Critical Analysis: Ares Capital (NASDAQ:ARCC) and Goldman Sachs BDC (NYSE:GSBD)

Ares Capital (NASDAQ:ARCC) and Goldman Sachs BDC (NYSE:GSBD) are both finance companies, but which is the superior business? We will compare the two companies based on the strength of their profitability, earnings, valuation, risk, dividends, analyst recommendations and institutional ownership.

Profitability

This table compares Ares Capital and Goldman Sachs BDC’s net margins, return on equity and return on assets.

	Net Margins	Return on Equity	Return on Assets
Ares Capital	44.94%	10.48%	5.00%
Goldman Sachs BDC	36.17%	13.95%	6.17%

Earnings & Valuation

This table compares Ares Capital and Goldman Sachs BDC”s top-line revenue, earnings per share and valuation.

	Gross Revenue	Price/Sales Ratio	Net Income	Earnings Per Share	Price/Earnings Ratio
Ares Capital	$2.99 billion	5.28	$1.52 billion	$2.05	10.93
Goldman Sachs BDC	$434.37 million	3.01	$62.87 million	$1.26	9.08

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

Analyst Recommendations

This is a summary of recent recommendations for Ares Capital and Goldman Sachs BDC, as provided by MarketBeat.com.

	Sell Ratings	Hold Ratings	Buy Ratings	Strong Buy Ratings	Rating Score
Ares Capital	0	2	7	0	2.78
Goldman Sachs BDC	2	0	0	0	1.00

Ares Capital presently has a consensus target price of $22.86, suggesting a potential upside of 2.04%. Goldman Sachs BDC has a consensus target price of $10.00, suggesting a potential downside of 12.63%. Given Ares Capital’s stronger consensus rating and higher probable upside, equities analysts plainly believe Ares Capital is more favorable than Goldman Sachs BDC.

Insider & Institutional Ownership

27.4% of Ares Capital shares are held by institutional investors. Comparatively, 28.7% of Goldman Sachs BDC shares are held by institutional investors. 0.5% of Ares Capital shares are held by company insiders. Comparatively, 0.1% of Goldman Sachs BDC shares are held by company insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a stock will outperform the market over the long term.

Risk & Volatility

Ares Capital has a beta of 0.7, suggesting that its share price is 30% less volatile than the S&P 500. Comparatively, Goldman Sachs BDC has a beta of 0.75, suggesting that its share price is 25% less volatile than the S&P 500.

Dividends

Ares Capital pays an annual dividend of $1.92 per share and has a dividend yield of 8.6%. Goldman Sachs BDC pays an annual dividend of $1.28 per share and has a dividend yield of 11.2%. 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. Goldman Sachs BDC pays out 101.6% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future.

Summary

Ares Capital beats Goldman Sachs BDC on 11 of the 16 factors compared between the two stocks.

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.

About Goldman Sachs BDC

Goldman Sachs BDC, Inc. is a business development company specializing in middle market and mezzanine investment in private companies. It seeks to make capital appreciation through direct originations of secured debt, senior secured debt, junior secured debt, including first lien, first lien/last-out unitranche and second lien debt, unsecured debt, including mezzanine debt and, to a lesser extent, investments in equities. The fund primarily invests in United States. It seeks to invest between $10 million and $75 million in companies with EBITDA between $5 million and $75 million annually.