Oaktree Specialty Lending (OCSL)

Business development company Oaktree Specialty Lending (NASDAQ:OCSL) missed Wall Street’s revenue expectations in Q2 CY2025, with sales falling 20.7% year on year to $75.27 million. Its non-GAAP profit of $0.37 per share was 17% below analysts’ consensus estimates.

Company Overview

Managed by Oaktree Capital Management, one of the world's premier alternative investment firms, Oaktree Specialty Lending (NASDAQ:OCSL) is a business development company that provides customized financing solutions to mid-market companies across various industries.

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.

Oaktree Specialty Lending competes with other publicly traded business development companies including Ares Capital Corporation (NASDAQ:ARCC), FS KKR Capital Corp. (NYSE:FSK), and Main Street Capital Corporation (NYSE:MAIN), as well as private credit funds managed by large asset managers.

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, Oaktree Specialty Lending’s 20% annualized revenue growth over the last five years was excellent. Its growth beat the average financials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Oaktree Specialty Lending’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.9% over the last two years. 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, Oaktree Specialty Lending missed Wall Street’s estimates and reported a rather uninspiring 20.7% year-on-year revenue decline, generating $75.27 million of revenue.

Assets Under Management (AUM) represents the total value of investments that a financial institution manages for its clients. These assets generate steady income through management fees, creating predictable revenue streams that remain stable so long as clients remain invested with the firm.

Oaktree Specialty Lending’s AUM has grown at an annual rate of 14.6% over the last five years, better than the broader financials industry but slower than its total revenue. When analyzing Oaktree Specialty Lending’s AUM over the last two years, we can see that growth halted as assets were flat. Other parts of the business were even bigger detractors of growth than fundraising or short-term investment performance over this shorter period since assets outperformed total revenue. Keep in mind that asset growth can be erratic and seasonal, so we don't rely on it too heavily for our business quality analysis.

In Q2, Oaktree Specialty Lending’s AUM was $2.81 billion, falling 4.4% short of analysts’ expectations. This print was 10% lower than the same quarter last year.

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, Oaktree Specialty Lending’s pre-tax profit margin has fallen by 131 percentage points, going from 145% to 13.8%. It has also declined by 11 percentage points on a two-year basis, showing its expenses have consistently increased at a faster rate than revenue. This usually raises questions unless the company is in high-growth mode and reinvesting its profits into attractive ventures.

In Q2, Oaktree Specialty Lending’s pre-tax profit margin was 51.3%. This result was 49.9 percentage points better than the same quarter last year.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Oaktree Specialty Lending’s EPS grew at a weak 5% compounded annual growth rate over the last five years, lower than its 20% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

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.

For Oaktree Specialty Lending, its two-year annual EPS declines of 10.6% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q2, Oaktree Specialty Lending reported adjusted EPS of $0.37, down from $0.54 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Oaktree Specialty Lending’s full-year EPS of $1.91 to shrink by 13.7%.

Diversified financial companies operate across multiple business segments, from investment banking and trading to wealth management and specialized lending. Their valuations hinge on balance sheet quality and the ability to compound shareholder equity across these diverse operations.

When analyzing this sector, tangible book value per share (TBVPS) takes precedence over many other metrics. This measure isolates genuine per-share value and provides insight into the institution’s capital position across diverse operations. On the other hand, EPS is often distorted by the diverse nature of operations, mergers, and various accounting treatments across different business units. Book value provides clearer performance insights.

Oaktree Specialty Lending’s TBVPS declined at a 1.7% annual clip over the last five years. A turnaround doesn’t seem to be in sight as its TBVPS also dropped by 7.5% annually over the last two years ($19.58 to $16.76 per share).

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, Oaktree Specialty Lending has averaged an ROE of 8.8%, uninspiring for a company operating in a sector where the average shakes out around 10%.

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.

Oaktree Specialty Lending currently has $1.47 billion of debt and $1.48 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 1.1×. 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.

We struggled to find many positives in these results. Its AUM missed and its EPS fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $13.73 immediately following the results.

Updated: November 7, 2025 at 11:48 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

We see the value of companies driving economic growth, but in the case of Oaktree Specialty Lending, we’re out. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its declining pre-tax profit margin shows the business has become less efficient. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its TBVPS has declined over the last five years.

Oaktree Specialty Lending’s forward price-to-sales ratio is 3.9x. The market typically values companies like Oaktree Specialty Lending based on their anticipated profits for the next 12 months, but there aren’t enough published estimates to arrive at a reliable number. You should avoid this stock for now - better opportunities lie elsewhere.