ESCRIT INC. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥10.41B
• Operating Income: ¥-1.17B
• Net Income: ¥-786M
• EPS: ¥-69.34

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

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: Weak quarter with a sharp swing to operating and net losses, pressured by revenue decline and an inflexible cost base. Revenue fell 9.1% YoY to 104.14, while operating income deteriorated to -11.65, and ordinary income to -12.34, culminating in net income of -7.86. Gross profit held at 54.66, implying a gross margin of 52.5%, but SG&A of 66.31 exceeded gross profit, driving the operating loss. Operating margin printed at -11.2% and ordinary margin at -11.9%, while net margin was -7.5%. Given the -80.1% YoY deterioration in operating income versus a 9.1% revenue decline, operating margin likely contracted materially YoY (estimated 1,000+ bps), though prior-period margin data are not disclosed to calculate exact basis points. Earnings quality cannot be fully assessed due to unreported cash flow figures, but the negative interest coverage (-21.1x) highlights significant earnings pressure relative to financing costs. Liquidity is marginally adequate on a current ratio basis at 106.6% (quick ratio 101.6%), supported by cash of 42.68 versus current liabilities of 63.83, but the buffer is thin. Leverage is elevated with a reported D/E of 2.85x, and long-term loans of 60.48 dominate the capital structure. ROE is -14.7% per DuPont (NPM -7.5%, asset turnover 0.508x, financial leverage 3.85x), highlighting margin weakness as the principal driver, amplified by leverage. ROIC is -10.6%, well below the 7–8% target zone and even below the 5% warning threshold, signaling value destruction. The effective tax rate mechanically appears at about 33% due to a tax benefit against losses, but this is not indicative of cash taxes. With cash flow data unreported, the ability to fund operations and any potential dividends from internal cash generation is unclear. The balance sheet shows short-term solvency is narrowly maintained, but debt service capacity is strained as operating losses exceed interest costs by a wide margin. Near-term focus should be on arresting revenue declines and resizing SG&A to below gross profit to restore operating break-even. Forward-looking, the company must improve utilization, booking momentum, and unit economics (price per event, add-on sales) while executing cost control to regain positive operating margin. Without visible cash flow support, refinancing risk and covenant headroom merit close monitoring. Overall, the print suggests a reset is needed to stabilize profitability and protect liquidity.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-7.5%) × 0.508 × 3.85 = -14.7%. The component driving the change is primarily Net Profit Margin, given the operating loss and negative ordinary income, while asset turnover at 0.508x is modest and financial leverage at 3.85x amplifies losses. Business reason: revenue declined 9.1% YoY, but SG&A of 66.31 exceeded gross profit of 54.66, indicating a high fixed-cost burden and insufficient cost flex to match lower volumes, resulting in negative operating margin. Non-operating items were not enough to offset operating weakness (non-operating income 0.08 vs expenses 0.77; interest expense 0.55). Sustainability: Margin pressure at current levels is not sustainable; improvements would require either revenue recovery (bookings, pricing, mix) or structural SG&A reduction. Asset turnover could improve if capacity utilization rises, but near-term visibility is limited. Operating leverage is negative currently (revenue down modestly, profits down sharply), flagging a cost structure misaligned with current demand. SG&A growth versus revenue growth cannot be quantified due to missing YoY SG&A, but the SG&A-to-revenue ratio is elevated at 63.6%, and SG&A exceeds gross profit, a clear red flag for margin quality.

Growth Assessment

Top-line contracted 9.1% YoY to 104.14, suggesting demand softness or reduced volumes/pricing in core operations. Profitability deteriorated disproportionately, with operating margin at -11.2% and net margin at -7.5%, reflecting negative operating leverage. Recurring quality appears weak this quarter; there are no disclosed one-time gains to mask results, and non-operating flows were small relative to operating losses. Without cash flow data, sustainability of operations relies on balance sheet capacity and potential external funding; durable growth will require improved bookings and cost normalization. Outlook hinges on execution to lift utilization and average revenue per event, as well as targeted SG&A and procurement efficiencies to bring operating margin back to at least break-even. Near-term, expect management to focus on cost containment and working capital discipline, given thin liquidity buffers. Any recovery in demand or successful pricing initiatives would have outsized incremental margin impact given the fixed-cost base.

