Reviewing Saratoga Investment (NYSE:SAR) and Ares Capital (NASDAQ:ARCC)

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

Analyst Ratings

This is a breakdown of recent recommendations and price targets for Saratoga Investment and Ares Capital, as reported by MarketBeat.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Saratoga Investment	0	4	0	0	2.00
Ares Capital	0	3	5	1	2.78

Saratoga Investment currently has a consensus price target of $24.25, suggesting a potential downside of 1.72%. Ares Capital has a consensus price target of $22.00, suggesting a potential upside of 0.23%. Given Ares Capital’s stronger consensus rating and higher probable upside, analysts plainly believe Ares Capital is more favorable than Saratoga Investment.

Dividends

Saratoga Investment pays an annual dividend of $3.00 per share and has a dividend yield of 12.2%. Ares Capital pays an annual dividend of $1.92 per share and has a dividend yield of 8.7%. Saratoga Investment pays out 147.1% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. Ares Capital pays out 93.7% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future.

Valuation and Earnings

This table compares Saratoga Investment and Ares 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	$148.85 million	2.55	$28.09 million	$2.04	12.10
Ares Capital	$2.99 billion	5.10	$1.52 billion	$2.05	10.71

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

Volatility & Risk

Saratoga Investment has a beta of 0.68, meaning that its share price is 32% less volatile than the S&P 500. Comparatively, Ares Capital has a beta of 0.68, meaning that its share price is 32% less volatile than the S&P 500.

Profitability

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

	Net Margins	Return on Equity	Return on Assets
Saratoga Investment	18.87%	14.04%	4.40%
Ares Capital	43.50%	11.05%	5.25%

Institutional and Insider Ownership

19.1% of Saratoga Investment shares are owned by institutional investors. Comparatively, 27.4% of Ares Capital shares are owned by institutional investors. 12.0% of Saratoga Investment shares are owned by insiders. Comparatively, 0.5% of Ares Capital shares are owned by insiders. Strong institutional ownership is an indication that endowments, large money managers and hedge funds believe a stock is poised for long-term growth.

Summary

Ares Capital beats Saratoga Investment on 12 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 Ares Capital

Ares Capital Corporation is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing. It prefers to make investments in companies engaged in the basic and growth manufacturing, business services, consumer products, health care products and services, and information technology service sectors. The fund will also consider investments in industries such as restaurants, retail, oil and gas, and technology sectors. It focuses on investments in Northeast, Mid-Atlantic, Southeast and Southwest regions from its New York office, the Midwest region, from the Chicago office, and the Western region from the Los Angeles office. The fund typically invests between $20 million and $200 million and a maximum of $400 million in companies with an EBITDA between $10 million and $250 million. It makes debt investments between $10 million and $100 million The fund invests through revolvers, first lien loans, warrants, unitranche structures, second lien loans, mezzanine debt, private high yield, junior capital, subordinated debt, and non-control preferred and common equity. The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically considers the purchase of stressed and discounted debt positions. The fund prefers to be an agent and/or lead the transactions in which it invests. The fund also seeks board representation in its portfolio companies.