Breaking Down Prospect Capital Corporation (PSEC) Financial Health: Key Insights for Investors

You're looking at Prospect Capital Corporation (PSEC) for that eye-popping yield, and honestly, who wouldn't be drawn to a forward dividend yield near 19.8% as of November 2025? But a seasoned investor knows that high yield often signals high risk, and the recent financials bear that out: the Net Asset Value (NAV) per share has seen a sharp deterioration, falling to $6.45 as of September 30, 2025, which represents a significant drop over the last year. While the company did report a Net Investment Income (NII) of $0.17 per share for the most recent quarter, topping analyst estimates, total revenue still missed expectations at $157.62 million; that's a classic sign of a dividend that may be unsustainable, even with management increasing their focus on first lien senior secured loans, which now make up 71.1% of the portfolio. The big question is whether the monthly $0.045 distribution can hold up against the continued erosion of book value, especially when the analyst consensus is a 'Sell,' yet the CEO and COO are buying shares.

Revenue Analysis

You need to know where Prospect Capital Corporation (PSEC) is actually making its money, especially with the shifting interest rate environment. The direct takeaway is that PSEC's revenue is highly concentrated in interest income from lending, but the top-line revenue saw a significant pullback in the last fiscal year, signaling a need for caution on growth expectations.

For the fiscal year (FY) ending June 30, 2025, Prospect Capital Corporation reported annual revenue of $719.44 million. This figure represents a substantial year-over-year decline, showing a -16.51% decrease from the prior fiscal year's revenue of $861.66 million. That's a serious drop, and it forces us to look closely at the underlying sources.

Primary Revenue Sources and Business Mix

As a Business Development Company (BDC), Prospect Capital Corporation's revenue is primarily generated from its investment activities, chiefly lending to and investing in middle-market privately-held companies. The core of the revenue stream is interest income from these loans. For the quarter ended June 30, 2025, interest income accounted for approximately 94.9% of the company's total investment income, which is a strong indicator of a recurring revenue profile.

The investment portfolio is heavily weighted toward its core middle market lending strategy, which represented 85% of total investments at cost as of June 2025. This focus on lending breaks down into a few key segments:

• Middle Market Lending: The dominant segment, with originations in the March 2025 quarter comprising 81% of the total.
• Real Estate: A smaller, but still meaningful, segment. The remaining real estate property portfolio included 58 properties and provided an income yield of 4.5% for the June 2025 quarter.
• Subordinated Structured Notes: This segment is being actively exited, reflected by it making up 0% of originations in the March 2025 quarter.

Shifting Investment Strategy and Revenue Quality

The company is defintely focused on improving the quality of its income. A significant change is the rotation of assets into first lien senior secured loans within the middle market segment. This move generally increases safety but can sometimes temper yield. Also, the company has been reducing its reliance on non-cash income; Payment in Kind (PIK) income-interest that is paid with more debt instead of cash-was reduced by over 50% from the June 2024 quarter to the June 2025 quarter. Less PIK income is a good sign for cash flow quality, even if it impacts the reported top-line revenue.

Here's the quick math on the recent revenue trend:

The overall revenue decline is a near-term risk, but the increased percentage of interest income suggests a more stable, albeit smaller, cash flow base. If you want to dive deeper into the firm's long-term vision, you can read their Mission Statement, Vision, & Core Values of Prospect Capital Corporation (PSEC).

Profitability Metrics

You're looking for the true picture of Prospect Capital Corporation (PSEC)'s earnings power, and in the Business Development Company (BDC) world, that means looking past the headline revenue to Net Investment Income (NII) and the quality of those earnings. The quick takeaway for the fiscal year ending June 30, 2025, is a clear divergence: PSEC maintained a solid operating margin proxy but took a massive hit on the net side due to investment losses.

For the fourth quarter of fiscal year 2025, the Net Investment Income (NII), which is the BDC equivalent of operating profit-the cash generated from its core lending and investment activities-was $\mathbf{\$79.043 \text{ million}}$. When we look at the estimated quarterly revenue of about $\mathbf{\$167.9 \text{ million}}$, that translates to an NII margin (our operating profit margin proxy) of roughly $\mathbf{47.1\%}$. That's a decent operational clip, but it's defintely showing stress; this NII figure is down from $\mathbf{\$102.922 \text{ million}}$ in the same quarter a year ago.

