EPS of $0.97 increased by 49.2% from previous year
Gross margin of 54.7%
Net income of 13.32M
""Our annualized second quarter dividend of $0.74 per share implies a 12.7% dividend yield based on the stock price..."" - Christian Oberbeck
Saratoga Investment Corp (SAR) Q2 2025 Financial Results Report: Strong NAV Preservation and Recovery Strategy
Executive Summary
In the second quarter of fiscal 2025, Saratoga Investment Corp (SAR) delivered a strong performance, highlighted by a total net income of $13.3 million, reflecting a significant year-over-year increase of 68.66% and a quarter-over-quarter increase of 101.46%. The company's net asset value (NAV) per share has shown resilience, inching up 0.8% quarter-over-quarter to $27.07, despite a year-over-year decline of 4.8%. Management emphasized the successful resolution of its Noland investment, marking a strategic recovery following previous downturns in portfolio credits. The ongoing economic environment, characterized by evolving interest rate dynamics, has provided a buoyant backdrop for SAR’s floating rate assets to generate higher earnings. With substantial liquidity of $162 million and an investment capacity of $385.5 million, SAR remains well-positioned to capitalize on future growth opportunities in a recovering M&A landscape.
Key Performance Indicators
Revenue
28.97M
QoQ: 26.78% | YoY:29.00%
Gross Profit
15.84M
54.67% margin
QoQ: 60.21% | YoY:57.72%
Operating Income
13.60M
QoQ: 93.97% | YoY:72.58%
Net Income
13.32M
QoQ: 101.46% | YoY:68.66%
EPS
0.97
QoQ: 102.08% | YoY:49.23%
Revenue Trend
Margin Analysis
Key Insights
**Revenue**: $28.97 million (up 29% YoY, 26.78% QoQ)
**Net Income**: $13.32 million (up 68.66% YoY, 101.46% QoQ)
**EPS**: $0.97 (up 49.23% YoY, 102.08% QoQ)
**Adjusted NII**: $18.2 million (up 38.3% YoY, 26.9% QoQ)
**NAV per Share**: $27.07 (down 4.8% YoY, up 0.8% QoQ)
Financial Highlights
- Revenue: $28.97 million (up 29% YoY, 26.78% QoQ)
- Net Income: $13.32 million (up 68.66% YoY, 101.46% QoQ)
- EPS: $0.97 (up 49.23% YoY, 102.08% QoQ)
- Adjusted NII: $18.2 million (up 38.3% YoY, 26.9% QoQ)
- NAV per Share: $27.07 (down 4.8% YoY, up 0.8% QoQ)
- Return on Equity (ROE): 5.8%, decreased from 9.6% YoY
- Dividend Yield: Annualized at 12.7%, consistent with a dividend of $0.74 per share.
The increases in revenues are attributed to the reversal of previously reserved interest on the Noland investment, contributing to a weighted average interest rate of 12.6%. Conversely, rising interest expenses have raised operational costs, necessitating keen management of financial leverage.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
28.97M
29.00%
26.78%
Gross Profit
15.84M
57.72%
60.21%
Operating Income
13.60M
72.58%
93.97%
Net Income
13.32M
68.66%
101.46%
EPS
0.97
49.23%
102.08%
Key Financial Ratios
currentRatio
1.96
grossProfitMargin
54.7%
operatingProfitMargin
46.9%
netProfitMargin
46%
returnOnAssets
1.1%
returnOnEquity
3.58%
debtEquityRatio
2.21
freeCashFlowPerShare
$5.18
dividendPayoutRatio
76.3%
priceToBookRatio
0.87
priceEarningsRatio
6.07
Net Income vs. Revenue
Expense Breakdown
Management Commentary
1. Management Efficiency and Recovery Strategy:
- "The successful full repayment and resolution of our Noland investment... continues to support our current levels of dividends, increases NAV, supports increased portfolio growth..." - Christian Oberbeck.
2. Market Environment and M&A Activity:
- "We appear to be seeing the early stages of a potential increase in M&A in the lower middle market reflected in multiple repayments over the past few months..." - Christian Oberbeck.
3. Quality of Portfolio:
- "Overall credit quality for this quarter increased to 99.7% of credits rated in our highest category..." - Henri Steenkamp.
"Our annualized second quarter dividend of $0.74 per share implies a 12.7% dividend yield based on the stock price..."
— Christian Oberbeck
"At quarter end, we maintained a substantial $385.5 million of investment capacity to support our portfolio companies..."
— Henri Steenkamp
Forward Guidance
Management anticipates a gradual recovery in M&A activity within the lower middle market, supported by attractive deal flow opportunities. The expectation of declining interest rates poses a dual-edged sword; lower rates could stimulate investment activity but may also compress margins. Given SAR's high-quality asset base and resilience in credit underwriting, management remains cautiously optimistic for sustained growth, urging investors to concentrate on ongoing performance metrics and liquidity management to navigate the anticipated volatility.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
SAR Focus
54.67%
46.90%
3.58%
6.07%
NMFC
66.70%
1.07%
2.51%
9.50%
TCPC
1.68%
1.77%
-5.87%
-4.53%
CGBD
80.00%
58.40%
2.05%
12.05%
TSLX
79.90%
69.90%
2.96%
10.47%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Saratoga Investment Corp presents a favorable risk-reward profile driven by strong liquidity, sound credit quality, and ongoing strategic recovery efforts post-reorganization of challenged credits. Investors should closely monitor the evolving interest rate environment alongside the management's ability to capitalize on emerging M&A opportunities to further enhance portfolio performance.
Key Investment Factors
Growth Potential
Saratoga maintains a robust growth trajectory, buoyed by a diversified portfolio across 41 industries including strong positions in first lien debt, offering a cushion against economic uncertainty.
Profitability Risk
Continued risk exists from rising interest rates impacting the cost of borrowing, along with performance pressures from industry-specific downturns in the lower middle market.
Financial Position
A strong liquidity position with $162 million in cash and substantial investment capacity provides Saratoga with the flexibility to leverage market conditions favorably.
SWOT Analysis
Strengths
Strong liquidity position of $162 million in cash and $385.5 million investment capacity.
Diversified portfolio with 85.2% in senior secured first lien debt, mitigating credit risk.
High management ownership aligning interests with shareholders.
Weaknesses
NAV per share has decreased 4.8% YoY, reflecting some prior credit quality issues and economic conditions.
Dependence on income-generating assets in a fluctuating interest rate environment.
Opportunities
Potential increase in M&A activity in the lower middle market could lead to higher income and portfolio growth.
Positioning to benefit from future economic recovery while actively managing balance sheet.
Threats
Macroeconomic uncertainty due to inflation and interest rate fluctuations.
Competitors may gain advantages through more aggressive pricing and terms in a low-volume M&A market.