Capital Southwest Corporation (CSWCZ) reported Q2 2025 results characterized by a solid EBITDA framework and meaningful net income, but with notable cash-flow dynamics that underscore reliance on financing activities to fund dividends. Revenue for the quarter stood at $38.417 million, down 10.19% year over year and up 5.97% quarter over quarter, while EBITDA was $35.426 million and net income reached $22.684 million (EPS $0.48). The gross margin remained robust at approximately 96.6%, and operating margin was about 88.8%, signaling continued fee-related and interest income strength within the asset-management/business-development framework. However, net cash from operating activities was negative (-$23.831 million) and free cash flow was negative (-$24.328 million), highlighting ongoing liquidity needs met predominantly through financing activities which yielded net cash inflows of $38.266 million for the period.
Key balance-sheet features show a large portfolio of long-term investments (~$1.508 billion) and a substantial debt burden (long-term debt of ~$785 million, total debt ~$785.0 million) against total assets of ~$1.604 billion and stockholders’ equity of ~$791 million. The company’s liquidity position appears strong on a headline basis, with cash and cash equivalents about $47.2 million and minimal current liabilities (~$0.799 million); yet leverage remains meaningful (long-term debt to total capitalization around 49.8% and total debt to capitalization around 15.9%). The stock trades at price-to-book around 1.55x and price-to-earnings around 13.5x, with a dividend yield of ~2.5%. The dividend payout ratio reported as ~134.5% indicates a payout at or above earnings, driven by financing activity rather than free-cash-flow-backed distributions, which may raise sustainability questions if financing conditions tighten.
Overall, CSWCZ presents a stable EBITDA foundation and ongoing management of a diversified middle-market portfolio, but the near-term investor thesis hinges on the sustainability of dividends, the trajectory of net cash flow, and the ability to grow net investment income amid rate and credit-market volatility. Absent explicit forward-looking guidance in the provided materials, investors should monitor liquidity management, NAV stability, and portfolio yield dynamics as critical drivers of the longer-term investment case.
Liquidity and Cash Flow
- Net cash provided by operating activities: -$23.831 million
- Free cash flow: -$24.328 million
- Net cash provided by (used in) financing activities: +$38.266 million
- Net change in cash: +$13.938 million; Cash at end of period: $47.237 million; Cash at beginning: $33.299 million
Balance Sheet and Leverage
- Total assets: $1.604498 billion
- Total liabilities: $813.240 million; Long-term debt: $785.031 million; Total debt: $785.031 million; Net debt: $737.794 million
- Shareholders’ equity: $791.258 million; Retained earnings: -$75.841 million
- Investments: Long-term investments: ~$1.508507 billion; Total current assets: ~$78.695 million
- Liquidity and ratios: Current ratio, quick ratio, and cash ratio are reported as 59.12x (indicative of high cash relative to minimal current liabilities in the dataset); Debt-to-capitalization: 0.159 (total debt to capitalization); Long-term debt to capitalization: 0.498; Return on equity: 2.87%; Return on assets: 1.41%
Valuation and Coverage
- Price-to-book: 1.545x; Price-to-sales: 31.81x; Price-to-earnings: 13.47x
- Dividend yield: 2.50%
- Dividend payout ratio: 134.5%
- Interest coverage (computed from EBIT/Interest): ~2.7x (using EBIT of $34.107m and interest expense $12.587m)
Notes
- Total Other Income/Expenses net: -$13.906 million; this sizable non-operating item materially affects pretax income and underscores the sensitivity of reported results to non-operating items in this quarter.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
38.42M
-10.19%
5.97%
Gross Profit
37.10M
-10.85%
-26.95%
Operating Income
34.11M
29.14%
19.12%
Net Income
22.68M
0.27%
61.62%
EPS
0.48
-15.79%
54.84%
Key Financial Ratios
currentRatio
59.12
grossProfitMargin
96.6%
operatingProfitMargin
88.8%
netProfitMargin
59%
returnOnAssets
1.41%
returnOnEquity
2.87%
debtEquityRatio
0.19
operatingCashFlowPerShare
$-0.5
freeCashFlowPerShare
$-0.5
dividendPayoutRatio
134.5%
priceToBookRatio
1.55
priceEarningsRatio
13.47
Net Income vs. Revenue
Expense Breakdown
Management Commentary
No earnings call transcript provided for QQ2 2025 in the supplied materials. Consequently, management commentary, strategic color, and qualitative updates typically captured from the call are not available in this dataset.