Here's the quick math on the net profitability: The company reported a significant net loss applicable to common shareholders of $\mathbf{\$226 \text{ million}}$ for the quarter ended June 30, 2025. This loss, primarily driven by unrealized investment losses, pushes the net profit margin into deeply negative territory, at approximately $\mathbf{-134.6\%}$ for the quarter. This is a stark reminder that in finance, a high operating margin doesn't mean much if your portfolio is deteriorating.

The trend in profitability is concerning. Net Investment Income has been declining, dropping from $\mathbf{\$83.489 \text{ million}}$ in the third quarter of 2025 to $\mathbf{\$79.043 \text{ million}}$ in the fourth quarter. This near-term trend points to increasing difficulty in generating stable income from the existing asset base, plus, the significant net losses highlight a persistent challenge with asset valuation and credit quality in the portfolio.

When you compare PSEC's operational efficiency to the broader BDC sector, a key risk indicator jumps out: Payment-in-Kind (PIK) income. PIK income is non-cash interest where the borrower pays the interest by issuing more debt, which can mask credit problems. PSEC's PIK income has averaged around $\mathbf{16\%}$ of total income in the recent quarters leading up to Q3 2025. This is significantly higher than the $\mathbf{2\% \text{ to } 8\%}$ average for most BDC peers. While PSEC has increased its focus on first lien senior secured loans, now representing $\mathbf{70.5\%}$ of the portfolio, the elevated PIK ratio still suggests a lower quality of earnings compared to sector leaders.

Here are the key operational takeaways for your decision-making:

• Monitor NII trends: The $\mathbf{47.1\%}$ operating proxy is stable, but the NII decline is a risk.
• Watch PIK income: $\mathbf{16\%}$ is a red flag for credit quality versus peers.
• Focus on Net Asset Value (NAV): The $\mathbf{-\$226 \text{ million}}$ net loss directly erodes shareholder equity.

For a more comprehensive look at the risks and opportunities, you can check out the full analysis at Breaking Down Prospect Capital Corporation (PSEC) Financial Health: Key Insights for Investors. Finance: Track NII coverage of the dividend in the next quarterly report.

Debt vs. Equity Structure

You're looking at Prospect Capital Corporation (PSEC)'s balance sheet to understand its risk profile, and that's the right move. The key takeaway is that Prospect Capital Corporation maintains a conservative leverage position relative to its peers, prioritizing long-term, unsecured financing and perpetual equity to manage maturity risk.

As of its fiscal year end on June 30, 2025, Prospect Capital Corporation's total debt was heavily skewed toward the long term. Specifically, the company reported $2,088.31 million in Long-Term Debt and Capital Lease Obligations, with essentially $0.00 million in Short-Term Debt and Capital Lease Obligations. This is a strong indicator of a deliberate strategy to avoid near-term liquidity pressures, which is defintely a plus in a volatile interest rate environment.

The core measure of this balance is the Debt-to-Equity (D/E) ratio. As of June 30, 2025, Prospect Capital Corporation's D/E ratio stood at 0.70. Here's the quick math: total debt of $2,088.31 million divided by total stockholders' equity of $2,988.77 million equals 0.70. This is significantly below the broader Business Development Company (BDC) sector average, which was around 1.19x as of November 2025. This lower ratio suggests a comparatively conservative use of financial leverage, giving the company more cushion against potential portfolio valuation dips.

Prospect Capital Corporation's funding strategy is a textbook example of matching long-term assets with long-term capital. They actively manage their debt maturities, which you can see in their recent activity:

• Retired a $156.2 million convertible bond maturity in March 2025.
• Redeemed the remaining outstanding 3.706% Notes due January 2026 in June 2025.
• Issued approximately $167 million in new 5.5% Series A Notes due 2030 in October 2025, with proceeds earmarked for refinancing existing debt.

This focus on refinancing and extending maturities means that as of June 30, 2025, only $2.4 million of debt remained to mature during the rest of the 2025 calendar year. That's a very clean near-term maturity schedule.

