals. 
In Q3, Capital Southwest reported EPS of $0.44, down from $0.48 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Capital Southwest’s full-year EPS of $1.62 to grow 39.8%.
8. Return on Equity
Return on equity (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.
Over the last five years, Capital Southwest has averaged an ROE of 10.6%, respectable for a company operating in a sector where the average shakes out around 10% and those putting up 25%+ are greatly admired.
9. Balance Sheet Assessment
The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.
If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.
Capital Southwest currently has $614.4 million of debt and $947 million of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 1×. We think this is safe and raises no red flags. In general, we’re comfortable with any ratio below 3.5× for a financials business.
10. Key Takeaways from Capital Southwest’s Q3 Results
It was encouraging to see Capital Southwest beat analysts’ revenue expectations this quarter. On the other hand, its EPS missed. Overall, this was a mixed quarter. The stock remained flat at $20.58 immediately after reporting.
11. Is Now The Time To Buy Capital Southwest?
Updated: December 4, 2025 at 11:20 PM EST
When considering an investment in Capital Southwest, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.
Capital Southwest isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its unimpressive EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders.
Capital Southwest’s P/E ratio based on the next 12 months is 9.7x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're pretty confident there are superior stocks to buy right now.
Wall Street analysts have a consensus one-year price target of $23.58 on the company (compared to the current share price of $21.85).