Comparing Saratoga Investment (NYSE:SAR) & OFS Capital (NASDAQ:OFS)

Saratoga Investment (NYSE:SAR) and OFS Capital (NASDAQ:OFS) are both small-cap finance companies, but which is the better investment? We will contrast the two businesses based on the strength of their risk, valuation, analyst recommendations, institutional ownership, earnings, profitability and dividends.

Analyst Ratings

This is a summary of recent recommendations for Saratoga Investment and OFS Capital, as provided by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Saratoga Investment	1	4	0	0	1.80
OFS Capital	1	1	0	0	1.50

Saratoga Investment presently has a consensus price target of $19.67, indicating a potential upside of 41.28%. Given Saratoga Investment’s stronger consensus rating and higher probable upside, equities analysts clearly believe Saratoga Investment is more favorable than OFS Capital.

Dividends

Saratoga Investment pays an annual dividend of $3.00 per share and has a dividend yield of 21.6%. OFS Capital pays an annual dividend of $0.68 per share and has a dividend yield of 17.9%. Saratoga Investment pays out -1,200.0% of its earnings in the form of a dividend. OFS Capital pays out -32.2% 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. OFS Capital has increased its dividend for 3 consecutive years. Saratoga Investment is clearly the better dividend stock, given its higher yield and lower payout ratio.

Risk and Volatility

Saratoga Investment has a beta of 0.62, meaning that its stock price is 38% less volatile than the S&P 500. Comparatively, OFS Capital has a beta of 0.85, meaning that its stock price is 15% less volatile than the S&P 500.

Valuation & Earnings

This table compares Saratoga Investment and OFS Capital”s top-line revenue, earnings per share (EPS) and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Saratoga Investment	$125.71 million	1.72	$36.60 million	($0.25)	-55.68
OFS Capital	$40.69 million	1.25	-$33.09 million	($2.11)	-1.80

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

Profitability

This table compares Saratoga Investment and OFS Capital’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Saratoga Investment	-3.35%	8.66%	2.78%
OFS Capital	-91.39%	6.09%	2.20%

Institutional and Insider Ownership

19.1% of Saratoga Investment shares are owned by institutional investors. Comparatively, 10.8% of OFS Capital shares are owned by institutional investors. 10.6% of Saratoga Investment shares are owned by insiders. Comparatively, 0.5% of OFS Capital shares are owned by insiders. Strong institutional ownership is an indication that hedge funds, large money managers and endowments believe a stock is poised for long-term growth.

Summary

Saratoga Investment beats OFS Capital on 13 of the 16 factors compared between the two stocks.

About Saratoga Investment

Saratoga Investment Corp. is a business development company specializing in leveraged and management buyouts, acquisition financings, growth financings, recapitalization, debt refinancing, and transitional financing transactions at the lower end of middle market companies. It structures its investments as debt and equity by investing through first and second lien loans, mezzanine debt, co-investments, select high yield bonds, senior secured bonds, unsecured bonds, and preferred and common equity. The firm prefers to invest in aerospace, automotive aftermarket and services, business products and services, consumer products and services, education, environmental services, industrial services, financial services, food and beverage, healthcare products and services, logistics, distribution, manufacturing, restaurants services, food services, software services, technology services, specialty chemical, media and telecommunications. It seeks to invest in the United States. The firm primarily invests $5 million to $50 million in companies having EBITDA of $2 million or greater and revenues of $8 million to $250 million. The firm prefer to take a majority stake. It invests through direct lending as well as participation in loan syndicates. The firm was formerly known as GSC Investment Corp. Saratoga Investment Corp. was formed on 2007 and is based in New York, New York with an additional office in Florham Park, New Jersey.

About OFS Capital

OFS Capital Corporation is a business development company specializing in direct and fund investments as well as add-on acquisitions. It provides flexible capital solutions primarily through debt capital and to a lesser extent, minority equity investments serving the needs of U.S.-based middle-market companies across a broad array of industries. It does not invest in operational turnarounds or start-up businesses. For direct, it specializes in debt and structured equity investments, recapitalizations and refinancing, management and leveraged buyouts, acquisition financings, ownership transition, shareholder liquidity events, growth capital, independent sponsor transactions, ESOPs, and minority investments in the lower middle market companies. It invests in the aerospace and defense, business services, consumer products and services, construction & building, durable goods, capital equipment, automotive, food and beverage, healthcare & pharmaceutical, specialty chemicals, transportation cargo and logistics, value added distribution, franchising, and industrial and niche manufacturing sectors. The firm invests in companies based in United States. It seeks to invest between $3 million and $35 million, revenues between $15 million and $300 million, annual EBITDA between $5 million and $50 million, and Enterprise value between $10 million and $500 million. The firm seeks to invest in companies with debt investment values between $5 million and $25 million. The fund uses senior secured, unitranche loans, first-lien, second lien, subordinated/ mezzanine loans, warrants, and preferred equity securities and common equity securities. It prefers to take a minority as well as majority stake in the investments made. It also co-invests with its partners for additional capital.