The company balances its debt financing with a substantial equity component, including its perpetual preferred stock offering programs totaling $2.25 billion. This preferred stock acts like permanent capital, meaning it has no scheduled maturity date, which is crucial for a BDC. Total funding from common and preferred equity combined was approximately $4.6 billion as of June 30, 2025. This blend of long-term, unsecured debt and non-maturing equity is what underpins their 'conservative, strong capitalization.'

For a deeper dive into how this capital structure impacts their investment strategy and dividend coverage, you should check out the full post at Breaking Down Prospect Capital Corporation (PSEC) Financial Health: Key Insights for Investors.

The limit here is that while the D/E ratio is low, what this estimate hides is the interest rate risk on the floating-rate portion of their debt, like the revolving credit facility, which can impact Net Investment Income (NII) even with a conservative debt level. Also, their Net of Cash Debt to Equity Ratio was 44.4% in June 2025, which is another way to look at their leverage after accounting for cash on hand. Finance: draft a sensitivity analysis on NII for a 50 basis point SOFR increase by end of next week.

Liquidity and Solvency

You need to know if Prospect Capital Corporation (PSEC) has the cash flow and short-term assets to cover its immediate obligations, and the answer is yes, but the story is more complex than a simple ratio. For the most recent reporting period, the company shows a solid, albeit tight, liquidity position, backed by a significant credit facility. This is a BDC, so their cash flow is a constant cycle of lending and funding, not just selling widgets.

The core liquidity metrics for Prospect Capital Corporation as of the most recent quarter are healthy for a Business Development Company (BDC). The Current Ratio sits at 1.22, and the Quick Ratio is very close behind at 1.17. This indicates that its current assets-even excluding less liquid items for the quick ratio-are sufficient to cover its current liabilities. Since both ratios are above 1.0, the company has a positive working capital (Current Assets minus Current Liabilities), which is a basic strength for meeting near-term obligations.

Here's the quick math on their immediate capacity:

• Current Ratio: 1.22 (Current Assets / Current Liabilities)
• Quick Ratio: 1.17 (Excludes inventory/less liquid assets)
• Working Capital Trend: Positive, indicating short-term assets exceed liabilities.
• Available Liquidity: $1.32 billion in cash and undrawn revolving credit facilities.

The working capital trend is less about a large dollar surplus and more about access to capital. Prospect Capital Corporation maintains a strong liquidity cushion with approximately $1.32 billion in available funds, which includes both cash on hand and undrawn revolving credit facility commitments. This large, committed facility is the true measure of a BDC's near-term strength, as it allows them to fund new investments and manage debt maturities without market disruption. They also have a laddered liability structure, which means their debt maturities are spread out to avoid a single large payment shock.

Looking at the fiscal year 2025 cash flow statement (ended June 30, 2025), you see the typical BDC pattern. Cash Flow from Operations (OCF) was a strong positive $523.17 million. This is the income generated from their core business of lending. However, the Cash Flow from Financing (FCF) was a net outflow of -$558.26 million. This outflow reflects the payment of dividends to shareholders and the net repayment of debt, which is a common and expected activity for a BDC managing its capital structure and shareholder payouts.

The Cash Flow from Investing (ICF) is where the business happens. While the net annual figure isn't explicitly listed, we know Prospect Capital Corporation is actively deploying capital, such as the $115 million all-cash acquisition of QC Holdings, Inc. on June 30, 2025. This constant cycle of investing (outflow) and receiving principal/interest (inflow) means the ICF is typically a net outflow as they grow the portfolio. The liquidity strength lies in the fact that the OCF is robust enough to cover the dividend and the $1.32 billion in unutilized credit is there to fund new investments and manage the financing gap.

The main liquidity strength is the $1.32 billion in available liquidity, which includes the undrawn revolving credit facility. The primary concern is the increase in non-accrual loans (loans where interest payments are significantly past due), which rose to 4.0% of total assets as of the fiscal year end, up from 2.7% a year earlier. This credit quality issue could impact future OCF if the trend continues, so keep a defintely close eye on that. For a deeper dive into who is buying and selling the stock, check out Exploring Prospect Capital Corporation (PSEC) Investor Profile: Who's Buying and Why?

Valuation Analysis

You want to know if Prospect Capital Corporation (PSEC) is a bargain or a trap. My analysis, using fresh fiscal year 2025 data, suggests the stock is currently priced as undervalued based on its assets, but the market's skepticism-reflected in the price-is a clear warning sign. The valuation metrics are mixed, but the trend is defintely concerning.

