EPS of $1.33 increased by 343.3% from previous year
Gross margin of -129.5%
Net income of 61.00M
"During the year, we grew our investment portfolio by approximately $300 million, or 21%, from $1.5 billion to $1.8 billion. The quality of our debt portfolio continued to improve as we further reduced our weighted average leverage in the investment portfolio to 3.5 times, maintained a solid 94% cash income as a percentage of total investment income, while decreasing our non-accruals at fair value from 2.3% to 1.7%." - Michael Sarner
Capital Southwest Corporation (CSWC) QQ4 2025 Earnings Review: Strong Balance Sheet Buildout, Steady Dividend Coverage, and SBIC Expansion
Executive Summary
Capital Southwest Corporation delivered a constructive QQ4 2025, underpinned by meaningful balance-sheet strengthening, portfolio diversification, and a disciplined approach to risk in a volatile macro environment. The quarter featured elevated net investment income per share driven by realized gains in equity investments and a favorable, though uneven, external backdrop. Management highlighted substantial growth in the investment portfolio (approximately $300 million year-over-year, up 21% to $1.8B) and a reduction in non-accruals to 1.7% of fair value, reflecting ongoing credit discipline. The company also advanced funding flexibility through a second SBIC license and an active ATM program, positioning CSWC to pursue lower-middle-market opportunities with a robust liquidity cushion (roughly $384 million in cash and undrawn facilities).
Net income for the quarter was $60.999 million with GAAP EPS of $1.33, aided by one-time expenses related to former leadership and two equity exits that increased the undistributed taxable income balance to $0.79 per share. Exits realized in the quarter contributed to a growing UTI balance that CSWC intends to deploy to sustain its quarterly and supplemental dividends. Net investment income (pre-tax) was $0.56 per share, while adjusted pre-tax NII (excluding one-time CEO transition costs) was $0.61 per share. Management reiterated a track record of dividend safety, capital flexibility, and above-book trading, noting that the company has never cut the regular dividend and has grown the quarterly dividend by 29 times since inception.
Looking forward, CSWC remains focused on: (1) originations in the $125–$150 million range for the next quarter, including add-ons, (2) a pipeline of 3–5 new platform opportunities with $75–$100 million of new capital and roughly $50 million in add-ons, (3) execution of the second SBIC program to deploy up to $175 million in debentures, and (4) maintaining conservative leverage (target regulatory leverage 0.8–0.95x) with ample liquidity to weather policy uncertainty. The near-term outlook also acknowledges tariff and policy volatility, with management expecting potential deal-volume slowdowns in tariff-exposed sectors but continued deal activity in defensive, service-oriented industries. Overall, the combination of steady NII, substantial UTI, and strategic capital access supports a constructive, albeit data-dependent, investment thesis for CSWC.
Key Performance Indicators
Revenue
88.44M
QoQ: 113.98% | YoY:180.76%
Gross Profit
-114.50M
-1.29% margin
QoQ: -530.23% | YoY:-547.36%
Operating Income
-82.38M
QoQ: -519.39% | YoY:-413.37%
Net Income
61.00M
QoQ: 274.96% | YoY:352.88%
EPS
1.33
QoQ: 291.18% | YoY:343.33%
Revenue Trend
Margin Analysis
Key Insights
Revenue: $88.44 million; YoY growth 180.76%; QoQ growth 113.98%. Management comments point to higher investment income and select equity gains driving revenue progression.
Gross Profit: -$114.50 million; YoY change -547.36%; QoQ change -530.23%. Large negative gross profit reflects portfolio-level fair-value movements and impairment timing; core operating EBITDA remains negative but is impacted by non-cash accounting and one-time items.
Operating Income: -$82.38 million; YoY change -413.37%; QoQ change -519.39%. Reflects credit portfolio impairments and one-time costs but is counterbalanced by gains in other income lines.
Net Income: $60.999 million; YoY change 352.88%; QoQ change 274.96%. Net income benefited from equity exits and non-operating gains; GAAP earnings are historically volatile in BDCs with equity strategies.
Overview of key QQ4 2025 metrics and the corresponding YoY and QoQ dynamics:
- Revenue: $88.44 million; YoY growth 180.76%; QoQ growth 113.98%. Management comments point to higher investment income and select equity gains driving revenue progression.
- Gross Profit: -$114.50 million; YoY change -547.36%; QoQ change -530.23%. Large negative gross profit reflects portfolio-level fair-value movements and impairment timing; core operating EBITDA remains negative but is impacted by non-cash accounting and one-time items.
- Operating Income: -$82.38 million; YoY change -413.37%; QoQ change -519.39%. Reflects credit portfolio impairments and one-time costs but is counterbalanced by gains in other income lines.
- Net Income: $60.999 million; YoY change 352.88%; QoQ change 274.96%. Net income benefited from equity exits and non-operating gains; GAAP earnings are historically volatile in BDCs with equity strategies.
- EPS (diluted): $1.33 per share; YoY growth 343.33%; QoQ growth 291.18%.
- Pre-tax NII (GAAP): $0.56 per share; Adjusted pre-tax NII: $0.61 per share (excludes CEO transition costs).
