CM Finance (NASDAQ: CMFN) and Capital Southwest Corporation (NASDAQ:CSWC) are both small-cap finance companies, but which is the superior business? We will compare the two businesses based on the strength of their analyst recommendations, institutional ownership, dividends, earnings, profitability, valuation and risk.

Dividends

CM Finance pays an annual dividend of $1.00 per share and has a dividend yield of 10.4%. Capital Southwest Corporation pays an annual dividend of $0.96 per share and has a dividend yield of 5.8%. CM Finance pays out 58.1% of its earnings in the form of a dividend. Capital Southwest Corporation pays out 58.5% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. CM Finance is clearly the better dividend stock, given its higher yield and lower payout ratio.

Volatility & Risk

CM Finance has a beta of 1.43, meaning that its stock price is 43% more volatile than the S&P 500. Comparatively, Capital Southwest Corporation has a beta of -0.49, meaning that its stock price is 149% less volatile than the S&P 500.

Institutional & Insider Ownership

44.1% of CM Finance shares are held by institutional investors. Comparatively, 62.1% of Capital Southwest Corporation shares are held by institutional investors. 1.8% of CM Finance shares are held by insiders. Comparatively, 5.9% of Capital Southwest Corporation shares are held by insiders. Strong institutional ownership is an indication that large money managers, endowments and hedge funds believe a stock is poised for long-term growth.

Analyst Ratings

This is a summary of recent ratings and price targets for CM Finance and Capital Southwest Corporation, as reported by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
CM Finance 0 0 0 0 N/A
Capital Southwest Corporation 0 1 3 0 2.75

Capital Southwest Corporation has a consensus target price of $20.25, suggesting a potential upside of 21.77%. Given Capital Southwest Corporation’s higher possible upside, analysts plainly believe Capital Southwest Corporation is more favorable than CM Finance.

Profitability

This table compares CM Finance and Capital Southwest Corporation’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
CM Finance 76.03% 9.42% 5.20%
Capital Southwest Corporation 96.98% 4.34% 3.86%

Earnings and Valuation

This table compares CM Finance and Capital Southwest Corporation’s top-line revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
CM Finance N/A N/A N/A $1.72 5.58
Capital Southwest Corporation $27.04 million 9.84 $15.36 million $1.64 10.14

Capital Southwest Corporation has higher revenue and earnings than CM Finance. CM Finance is trading at a lower price-to-earnings ratio than Capital Southwest Corporation, indicating that it is currently the more affordable of the two stocks.

Summary

Capital Southwest Corporation beats CM Finance on 7 of the 13 factors compared between the two stocks.

About CM Finance

CM Finance Inc is an externally managed, non-diversified closed-end management investment company. The Company is a specialty finance company that invests primarily in the debt of the United States middle-market companies. The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing in debt and related equity of privately held lower middle-market companies. As of June 30, 2016, the Company’s portfolio consisted of debt and equity investments in 22 portfolio companies. It invests in unitranche loans and standalone second and first lien loans, with an emphasis on floating rate debt. It also selectively invests in mezzanine loans/structured equity and in the equity of portfolio companies through warrants and other instruments.CM Investment Partners LLC is an external investment advisor of the Company.

About Capital Southwest Corporation

Capital Southwest Corporation is an investment company that specializes in providing customized financing to middle market companies in a range of industry segments located primarily in the United States. The Company is a specialty lending company. Its principal investment objective is to produce risk-adjusted returns by generating current income from debt investments and capital appreciation from its equity and equity related investments. It focuses on partnering with business owners, management teams and financial sponsors to provide financing solutions to fund growth, changes of control, or other corporate events. In allocating future investments, it focuses on investing in senior and subordinated debt securities secured by security interests in portfolio company assets, coupled with equity interests. It targets senior and subordinated investments in the lower middle market and private loan transactions, as well as first and second lien syndicated loans in middle market companies.

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