The core of the issue is the stock's massive discount to its book value, coupled with a high-risk analyst consensus.

• Price-to-Book (P/B) Ratio: The P/B ratio stands at approximately 0.30. This means the stock trades at only 30% of its net asset value (NAV), a significant discount that screams 'undervalued' in a traditional sense.
• Price-to-Earnings (P/E) Ratio: The P/E ratio is volatile. The reported 2025 actual P/E is around 3.57, which appears extremely low and suggests the stock is cheap relative to its earnings. However, this metric for a Business Development Company (BDC) like Prospect Capital Corporation is less reliable than Net Investment Income (NII).
• Enterprise Value-to-EBITDA (EV/EBITDA): The Forward EV/EBITDA is around 10.69. This is a more complex metric for a BDC, but it gives you a sense of the total company value relative to its operational cash flow.

Here's the quick math on the discount: If you bought $100 worth of Prospect Capital Corporation stock at a P/B of 0.30, you are theoretically buying $333 worth of underlying assets. What this estimate hides, however, is the market's concern about the quality and liquidity of those assets.

Stock Price and Analyst Sentiment: A Reality Check

The stock price trend over the last year maps directly to the market's low confidence. Over the last 12 months leading up to November 2025, the stock price has fallen sharply, decreasing between 35.40% and 40.73%. The 52-week trading range is stark, with a high of $5.28 and a low of $2.57. As of mid-November 2025, the price is hovering near its low, around $2.75 to $2.80.

The analyst consensus is a clear indicator of near-term risk. The average analyst rating is a 'Sell' or 'Moderate Sell'. The average 12-month price target is $2.50, which implies a further downside of about -9.58% from the current price. The analysts are telling you they expect the price to fall closer to the 52-week low.

The Dividend Story: High Yield, High Risk

Prospect Capital Corporation's dividend yield is the primary draw for investors, but you need to look past the headline number.

The current dividend yield is extremely high, sitting between 19.78% and 20.74% as of November 2025. The annual dividend is $0.54 per share. A yield this high often signals that the market views the dividend as unsustainable and expects a cut. The dividend payout ratio is a critical, but complicated, factor here. While the GAAP-based payout ratio for the quarter ended June 2025 was reported as 0.00 (likely due to negative GAAP earnings), the key for a BDC is the coverage of the dividend by Net Investment Income (NII). The high yield compensates investors for the significant price volatility and the persistent discount to NAV.

To understand the full picture of who is buying and why, especially with such a high yield, you should read Exploring Prospect Capital Corporation (PSEC) Investor Profile: Who's Buying and Why?.

The takeaway is simple: Prospect Capital Corporation is statistically cheap, but the market is pricing in significant risk, which is why the stock has dropped over 35% in the last year.

Risk Factors

You're looking at Prospect Capital Corporation (PSEC) because of its yield, but you need to understand the structural risks that have kept its stock price under pressure. The direct takeaway here is that while management is actively de-risking the portfolio, the historical trend of Net Asset Value (NAV) decline and a high probability of financial distress remain significant near-term concerns.

Honestly, the biggest internal risk is the continued erosion of shareholder value, visible in the declining Net Asset Value (NAV) per common share. The NAV per share dropped from $7.25 to $6.56 for the fiscal year ended June 30, 2025, and then further to $6.45 by September 30, 2025. This historical trend is a clear sign that the company has struggled to grow capital over time. This is a tough environment for any Business Development Company (BDC).

The financial health metrics also raise a red flag. Macroaxis estimates Prospect Capital Corporation's probability of financial distress is over 73% to 76% in the next two fiscal years, which is significantly higher than the Capital Markets sector average. Here's the quick math on portfolio quality from the fiscal year-end:

• Net Loss: The company reported a significant net loss applicable to common shareholders of $226 million for the quarter ended June 30, 2025.
• Non-Accrual Loans: Loans not generating interest income stood at 4.0% of total assets (at cost) as of June 30, 2025, though this improved to approximately 0.7% (at fair value) by September 30, 2025.
• Revenue Miss: Total investment income for the quarter ended September 30, 2025, was $157.6 million, missing analyst estimates and reflecting a decrease from the prior year.

