ARCC

We rate ARES CAPITAL CORP (ARCC) as a Reduce with a composite score of 47.8/100 at a current price of $19.18. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in momentum (70th percentile) and stability (61th percentile), which together account for the majority of the composite score. Offsetting weakness in investment (28th percentile) and quality (29th percentile) tempers our overall conviction. We assign a No Moat rating (18/100), High uncertainty, and Standard capital allocation.

Key items to watch: whether strong momentum is fundamentally supported by revenue trends; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

ARES CAPITAL CORP holds an above-average position (#11 of 38) within the Financial sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 47.8/100 places it at rank #2348 in our full 7,333-stock universe. With a $14.5B market capitalization, ARES CAPITAL CORP operates at meaningful scale within the Financial sector, providing competitive advantages in distribution, procurement, and customer reach.

Despite positive momentum (70th percentile), revenue contraction of -13% creates a divergence between price action and fundamental trajectory. This divergence suggests either that the market is looking through near-term weakness or that technical factors are temporarily inflating the stock. Investors should assess whether the revenue decline reflects cyclical weakness or structural challenges.

The margin cascade tells an important story: gross margins of 0% (-100.0pp vs sector) narrow to operating margins of 0% (-59.1pp vs sector) and net margins of 97.3%, yielding a gross-to-net conversion rate of N/A%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $19.18, ARES CAPITAL CORP is trading near fair value based on current fundamentals. Our value factor score of 55/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 9.8x (roughly in line with the sector median of 9.8x), EV/EBITDA of 20.9x (at a premium), P/B of 1.0x, P/S of 9.5x. The below-sector P/E suggests possible undervaluation or the market pricing in near-term headwinds.

We assign a High uncertainty rating to ARES CAPITAL CORP. Key risk factors include significant leverage (112% debt-to-equity), weak quality scores (29th percentile). The wide range of potential outcomes widens our fair value estimate and increases the possibility of permanent capital impairment. Investors considering this name should size positions accordingly and demand a meaningful margin of safety before initiating.

Specific risk factors that inform our assessment include: significant leverage (112% debt-to-equity); weak quality scores (29th percentile). Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 61th percentile and quality factor at the 29th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: above-average stability (61th percentile) suggests predictable business dynamics; a 9.49% dividend yield anchors total return. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile warrants caution and disciplined position management.

We rate ARES CAPITAL CORP's capital allocation as Standard. Management has shown adequate — though not exceptional — stewardship of shareholder capital. Returns on equity stand at 9.8%, and the balance sheet is managed within acceptable parameters (D/E: 112%). Exemplary allocators typically sustain ROE above 20% and D/E below 50%; ARES CAPITAL CORP falls short on at least one dimension.

There is room for improvement in optimizing the capital structure or enhancing shareholder returns. The 9.49% dividend yield provides some income return, but the overall capital allocation framework would benefit from either higher reinvestment returns, improved balance sheet efficiency, or increased shareholder distributions. We will monitor for signs of strategic improvement that could warrant an upgrade.

In summary, ARES CAPITAL CORP receives a Reduce rating with a composite score of 47.8/100 (rank #2348 of 7,333). Our quantitative framework assigns a No Moat (18/100, trend: stable), High uncertainty, and Standard capital allocation. The average factor score across quality, value, momentum, stability, and investment is 49/100.

Our analysis does not support a constructive view on ARES CAPITAL CORP at this time. The combination of limited competitive advantages, high uncertainty, and standard capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.