- Undistributed Taxable Income (UTI): $0.79 per share at quarter-end, up from $0.68; subsequent exits (~$20M) expected to further boost UTI.
- NAV per share: $16.70, up from $16.59; drivers include equity issuance premiums and equity portfolio depreciation net of accretion.
- Portfolio characteristics: Credit portfolio on-balance $1.6B; yield 11.7%; leverage 3.5x; 89% of credit portfolio in first lien senior secured debt; 95% rated top two categories; cash-flow coverage 3.4x; enterprise value concentration ~43% of portfolio.
- Liquidity and capital structure: Approximately $384 million in cash and undrawn leverage commitments; corporate facility increased by $25 million post-quarter; unsecured covenant-free debt accounted for 47% of liabilities; earliest maturities in Oct 2026.
- Dividends: Regular dividend of $0.58 per share and supplemental $0.06 per share for the June 2025 quarter (total $0.64 per share). 28 special/supplemental dividends totaling $4.18 per share since inception of the credit strategy; regular dividends have grown 29x since inception.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
88.44M
180.76%
113.98%
Gross Profit
-114.50M
-547.36%
-530.23%
Operating Income
-82.38M
-413.37%
-519.39%
Net Income
61.00M
352.88%
274.96%
EPS
1.33
343.33%
291.18%
Key Financial Ratios
currentRatio
0.19
grossProfitMargin
-129.5%
operatingProfitMargin
-93.2%
netProfitMargin
73.7%
returnOnAssets
3.46%
returnOnEquity
7.38%
debtEquityRatio
0.45
operatingCashFlowPerShare
$-1.33
freeCashFlowPerShare
$-1.33
dividendPayoutRatio
128.1%
priceToBookRatio
1.2
priceEarningsRatio
4.06
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management takeaways from the QQ4 2025 earnings call:
- Strategy and capital discipline: Michael Sarner highlighted portfolio growth and balance-sheet strengthening, noting: “During the year, we grew our investment portfolio by approximately $300 million, or 21%, from $1.5 billion to $1.8 billion. The quality of our debt portfolio continued to improve as we further reduced our weighted average leverage in the investment portfolio to 3.5 times, maintained a solid 94% cash income as a percentage of total investment income, while decreasing our non-accruals at fair value from 2.3% to 1.7%.†This underpins confidence in the company’s defensive risk posture and dividend sustainability.
- Equity portfolio gains and UTI: Josh Weinstein emphasized equity upside and exits: “Our equity portfolio was marked at 142% of our cost representing $53.2 million in embedded unrealized appreciation... we have harvested four sizable exits in the past four months that produce significant UTI which is now available for distribution to our shareholders.†The company aims to turn UTI into recurring distributions, with exits expected to drive further increases in UTI.
- Dividend trajectory and coverage: The call reiterated CSWC’s track record of growing regular dividends and solid coverage: “We grew our regular dividends from $2.24 per share in fiscal year 2024 to $2.31 per share in fiscal year 2025, while paying an additional $0.23 per share in supplemental dividends.â€
- Near-term capital deployment and SBIC program: Management outlined near-term deployment plans and SBIC expansion: “Subsequent to quarter end, we received final approval from the SBA for a second SBIC license... up to $175 million in additional SBA debentures.†Chris Rehberger noted near-term liquidity and debt capacity: “Balance sheet liquidity is robust, with approximately $384 million in cash and undrawn leverage commitments… Substantial progress on SBIC 2 and debt capacity.â€
During the year, we grew our investment portfolio by approximately $300 million, or 21%, from $1.5 billion to $1.8 billion. The quality of our debt portfolio continued to improve as we further reduced our weighted average leverage in the investment portfolio to 3.5 times, maintained a solid 94% cash income as a percentage of total investment income, while decreasing our non-accruals at fair value from 2.3% to 1.7%.
— Michael Sarner
This quarter we deployed a total of $150 million of new committed capital including $113 million of first lien senior secured debt and $3 million of equity across four new portfolio companies.
— Josh Weinstein
Forward Guidance
Outlook and near-term targets derived from management commentary and market context:
- Origination and deal flow: Management guided for total new commitments of roughly $125–$150 million in the next quarter, with approximately $75–$100 million allocated to new platform companies and about $50 million in add-ons. The emphasis remains on first-lien, secured debt and selective equity co-investments, with an expectation of continued add-on activity in a disciplined risk framework.
- SBIC expansion and funding cadence: With final SBA approval for a second SBIC license, CSWC expects first draws within roughly three months, targeting up to $175 million of additional debentures, with the overall SBIC facility potentially totaling up to $350 million. This augments financing flexibility for lower-middle-market platforms.
- Leverage and liquidity targets: The company reiterates a target regulatory leverage window of 0.8–0.95x and aims to maintain substantial liquidity via secured/unsecured debt and ATM equity programs to fund growth while preserving covenant cushions.
- UTI and distributions: Given the realized gains from equity exits (~$20 million in the June quarter) and a growing equity appreciation balance, CSWC expects UTI creation to support recurring supplemental dividends. The company will monitor UTI accumulation and consider programmatic distributions rather than large one-time specials, maintaining flexibility to adjust based on realized gains, NAV movements, and regulatory constraints.
