THL Credit (NASDAQ: CMFN) and CM Finance (NASDAQ:CMFN) are both small-cap finance companies, but which is the superior business? We will compare the two businesses based on the strength of their risk, profitability, dividends, institutional ownership, valuation, analyst recommendations and earnings.

Dividends

THL Credit pays an annual dividend of $1.08 per share and has a dividend yield of 12.8%. CM Finance pays an annual dividend of $1.00 per share and has a dividend yield of 10.9%. THL Credit pays out 89.3% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future. CM Finance pays out 87.0% of its earnings in the form of a dividend, suggesting it may not have sufficient earnings to cover its dividend payment in the future.

Profitability

This table compares THL Credit and CM Finance’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
THL Credit -8.89% 11.15% 6.15%
CM Finance 54.18% 8.13% 4.52%

Institutional and Insider Ownership

44.6% of THL Credit shares are owned by institutional investors. Comparatively, 50.3% of CM Finance shares are owned by institutional investors. 0.5% of THL Credit shares are owned by company insiders. Comparatively, 1.8% of CM Finance shares are owned by company insiders. Strong institutional ownership is an indication that hedge funds, endowments and large money managers believe a company will outperform the market over the long term.

Volatility and Risk

THL Credit has a beta of 1.07, meaning that its share price is 7% more volatile than the S&P 500. Comparatively, CM Finance has a beta of 1.18, meaning that its share price is 18% more volatile than the S&P 500.

Analyst Ratings

This is a breakdown of recent recommendations and price targets for THL Credit and CM Finance, as reported by MarketBeat.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
THL Credit 0 4 0 0 2.00
CM Finance 0 2 1 0 2.33

THL Credit presently has a consensus target price of $10.00, suggesting a potential upside of 18.76%. Given THL Credit’s higher probable upside, equities research analysts clearly believe THL Credit is more favorable than CM Finance.

Earnings and Valuation

This table compares THL Credit and CM Finance’s top-line revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio Net Income Earnings Per Share Price/Earnings Ratio
THL Credit $78.77 million 3.49 -$7.90 million $1.21 6.96
CM Finance $31.01 million 4.04 $23.57 million $1.15 7.96

CM Finance has lower revenue, but higher earnings than THL Credit. THL Credit is trading at a lower price-to-earnings ratio than CM Finance, indicating that it is currently the more affordable of the two stocks.

Summary

CM Finance beats THL Credit on 10 of the 16 factors compared between the two stocks.

About THL Credit

THL Credit, Inc. is an externally managed, non-diversified closed-end management investment company. The Company’s investment objective is to generate both current income and capital appreciation, primarily through investments in privately negotiated debt and equity securities of lower middle market companies. The Company is a direct lender to lower middle-market companies and invests primarily in directly originated first lien senior secured loans, including unitranche investments. In certain instances, it also makes second lien secured loans and subordinated, or mezzanine, debt investments, which may include an associated equity component, such as warrants, preferred stock or similar securities, and direct equity investments. Its first lien senior secured loans may be structured as traditional first lien senior secured loans or as unitranche loans. The Company’s investment activities are managed by THL Credit Advisors LLC.

About CM Finance

CM Finance Inc. is a business development company specializing in loan, mezzanine, middle market, growth capital, and recapitalization investments. The fund typically invests in United States and Europe. Within United States, the fund seeks to invest in Midatlantic, Midwest, Northeast, Southeast, and West Coast regions. The fund primarily invests in cable and satellites; consumer services; healthcare equipment and services; industrials; information technology; telecommunication services; and utilities sectors. The fund seeks to invest in companies with EBITDA more than $15 million. The fund is based in New York, New York.

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