$13.50
$28.40
bear $13.50
base $21.00
bull $28.40
margin of safety $14.50
market price* $23.08
Capital Southwest is an internally managed business development company based in Dallas that lends to, and takes small equity stakes in, privately owned U.S. lower middle market and middle market companies. About 90% of its $2.2 billion portfolio (June 30, 2026) is first-lien senior loans, mostly at floating rates, and it owns equity in roughly two-thirds of its borrowers. Because it is a lender, borrowing is the raw material of its business and interest is an operating cost, so we value the earnings left after interest directly and do not subtract its debt a second time. How we measured earnings. The usual cash-flow measure does not work for a lender, because the loans it makes and is repaid run through operating cash flow (fiscal 2026 operating cash flow was negative $193.5 million). We used net investment income after interest, salaries, stock compensation and taxes, plus realized gains and losses on investments after tax. Realized losses are the loans that were actually written off, so they are a real cost of doing business, and realized equity gains are counted in the same way. On that basis, earnings per share for the years ended March 31 were $2.12 (2022), $1.72 (2023), $1.72 (2024), $1.44 (2025) and $2.49 (2026). Net investment income alone was steadier at $2.29, $2.70, $2.49 and $2.40 for 2023 to 2026, but loan losses took about $0.98 per share in 2024 and $1.05 in 2025. We used the median of 2022 to 2026, $1.72, because that window contains both the benign years and the credit-loss years. We did not use 2026 alone, since a $30 million equity gain helped offset debt-investment losses that year. We used the basic share count: the diluted count is about 9 million shares higher only because of the 2029 convertible notes ($230 million, 5.125%, convertible at $25 per share), which we treat as debt. What has changed since our previous estimate. We previously valued the shares at $15.50 / $29.40 / $51.30 (bear/base/bull), assuming earnings would grow 1% to 6% a year and continue growing beyond ten years. We no longer credit that growth. Earnings per share have not grown over five years (about $2.12 in 2022 versus $2.49 in 2026, with a $1.44 low in between). The extra capital the company raises and lends out has been raised from outside investors, not generated from its own cash, and the loan yield fell from 11.7% to 10.8% in the latest year as benchmark rates came down. There is also good news that we weigh in the other direction: loans on non-accrual fell to 1.1% of portfolio value (2.4% of cost) from 1.7% (3.5%) a year earlier, and net investment income grew 14.6% to $135.5 million in fiscal 2026. The quarter to June 30, 2026 produced net investment income of about $0.58 per share (about $2.33 annualized), while net asset value slipped from $16.69 to $16.61 on unrealized losses. Growth check. Earnings per share rose about 73% in fiscal 2026 ($1.44 to $2.49), but that was a rebound from unusually heavy 2025 losses, not a new run rate. The base case therefore starts at the $1.72 median and stays flat. Growth from new lending is left out because it is funded by issuing shares and borrowing rather than by the business's own cash, and the per-share record does not show it adding up. Base case, $21.0 per share. Earnings hold at $1.72 per share for ten years, then decline 5% a year, because nothing contracted keeps a floating-rate loan book earning beyond that. The first ten years are worth $12.66 and the years after are worth $8.29. The business is valued after interest, so its $1.15 billion of borrowings at March 31, 2026 are already charged in these earnings; nothing further is subtracted. Net assets at June 30, 2026 were $16.61 per share. Bear case, $13.5 per share. Loan yields fall another half point (about $0.17 per share) and credit losses repeat the fiscal 2024 and 2025 experience of roughly $1.05 per share a year, leaving earnings near $1.10 per share for three years. Afterward earnings recover only to the $1.44 of the worst recent year, less about $0.09 per share because the 2029 convertible notes must be refinanced at roughly the 7.75% the company already pays on its 2028 notes, giving $1.35. Earnings then decline 10% a year after year ten. The business is worth $13.5 per share after interest; the debt is already reflected, so the difference is $13.5. Debt is about 1.15 times net assets ($1.22 billion against $1.06 billion), so a credit downturn matters. Near-term borrowing includes $223 million of government-guaranteed SBA debentures, a $100 million subsidiary credit facility, 7.75% notes due 2028, the 2029 convertible notes, and notes due 2030. Bull case, $28.4 per share. The company keeps earning what its latest quarter shows, about $2.33 per share, with realized gains and losses netting to roughly zero, as they did in fiscal 2022 and 2026. Earnings hold for ten years and then decline 5% a year. This is worth about $17.15 for the first ten years and $11.24 afterward. What would make this estimate wrong. If credit losses run well beyond the fiscal 2024 to 2025 experience, or loan yields keep dropping faster than borrowing costs, the shares could be worth less than net assets. If instead the company's history of low losses on its first-lien loans holds and net investment income stays near $2.33 per share, the bull case is closer to reality. We could not reconcile the difference between the annual net investment income shown in the tagged data ($136.6 million) and the after-tax figure of $135.5 million reported in the filing text beyond the $1.1 million of income taxes; we used the after-tax figure. The margin-of-safety price of $14.50 sits about 31% below the base case, reflecting a leveraged lender exposed to the credit cycle, and just above the bear case.