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If you are wondering whether Capital Southwest is offering fair value at its recent price of US$23.08, it helps to break the story into what the market has been doing and what the underlying numbers say.
Over the short term the stock has had a mixed run, with a 2.5% decline over the last 7 days, a 5.2% gain over the past month, a 3.5% return year to date and a 17.1% return over the past year, while the 3 year and 5 year returns sit at 71.2% and 122.1% respectively.
Recent share price moves are often influenced by a mix of macro sentiment, sector trends and company specific updates that shape how investors view risk and reward. For Capital Southwest, those factors provide useful context for assessing whether the current price reflects its fundamentals or if the market reaction has gone too far in either direction.
On our valuation checklist Capital Southwest scores 3 out of 6. This means it screens as undervalued on half of the key tests. Next we compare different valuation approaches before finishing with a more complete way to think about the company’s value beyond any single metric.
The Excess Returns model looks at how much profit a company is expected to generate above the return that equity investors typically require, then capitalises those extra profits into a per share value.
For Capital Southwest, the model starts with a Book Value of US$16.62 per share and a Stable Book Value of US$16.59 per share, based on the median book value from the past 5 years. Using analysts’ weighted future Return on Equity estimates from 4 analysts, Simply Wall St derives a Stable EPS of US$2.35 per share.
The required return for shareholders, or Cost of Equity, is US$1.59 per share, which implies an Excess Return of US$0.76 per share. The Average Return on Equity used in the model is 14.17%. In simple terms, the model assumes Capital Southwest can continue to earn returns on its equity base above what investors require and converts that spread into an intrinsic value.
This Excess Returns valuation produces an intrinsic value of about US$28.60 per share, compared with the recent price of US$23.08. That implies the shares trade at roughly a 19.3% discount to this estimate.
For a profitable company, the P/E ratio is a useful shorthand for what you are paying for each dollar of current earnings. It ties the share price directly to the bottom line and is widely used across the Capital Markets industry, which makes comparisons easier.
What counts as a “normal” or “fair” P/E depends on how the market views a company’s earnings growth potential and risks. Higher growth and lower perceived risk tend to justify a higher P/E, while lower growth or higher risk usually point to a lower multiple.
Capital Southwest currently trades on a P/E of 15.6x. That sits below the Capital Markets industry average of about 24.8x and the peer group average of 24.3x. Simply Wall St also calculates a proprietary “Fair Ratio” for Capital Southwest of 14.6x, which is the P/E it would expect given factors like the company’s earnings growth profile, industry, profit margin, market cap and risk characteristics.
This Fair Ratio is more tailored than a simple industry or peer comparison because it adjusts for Capital Southwest’s own fundamentals rather than assuming it should be valued exactly like the average stock in its sector.
Compared with the Fair Ratio of 14.6x, the current P/E of 15.6x suggests the shares trade somewhat above that level. This indicates they screen as overvalued on this metric.
Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which are simply your story about a company linked directly to your assumptions for fair value, future revenue, earnings and margins.
On Simply Wall St, within the Community page used by millions of investors, a Narrative connects three things in one place: the company’s story, a forward looking financial forecast and the fair value that emerges from those assumptions.
This makes Narratives an easy tool to pressure test your own view, because you can compare your Fair Value for Capital Southwest with the current share price and decide whether that gap is wide enough for you to consider buying or selling.
Because Narratives update automatically when new information such as fresh earnings reports or major news is added to the platform, your Fair Value view stays in sync with what is happening without you having to rebuild your model each time.
For example, one Capital Southwest Narrative on the Community page might reflect a cautious view with a relatively low fair value, while another assumes different revenue and margin expectations that support a meaningfully higher fair value estimate.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
