Saratoga buys mezzanine debt. This company's goal is to create the best cash flow from the debt that they hold. Although mezzanine debt was at the root of the financial crisis, the vetting of debt is far more intricate, lowering the risk SAR takes on. But, the best part is that this company is trading at a mere fraction of its EPS when compared to other companies in the sector. It is a huge bargain.
Saratoga Investment financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures the total debt position of Saratoga Investment, including all of Saratoga Investment's outstanding debt obligations, and compares it with the equity. In simple terms, the high financial leverage means the cost of production, together with running the business day-to-day, is high, whereas, lower financial leverage implies lower fixed cost investment in the business and generally considered by investors to be a good sign. So if creditors own a majority of Saratoga Investment assets, the company is considered highly leveraged. Understanding the
composition and structure of overall Saratoga Investment debt and outstanding corporate bonds gives a good idea of
how risky the capital structure of a business is and if it is worth investing in it. Please read more on our
technical analysis page.
Understanding Saratoga Total Liabilities
Saratoga Investment Corp liabilities are broken down into two parts on the balance sheet. These are short-term (or current) obligations and long-term debt. Saratoga Investment Corp has to fulfill its short-term liabilities in this reporting year and should be no more than 12 months old. Long-term debt, on the other hand, is anything beyond the 12-month payment timeframe. Common short-term liabilities found on Saratoga Investment balance sheet include debt obligations and money owed to different Saratoga Investment vendors, workers, and loan providers. Below is the chart of Saratoga short long-term liabilities accounts currently reported on its balance sheet.
You can use Saratoga Investment Corp
financial leverage analysis tool to get a better grip on understanding its financial position
How important is Saratoga Investment's Liquidity
Saratoga Investment
financial leverage refers to using borrowed capital as a funding source to finance Saratoga Investment Corp ongoing operations. It is usually used to expand the firm's asset base and generate returns on borrowed capital. Saratoga Investment financial leverage is typically calculated by taking the company's all interest-bearing debt and dividing it by total capital. So the higher the debt-to-capital ratio (i.e., financial leverage), the riskier the company. Financial leverage can amplify the potential profits to Saratoga Investment's owners, but it also increases the potential losses and risk of financial distress, including bankruptcy, if the firm cannot cover its debt costs. The degree of Saratoga Investment's financial leverage can be measured in several ways, including by ratios such as the debt-to-equity ratio (total debt / total equity), equity multiplier (total assets / total equity), or the debt ratio (total debt / total assets). Please check the
breakdown between Saratoga Investment's total debt and its cash.
Breaking down Saratoga Investment Indicators
Saratoga Investment Corp. is a specialty finance company. The Company is an externally managed, closed-end, non-diversified management investment company. The Company invests primarily in leveraged loans and mezzanine debt issued by private middle-market companies in the United States. The company is traded in the United States under SAR. Its market capitalization is $122 million and its stock is traded at $21.75. The objective of this fund is to earn income through the debt payments. To a lesser extent, they company does try and earn capital appreciation, however, that is a smaller portion of the company’s focus.
Mezzanine debt is a type of layering of debt where the company will purchase multiple debts that may have a great deal of variability in the risk. This diversifies the debt and diversifies the risk that SAR takes on. The theory is that if there is any kind of default it will be on a smaller portion of the debt held by the company. Otherwise, the company purchases these layers of debt in one large, bulk purchase and then earns the interest from then on out.
It should be noted that this type of instrument was at the heart of the financial crisis of 2008. However, it must also be noted that the economic landscape was entirely different than before and credit risks have been heavily scrutinized. This was not the case back in the housing bubble that created the financial crisis.
Investing in a stock like this would be more akin to investing in a bond. As mentioned, the primary purpose of the investments SAR purchases is for cash flow versus capital appreciation. Given that, with the stock trading at $21.75 per share the cashflow you are receiving for that investment has a very large ratio. Currently, the earnings-per-share is nearly 10-times, about 2.5 times better than the stock market’s current average of 25-times. Here are the EPS for the past few years:
2012: $3.55
2013: $1.73
2014: $2.04
2015: $2.09
This is an excellent opportunity to invest in a great cashflow stream. What is also interesting is that the Price/Book value. Whereas the market recognizes the industry and has invested in the sector, this stock has been missed. Price/Book in industry is 15.17. However, SAR is trading at 0.96, well below the industry average. There is potential for this stock to catch up to the industry. If it does SAR’s stock could see a move as much as 100 percent, pushing the stock up to about $45.00 per share.
The fact that the general market recognizes the industry and has pushed the stocks of the sector upward as it has is telling of the potential for this company. But, I have not found anything in the stock itself that tells me why the company has been left behind as it has. The earnings are generally increasing, a function of good management. In fact, the funds invested do not really change. These assets are largely the same and will not affect anything with regards to the cashflow. That has more to do with management being effective at employing the capital available.
The economy is continuing to expand. This will lead to better opportunities for the individuals who are paying these mezzanine debts. Simply, as the economy expands and incomes increase, the risk levels decrease for debt holders that are paying these instruments. At the same time, management has demonstrated that they are efficient at employing the capital they have on hand.
If you are looking for a company to purchase that is discounted to the industry and the general market, and are looking for a great source of cashflow, SAR is an excellent opportunity.
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David Taylor is a Senior Member of Macroaxis Editorial Board - Sector Analysis. David is a professional writer who writes for multiple investment news outlets. His primary focus is dynamic movements in financial markets and effects of economic volatility on North American industries and sectors. David has many years of experience in financial service industry including working with major banks as a FX trader. In his free time, he does a lot of outdoors type activities including rock climbing, mountain biking, hiking, mountaineering and kayaking in the summer, and snowboarding in the winter.
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