N/A
— N/A
N/A
— N/A
Forward Guidance
Forward guidance was not explicitly disclosed in the provided data. In the absence of management targets, the plausible trajectory hinges on: (1) stabilization or expansion of net investment income through portfolio optimization and favorable credit spreads; (2) maintaining fee-related revenue streams and management/monitoring fees; (3) sustaining cash flow generation to support dividends amid ongoing leverage. Investors should monitor: (a) NAV stability given large long-term investments; (b) portfolio yield and default experience in rising-rate environments; (c) ongoing liquidity management and access to financing markets; (d) any changes to dividend policy or payout coverage if FCF remains negative over multiple quarters.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
CSWCZ Focus
96.57%
88.80%
2.87%
13.47%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Neutral-to-modestly-bullish on the longer-term structural position of Capital Southwest as a diversified asset-manager/BDCs player, but the near-term investment thesis is cautious due to negative operating cash flow and a payout ratio well above one. The quarter demonstrates solid profitability (EBITDA and net income) but raises red flags about cash generation versus dividend funding. Investors should focus on: NAV stability and trajectory, sufficiency of net investment income to sustain distributions, and the company’s ability to grow fee-based revenues without compromising credit quality. A constructive path would involve returning to positive operating cash flow, improving free cash flow coverage of dividends, and prudently growing assets under management to support sustainable yields. Monitoring debt affordability, portfolio performance in rising-rate environments, and any management commentary on guidance will be essential for updating the outlook.
Key Investment Factors
Growth Potential
Moderate growth potential from continued middle-market investments, diversified credit and private equity activity, and fee-based revenue streams. Scale in asset management fees may improve with higher assets under management and stronger deal flow in the agency and private credit markets.
Profitability Risk
Primary risks include sustained negative free cash flow, dividend sustainability under higher financing costs, credit and interest rate risk affecting portfolio yields and impairment, and potential volatility in the capital markets that could constrain external funding or NAV performance. Elevated payout ratio suggests sensitivity to funding conditions if debt costs rise or investment opportunities decelerate.
Financial Position
Solid balance sheet foundation with substantial long-term investments and a sizeable equity base, but a meaningful debt load relative to equity. Liquidity appears favorable on the surface (cash ~$47.2M), yet cash flow from operations is negative, indicating reliance on financing activities to fund distributions.
SWOT Analysis
Strengths
Robust EBITDA framework with high gross margins (~96.6%) and solid operating margin (~88.8%).
Large portfolio of long-term investments contributing to net income generation.
Positive quarterly net income with manageable tax effects (tax benefit noted in the period).
Strong equity base with substantial total assets and a diversified asset mix.
Weaknesses
Negative free cash flow and negative operating cash flow in the quarter, signaling liquidity reliance on financing activities.
Dividend payout ratio above 100% (approximately 134.5%), raising sustainability concerns if financing conditions tighten.
Reported non-operating items (Total Other Income/Expenses net) significantly affecting pretax and net results.
Opportunities
Potential to grow traditional asset-management and advisory fee income as assets under management scale.
Portfolio optimization could enhance yield while reducing credit risk and volatility.
Access to favorable financing terms could support dividend policy and opportunistic investments.
Threats
Rising interest rates and credit-market volatility could compress net investment income and increase funding costs.
Regulatory and macroeconomic changes impacting financial services and BDC funding channels.
Market competition for middle-market deals could pressure yields and fee structures.
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