On the external side, the risks are what you'd expect in this market: competition and volatility. The middle-market lending space is crowded, and any economic downturn or sustained high-interest rate environment puts pressure on the company's portfolio companies, increasing the risk of defaults. Geopolitical risks and general market volatility are also explicit threats that require defintely strategic risk management. If you want to dive deeper into the firm's philosophy on navigating these waters, check out their Mission Statement, Vision, & Core Values of Prospect Capital Corporation (PSEC).

But to be fair, management is taking clear action to mitigate these risks. Their strategic rotation is focused on capital preservation and risk reduction, moving away from riskier assets. They are heavily focused on first lien senior secured loans, which represented 70.5% of the portfolio as of June 30, 2025, a much safer position in the capital structure. Plus, they've nearly completed the exit of their subordinated structured notes portfolio, which was reduced to just 0.3% of the investment portfolio by September 30, 2025.

The balance sheet is also structured to withstand shocks. Prospect Capital Corporation has a laddered liability structure, with debt maturities extending out 26 years through 2052, and a significant portion of its funding is through unsecured term debt, which lacks restrictive financial covenants. This gives them flexibility. The earlier dividend cut has also made the current payout more sustainable, evidenced by improved dividend coverage in 2025.

Your next step is to monitor the non-accrual rate in the next quarterly report. If it starts to rise again, that's a signal of worsening portfolio health.

Growth Opportunities

The future for Prospect Capital Corporation (PSEC) isn't about chasing risky, high-yield bets; it's a calculated pivot toward stability and lower-risk, income-generating assets. You're seeing a fundamental strategic shift that aims to de-risk the portfolio, which is the real engine for sustainable growth in a higher interest rate environment.

Their growth story now centers on recycling capital from complex, illiquid assets into their core business of first lien senior secured loans. That's the clear action you need to watch.

Strategic Shift: De-Risking for Income

The biggest driver for Prospect Capital Corporation's near-term performance is its decisive move away from riskier investments. This isn't just talk; the numbers show a clear change in portfolio composition, which should translate to more predictable net investment income (NII).

For example, the company's allocation to first lien senior secured loans-the safest part of the capital structure-increased by a substantial 650 basis points from the prior year, reaching 71.1% of the portfolio mix as of the first quarter of fiscal year 2026 (ending September 30, 2025). This move is defintely a positive for credit quality. Plus, they've nearly completed the exit of their subordinated structured notes portfolio, which was reduced by 781 basis points to just 0.6% of the total portfolio at cost as of June 30, 2025.

The capital generated from these exits is being redeployed into their core lending business, where performing interest-bearing investments are currently generating an attractive annualized yield of 12.2% as of the quarter ended June 30, 2025.

• Increase first lien loans to 71.1% of the portfolio.
• Substantially exit subordinated structured notes.
• Recycle capital from real estate with a $378 million unrealized gain.

Earnings and Revenue Reality Check

While the strategic shift is underway, the fiscal year 2025 results show a mixed picture. The company's focus on cost management and investment performance helped it beat earnings forecasts, but revenue still faced headwinds from market conditions.

Here's the quick math on the most recent quarterly results, which gives you a clear sense of the near-term financial reality:

The Net Investment Income (NII) of $79.4 million in the first quarter of fiscal year 2026 is a solid figure, showing the income-generating power of the restructured portfolio. Still, you have to be a trend-aware realist: some long-term analyst models still project a negative annual growth rate on a per-share basis, primarily due to the historical impact of share dilution.

Competitive Edge and Scale Advantage

Prospect Capital Corporation's significant size and diversified structure give it a clear competitive advantage in the middle-market lending space. Being one of the largest Business Development Companies (BDCs) means they can access better financing and manage risk more effectively than smaller peers.

As of June 30, 2025, the company's Total Assets stood at approximately $6.8 billion, which is nearly double the listed peer average of $3.4 billion. This scale allows for a broad portfolio across 33 different industries, mitigating sector-specific downturns. Furthermore, the alignment of interests is strong: the senior management team and employees own a substantial 28.5% of all common shares outstanding, valued at approximately $0.9 billion at Net Asset Value (NAV) as of June 30, 2025.

For more on the foundational metrics of this company, you should read the full post: Breaking Down Prospect Capital Corporation (PSEC) Financial Health: Key Insights for Investors.