- Market and risk factors to monitor: Tariff/policy volatility, mix shift toward tariff-exposed industries, and potential deal-volume deceleration in affected sectors. Management underscored the endurance of the portfolio by emphasizing: (i) 7% of debt at fair value with moderate tariff risk (1% above 50% LTV), (ii) disciplined underwriting with LTVs in the 35%–50% range for new deals, and (iii) ongoing hedges against macro volatility by maintaining a robust equity cushion and diversification across industries.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
CSWC Focus
-1.29%
-93.20%
7.38%
4.06%
OXLC
73.70%
76.10%
18.60%
1.27%
XFLT
84.00%
49.20%
2.68%
7.41%
CRF
85.70%
2.06%
7.76%
4.10%
CLM
84.70%
2.29%
7.93%
3.77%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
CSWC’s QQ4 2025 results reflect a company with a strong structural framework for growth in the lower-middle-market credit and equity co-investment space. The combination of (i) a large, low-leverage portfolio with strong NII coverage, (ii) robust liquidity and diversified funding, and (iii) a clear path to SBIC2 deployment positions CSWC to capitalize on accretive deals and equity realizations, while maintaining capital preservation disciplines. Management’s emphasis on adding high-quality, first-lien opportunities in defensively oriented industries, plus ongoing add-ons to existing platforms, supports a positive long-term growth trajectory. Near term, the risk-reward balance remains contingent on tariff dynamics and macro spend in the lower middle market, with potential for some near-term deal-flow volatility. The company’s ability to grow UTI, fund distributions, and deploy capital via SBIC2 is a key differentiator that could translate into continued earnings and dividend visibility, assuming exits and equity gains materialize as anticipated. Investors should monitor: (1) SBIC funding cadence and realized gains feeding UTI, (2) pipeline progress and add-on activity, (3) changes in regulatory leverage and debt maturities, and (4) macro-driven shifts in deal flow and pricing in tariff-exposed sectors.
Key Investment Factors
Growth Potential
Growth opportunities arise from (a) SBIC2 deployment (up to $175 million) and continued ATM equity access, (b) pipeline of 3–5 new platform deals per quarter totaling about $75–$100 million in new capital with additional $50 million in add-ons, and (c) ongoing equity co-investments generating unrealized appreciation and potential realized gains to support distributions.
Profitability Risk
Primary risks include tariff/policy volatility affecting lower-middle-market portfolio cash flows, potential spread compression in stressed segments, slower M&A activity reducing deal flow, and execution risk around SBIC deployment and refinancing of maturing debt. The credit portfolio’s moderate tariff exposure is limited (7% fair value moderate risk; 1% with LTV >50%), but macro uncertainty can impact origination velocity and leverage dynamics.
Financial Position
CSWC remains financially disciplined with leverage controls (3.5x portfolio leverage; 0.89 regulatory debt-to-equity; 0.79–0.80 UTI per share trajectory), strong liquidity (approx. $384M cash and undrawn facilities), and a diversified funding base (convertible debt, secured facilities, ATM equity). NAV per share increased to $16.70, aided by equity issuances at premiums and gains from exits, supporting dividend sustainability.
SWOT Analysis
Strengths
Low leverage with 3.5x debt-to-EBITDA and 0.89x regulatory debt-to-equity, plus no maturities until Oct 2026.
Diversified capital structure and liquidity: roughly $384 million in cash and undrawn facilities; SBIC expansion in progress; ATM equity access.
Internally managed BDC model delivering fixed-cost leverage and cost efficiency with superior operating leverage (LTM 1.7% vs. industry ~2.8%).
Strong dividend track record and robust dividend coverage (110% NII coverage over the last 12 months; 29 regular dividend increases since inception).
Portfolio health with 95% of credit portfolio rated top two categories; 11.7% weighted average yield on credit portfolio; substantial unrealized equity appreciation; meaningful exits ongoing.
Weaknesses
GAAP earnings are volatile due to equity strategy and fair-value adjustments; near-term gross profit negative due to impairments and non-cash items.
Concentration risk in lower-middle-market segment and ongoing exposure to tariff/policy shifts; potential sensitivity to recessionary environments.
Reliance on external financing windows (SBIC approvals, ATM access) and the SBA process, which can introduce timing risk.
Equity co-investment valuation depends on private markets; potential dilution or valuation swings if exits slow.
Opportunities
SBIC2 deployment up to $175 million, broadening debt capital for lower-middle-market platform growth.
Pipeline of 3–5 new platform opportunities per quarter with add-ons; continued deleveraging and accretion to NAV.
Expansion opportunities for Unitronic product if traditional lenders pull back; potential competitive advantages in rising-rate environments.
Continued above-book trading supports the ability to raise equity capital in uncertain times.
Threats
Tariff-driven macro volatility and policy uncertainty could dampen deal flow in tariff-exposed sectors.
Market competition for high-quality deals may compress spreads in the lower middle market; potential pricing pressure if risk appetites shift.
Macro shocks could elevate credit risk in some portfolio companies, impacting cadenced exits or equity realizations.
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