SDS HOLDINGS Co.,Ltd. FY2026 Q1 Earnings Report

Financial Highlights

• Net Sales: ¥938M
• Operating Income: ¥-0
• Net Income: ¥-24M
• EPS: ¥-3.47

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment 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: Weak quarter with revenue contraction, razor-thin implied operating profit, and a swing to ordinary and net losses under a highly leveraged balance sheet. Revenue was 9.38 (100M JPY), down 9.5% YoY, while gross profit was 1.35, yielding a 14.4% gross margin. SG&A was 1.32, nearly exhausting gross profit, implying operating income around 0.03 before unreported operating items. Ordinary income came in at -0.26, reflecting a net non-operating burden (non-operating income 0.05 vs non-operating expenses 0.19) and highlighting financing costs (interest expense 0.14). Profit before tax was -0.11 and net income was -0.35, equating to a net margin of -3.7% and EPS of -3.47 JPY. DuPont indicates ROE at -5.0%, driven by negative margins (net margin -3.7%), low asset turnover (0.196), and very high financial leverage (6.79x). Gross margin is modest at 14.4%, and with SG&A at roughly 14.1% of sales, operating leverage is currently unfavorable. The effective tax rate of -118.1% (tax expense despite a pretax loss) indicates non-deductible items or timing differences pressuring after-tax results. Liquidity is tight: current ratio 1.12x, cash and deposits 2.10 versus short-term loans 20.67, elevating refinancing risk. Balance sheet leverage is high with D/E of 5.79x and accumulated losses (retained earnings -38.57), leaving limited equity buffers (owners' equity 5.71, total equity 7.06). Goodwill is 3.78 (about 7.9% of assets), adding impairment risk if profitability remains weak. Operating cash flow is unreported, limiting earnings quality assessment and FCF visibility. With revenue down and financing costs heavy, near-term focus must be on margin protection, cost control, and deleveraging. Forward-looking, the company needs to stabilize gross margins on projects, reduce SG&A intensity, and secure refinancing to mitigate liquidity strain. Disclosure gaps (operating income, cash flows, segment details) constrain deeper diagnostics and raise uncertainty. Overall, the quarter underscores execution and financing headwinds that must be addressed to restore profitability and improve resilience.

Profitability Analysis

ROE decomposition: ROE (-5.0%) = Net Profit Margin (-3.7%) × Asset Turnover (0.196) × Financial Leverage (6.79x). The dominant negative driver is the net margin, given the combination of modest gross margin (14.4%), SG&A ratio (~14.1%), and non-operating interest burden (0.14) pushing ordinary income negative. Asset turnover is low at 0.196, reflecting low sales relative to a 47.95 asset base, which dampens returns even if margins improve. Financial leverage is high at 6.79x (Assets/Equity), mechanically amplifying any margin outcome; currently, it amplifies losses into negative ROE. Business explanation: project gross margins are thin, and SG&A essentially fully absorbs gross profit; after that, interest expense turns results to loss. Sustainability: current net margin pressure appears structural unless pricing, cost pass-through, or mix improves; interest costs will persist until deleveraging or refinancing at lower rates. Concerning trends: revenue fell 9.5% YoY while SG&A absorption remained heavy, implying negative operating leverage; interest expense (0.14) is sizable relative to implied operating profit (~0.03), suggesting sub-1x interest coverage on an operating basis.

Growth Assessment

Revenue declined 9.5% YoY to 9.38, indicating weaker demand or slower project execution/order intake. Gross profit of 1.35 and a 14.4% margin suggest limited pricing power or cost pressures in the quarter. With SG&A at 1.32, operating earnings capacity is minimal without revenue scale or cost cuts. Ordinary loss (-0.26) and net loss (-0.35) highlight that financing structure currently overwhelms operating contribution. Non-operating profile (income 0.05 vs expenses 0.19) shows no outsized one-offs supporting profit; the tax expense despite pretax loss further reduced earnings. Outlook: near-term growth depends on order backlog conversion and improvement in project margin mix; without volume recovery or SG&A reduction, profit growth is constrained. Execution focus should be on bidding discipline, cost pass-through, and avoiding low-margin work. Any macro softness in construction demand would prolong top-line pressure and keep margins tight. Absent cash flow data, sustainability of growth investments (capex, working capital) is unclear.

Financial Health

Liquidity: Current ratio 1.12x and quick ratio 1.12x are only slightly above 1.0, signaling tight liquidity. Short-term loans are 20.67 versus cash 2.10 and very small reported receivables (0.37), implying significant refinancing and rollover dependence; maturity mismatch risk is elevated. Solvency: D/E is 5.79x (warning), with total liabilities 40.89 against total equity 7.06; long-term loans 15.21 further embed leverage. Retained earnings are deeply negative (-38.57), indicating limited loss-absorption capacity. Asset composition: goodwill 3.78 and total intangible assets 3.80 imply potential impairment risk if losses persist. No off-balance-sheet obligations are disclosed in the provided data. Explicit warnings: Current ratio is above 1.0 (no immediate red flag), but D/E > 2.0 is a clear high-leverage warning.

Cash Flow Quality

Operating, investing, and financing cash flows are unreported this quarter, so OCF/Net Income and FCF cannot be assessed. With implied operating profit minimal and interest expense meaningful, cash earnings are likely weak, but this cannot be confirmed without OCF disclosure. Working capital detail is limited (inventories unreported), hindering assessment of whether receivables or payables management influenced earnings. Given heavy short-term debt reliance (20.67) and cash of 2.10, free cash flow coverage of obligations and dividends (if any) is uncertain and likely constrained until profitability improves or leverage is reduced.

Dividend Sustainability

Dividend information is unreported. With net loss (-0.35), high leverage (D/E 5.79x), tight liquidity (current ratio 1.12x), and no visibility on OCF/FCF, the capacity to fund dividends from internally generated cash appears limited. Payout ratio and FCF coverage cannot be calculated. Policy outlook cannot be inferred from the provided data; prudence would suggest prioritizing balance sheet stabilization and debt service over distributions until earnings and cash flow recover.

Risk Assessment

Business Risks:

• Project margin risk: 14.4% gross margin with near-equal SG&A leaves negligible operating profit.
• Demand/order backlog risk: revenue down 9.5% YoY suggests potential softness or execution delays.
• Cost inflation pass-through risk in construction inputs and subcontracting.
• Execution risk on fixed-price contracts leading to cost overruns.
• Goodwill impairment risk (3.78) if profitability does not improve.

Financial Risks:

• High leverage: D/E 5.79x with total liabilities 40.89 vs equity 7.06.
• Refinancing risk: short-term loans 20.67 vs cash 2.10 and limited liquid current assets.
• Interest burden risk: interest expense 0.14 likely exceeds sustainable operating earnings capacity.
• Tax cash outlay risk despite losses (effective tax rate -118.1%).
• Thin liquidity buffer: current ratio 1.12x.

Key Concerns:

• Ordinary loss (-0.26) and net loss (-0.35) amid rising financing costs.
• Negative retained earnings (-38.57) limiting financial flexibility.
• Unreported operating cash flow prevents validation of earnings quality.
• Potential covenant pressure due to high leverage and losses.
• Limited working capital detail (inventories unreported) obscures short-term cash dynamics.

Investment Implications

Key Takeaways:

• Top line contracted 9.5% YoY to 9.38; scale is insufficient to cover fixed costs.
• Gross margin 14.4% and SG&A ~14.1% yield negligible operating earnings.
• Ordinary and net losses reflect a heavy interest burden (0.14) and non-operating expense mix.
• ROE -5.0% driven by negative net margin and high financial leverage (6.79x).
• Liquidity and refinancing are key pressure points: short-term loans 20.67 vs cash 2.10.
• Equity base is thin with accumulated losses, heightening sensitivity to further shocks.

Metrics to Watch:

• Operating income disclosure and operating margin trajectory.
• OCF and FCF once reported; OCF/NI ratio for earnings quality.
• Order backlog and new orders as leading indicators of revenue recovery.
• Gross margin by project/mix and SG&A as a % of sales.
• Interest coverage (EBIT/interest) and debt maturity profile.
• Current ratio and cash balance trends; refinancing activity.

Relative Positioning: Within small-cap construction peers, SDS appears more leveraged and liquidity-constrained, with thinner operating buffers and higher refinancing risk; absent a near-term recovery in orders/margins or balance sheet repair, resilience is below average.

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