Financial Health

Liquidity: Current ratio 1.07 and quick ratio 1.02 indicate a narrow liquidity cushion; not a warning threshold breach (<1.0), but limited buffer against shocks. Cash and deposits of 42.68 cover 66.9% of current liabilities (63.83) and over 20x short-term loans (2.00), mitigating immediate refinancing risk but leaving little room if cash burn persists. Solvency: Reported D/E of 2.85x is high (warning), with long-term loans of 60.48 forming the bulk of interest-bearing debt. Interest coverage is deeply negative (-21.1x), reflecting unsustainable debt service from current earnings. Maturity mismatch: Current assets 68.05 marginally exceed current liabilities 63.83; however, ongoing operating losses could erode this cushion. Net debt estimation using disclosed cash and loans suggests positive net debt, but total interest-bearing debt was not fully disclosed in a single line; we rely on short- and long-term loans totaling 62.48 as a proxy. Off-balance sheet obligations: Not disclosed; none can be assessed from available data. Equity base of 53.35 provides limited loss-absorption capacity relative to total liabilities of 151.83, reinforcing the need to restore profitability.

Cash Flow Quality

OCF, capex, and FCF are unreported, preventing a direct OCF/Net Income assessment or FCF coverage analysis. Given the operating loss (-11.65) and negative ordinary income (-12.34), cash generation is likely strained absent significant working capital release. Working capital accounts are small (AR 3.43, inventory 3.18) relative to revenue scale, limiting the potential for large non-recurring cash releases. No signs of working capital manipulation can be identified from the limited snapshot; however, the thin current ratio suggests tight cash management. Sustainability: Without OCF and capex data, we cannot confirm if internal cash generation can cover interest and any maintenance capex; debt service capacity appears weak based on earnings metrics alone. Monitoring of OCF, changes in deferred revenue/advance bookings (if applicable), and capex deferrals is critical next quarter.

Dividend Sustainability

Dividend data are unreported for the period. With net income negative (-7.86) and ROE at -14.7%, the payout ratio is not meaningful and would not be supported by earnings this quarter. FCF coverage cannot be assessed due to missing OCF and capex. Policy outlook: In the absence of profits and with elevated leverage, dividend visibility is low until profitability and cash generation recover; preserving liquidity is likely prioritized. We will reassess once full-year guidance, OCF, and capex plans are disclosed.

Risk Assessment

Business Risks:

• Demand volatility in core wedding/banquet services leading to volume and pricing pressure
• High fixed-cost base (SG&A exceeding gross profit) causing negative operating leverage on modest revenue declines
• Cost inflation for food, energy, and labor squeezing margins
• Execution risk in resizing operations and improving utilization
• Seasonality and concentration risk tied to event calendars and consumer sentiment

Financial Risks:

• Elevated leverage (D/E 2.85x) and negative interest coverage (-21.1x) increasing refinancing and covenant risk
• Thin liquidity buffer (current ratio 1.07; quick ratio 1.02) vulnerable to cash burn
• Potential need for debt renegotiation or equity issuance if losses persist
• Sensitivity to interest rate changes impacting financing costs

Key Concerns:

• ROIC at -10.6% signaling value destruction
• Operating margin at -11.2% with SG&A above gross profit
• Ordinary income deeply negative (-12.34), indicating weak core earnings after financing
• Limited visibility on OCF and capex, hampering cash sustainability assessment

Investment Implications

Key Takeaways:

• Revenue down 9.1% YoY to 104.14 with sharp deterioration in profitability
• Operating margin -11.2%; SG&A (66.31) exceeds gross profit (54.66), necessitating cost actions
• ROE -14.7% driven by negative margins and high leverage (3.85x DuPont factor)
• Interest coverage -21.1x highlights immediate earnings strain vs. financing costs
• Liquidity is just above minimum thresholds (current ratio 1.07), requiring tight cash control
• ROIC -10.6% well below target levels, indicating urgent need for capital efficiency improvements

Metrics to Watch:

• Operating cash flow and free cash flow
• Bookings, pipeline, and average revenue per event
• SG&A-to-revenue ratio and fixed-cost reduction progress
• Operating and net margin trajectory (bps changes)
• Interest coverage and debt maturity profile
• Current ratio and cash balance trends
• ROIC recovery toward >5% and ultimately 7–8%

Relative Positioning: Versus domestic wedding service peers, the company currently exhibits weaker profitability (negative operating and ordinary margins) and higher balance-sheet risk (D/E 2.85x). Restoration of break-even operations and improved cash generation are prerequisites to close the gap with more profitable, lower-leverage operators.

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