Information Strategy and Technology Co.,Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥5.79B
• Operating Income: ¥367M
• Net Income: ¥202M
• EPS: ¥19.59

Income Statement

Balance Sheet

Profitability Ratios

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: A solid but unspectacular FY2025 Q3, with healthy liquidity, acceptable profitability, and conservative leverage, offset by limited disclosure on cash flows and dividends. Revenue reached 57.91 (100M JPY), generating gross profit of 15.41 and operating income of 3.67, translating to a gross margin of 26.6% and operating margin of 6.3%. Ordinary income was 3.51 and net income was 2.02, implying a net margin of 3.5% and EPS (basic) of 19.59 JPY. DuPont analysis indicates ROE of 12.7%, driven by moderate asset turnover (1.506x) and leverage (2.42x) on a relatively thin net margin. The effective tax rate is elevated at 42.2%, weighing on bottom-line conversion. Non-operating impact was modestly negative (net -0.16), primarily reflecting interest expense of 0.09 against small interest income of 0.02. Liquidity is strong with a current ratio of 214.6% and quick ratio of 214.6%, and cash & deposits of 18.46 comfortably exceed reported long-term loans of 9.73. Capital structure appears conservative with D/E of 1.42x and an implied equity ratio of approximately 41.3% (15.89/38.46). Interest coverage is robust at 42.6x, indicating low near-term financial stress. Goodwill and intangibles total 10.62, a notable 28% of total assets and about 67% of equity, introducing medium-term impairment risk if growth underperforms. Margin trend comparison in basis points is not determinable due to absent YoY disclosures (bps change: N/A). Earnings quality cannot be validated given unreported operating cash flow; OCF/NI and FCF are not calculable. ROIC (reported metric) of 29.6% is excellent versus a 7–8% benchmark, although the calculation basis is not disclosed. With non-operating items minor and no equity-method income reliance, earnings appear predominantly operating in nature. Forward-looking, maintaining a 6%+ operating margin and 12%+ ROE will hinge on utilization rates, pricing discipline, SG&A control, and avoiding goodwill impairment.

Profitability Analysis

ROE (12.7%) = Net Profit Margin (3.5%) × Asset Turnover (1.506x) × Financial Leverage (2.42x). The most sensitive component is the net margin given a modest 3.5% base and elevated effective tax rate (42.2%) that compresses after-tax returns. Business drivers: gross margin of 26.6% and SG&A ratio of 20.3% (11.73/57.91) yield an operating margin of 6.3%; non-operating net costs (-0.16) and high taxes reduce the net margin to 3.5%. The 1.506x asset turnover reflects an asset-light model with high cash and receivables relative to assets, which supports returns despite modest margins. Leverage at 2.42x (assets/equity) is moderate and not the primary ROE driver. Sustainability: operating margin is likely sustainable if utilization and pricing hold; however, the high tax rate is a structural headwind unless tax planning improves. Watch for SG&A growth relative to revenue; with a 20.3% SG&A ratio, outsized SG&A increases would quickly erode operating leverage. No YoY data limits trend attribution; we cannot confirm margin expansion/compression.

Growth Assessment

Revenue scale is 57.91 with operating income of 3.67, indicating a viable mid-sized IT/services profile; however, growth trajectory is not assessable without YoY/quarterly breakdown. Profit quality is mainly operating-driven (low non-operating contribution), which is positive for recurrence. The tax burden depresses net growth; any normalization could unlock net margin upside. With goodwill/intangibles at 10.62, prior M&A likely contributes to scale; sustaining growth requires successful integration and retention of acquired earnings. Outlook hinges on demand visibility in system integration/outsourcing, hiring and bench utilization, and pricing amid wage pressures. Absent OCF/FCF data, we cannot validate whether growth is cash-accretive. No evidence of equity-method or one-time gains dependence.

Financial Health

Liquidity is strong: current ratio 214.6% (27.56/12.84) and quick ratio 214.6%, with cash & deposits of 18.46 exceeding reported long-term loans of 9.73, implying a net cash position on disclosed items. Solvency is adequate: D/E 1.42x and an implied equity ratio of ~41.3% (15.89/38.46). Interest coverage is 42.6x, indicating ample buffer. Maturity mismatch risk appears low given sizable current assets versus current liabilities; short-term debt is unreported, but payables (3.65) are well covered by cash and receivables (26.87 combined). Noncurrent liabilities are concentrated in long-term loans (9.73), suggesting limited near-term refinancing pressure. No off-balance sheet obligations are disclosed in the provided data. Explicit warnings: none triggered (Current Ratio > 1.0; D/E < 2.0).

Cash Flow Quality

OCF/Net Income is not calculable due to unreported cash flow statements; therefore, we cannot validate earnings-to-cash conversion or working capital dynamics. Free cash flow is unreported; coverage of growth capex and dividends cannot be assessed. With receivables at 8.41 vs payables at 3.65, the business likely operates with a positive receivables cycle typical of IT services; however, without OCF we cannot rule in/out quarter-end working capital optimization. Given robust interest coverage and net cash on disclosed items, short-term liquidity risk is low, but the quality of earnings remains unverified.

Dividend Sustainability

Dividend data (DPS, payout, total dividends) is unreported, so payout assessment is not possible. With net income of 2.02 and absent FCF disclosure, we cannot confirm coverage. Balance sheet strength (net cash on disclosed items and 41% equity ratio) would ordinarily support ordinary dividends, but sustainability depends on underlying OCF, which is not available. Policy outlook cannot be inferred from the provided data.

Risk Assessment

Business Risks:

• Execution risk in maintaining utilization and pricing amid wage inflation in IT services
• Customer concentration and project postponement/cancellation risk (typical for SI/SES models)
• Goodwill and intangible asset impairment risk (10.62 total; ~28% of assets, ~67% of equity)
• Talent retention and hiring competition impacting delivery capacity and margins

Financial Risks:

• High effective tax rate (42.2%) structurally suppresses net margin and ROE
• Potential undisclosed short-term debt or lease obligations (cash flow statement not provided)
• Refinancing risk is limited but present given 9.73 long-term loans; interest rate changes could affect non-operating costs
• Earnings-to-cash conversion uncertainty due to unreported OCF/FCF

Key Concerns:

• Lack of cash flow disclosure prevents validation of earnings quality
• Intangible-heavy balance sheet elevates impairment sensitivity in a downturn
• Thin net margin (3.5%) leaves less room for shocks despite adequate operating margin

Investment Implications

Key Takeaways:

• ROE at 12.7% is respectable, supported by solid asset turnover and moderate leverage
• Operating margin of 6.3% on a 26.6% gross margin indicates reasonable operating discipline
• Liquidity is strong with current ratio >2x and net cash on disclosed items
• Non-operating items are minor; core earnings quality appears operating-driven but unverified without OCF
• Elevated effective tax rate materially compresses net margins; any normalization would be an upside lever
• Goodwill/intangibles are sizable, implying impairment sensitivity if growth slows

Metrics to Watch:

• Operating cash flow and OCF/Net Income ratio (target >1.0)
• SG&A growth vs revenue growth and SG&A ratio trajectory
• Effective tax rate normalization path
• Receivables DSOs and any build-up relative to revenue
• Goodwill impairment testing outcomes and segment profitability
• Leverage and net cash position including any short-term borrowings or lease liabilities

Relative Positioning: Within Japan IT services peers, profitability (6%+ OPM, 12%+ ROE) appears middle-of-the-pack to slightly above average, supported by healthy liquidity and conservative leverage; disclosure gaps on cash flows/dividends and a high tax rate are relative weaknesses, while limited non-operating dependence is a relative strength.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis