Quest Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥8.79B
• Operating Income: ¥486M
• Net Income: ¥356M
• EPS: ¥62.60

Income Statement

Balance Sheet

Cash Flow Statement

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

Quest Co., Ltd. (TSE: 2332) reported strong top-line growth in FY2026 Q2 with revenue of ¥8.785bn, up 21.4% YoY, but profitability contracted as operating income fell 2.1% to ¥486m and net income declined 5.8% to ¥335m. The reported net margin was 3.81%, indicating that higher costs and/or a less favorable project mix offset revenue momentum. EBITDA was ¥507m (5.8% margin), implying limited depreciation burden (¥21m) and an asset-light profile typical of IT services. DuPont analysis shows ROE of 4.58%, decomposed into a 3.81% net margin, 0.866x asset turnover, and 1.39x financial leverage—an ROE level below typical domestic IT services mid-teens benchmarks, highlighting margin pressure as the main drag. The gross profit disclosed was ¥1.358bn, equating to a gross margin of 15.5%; this points to tight contribution margins considering the labor-intensive nature of SI and outsourcing, though classification differences may exist. Operating leverage appears muted this quarter: revenue rose sharply but operating profit declined, suggesting wage inflation, subcontracting costs, or higher SG&A absorbed the growth. Ordinary income of ¥511m slightly exceeded operating income, indicating minimal non-operating headwinds and very low interest burden (interest expense ¥0.45m; interest coverage ~1,082x). Liquidity looks robust with a current ratio of 331% and working capital of ¥4.97bn, providing ample buffer for project execution and receivables cycles. The balance sheet is conservatively levered with financial leverage at 1.39x and debt-to-equity of 0.35x; solvency risk appears low. Operating cash flow was ¥292m, yielding an OCF/Net Income ratio of 0.87; cash conversion is reasonable but below 1.0, implying some working capital absorption. Free cash flow is not determinable this quarter due to unreported investing cash flows; FCF shown as 0 reflects non-disclosure rather than zero spending. Several items (equity ratio, cash & equivalents, inventories, share counts, DPS) are unreported; conclusions rely on available metrics and may not capture full capital allocation or cash position nuances. The effective tax rate metric provided as 0.0% is not reflective of the actual tax burden; reported income tax was ¥179m against net income of ¥335m, implying a normal tax load at the pre-tax level. Overall, Quest delivered healthy growth but experienced margin compression, resulting in lower earnings and subdued ROE despite strong liquidity and negligible financing costs. Near-term outlook hinges on pricing discipline, utilization, and control of subcontracting and labor costs to re-expand operating margins.

Profitability Analysis

ROE_decomposition:

• net_profit_margin: 3.81% (Net income ¥335m on revenue ¥8,785m)
• asset_turnover: 0.866x (Revenue ¥8,785m / Total assets ¥10,140m)
• financial_leverage: 1.39x (Assets/Equity; ¥10,140m/¥7,308m)
• calculated_ROE: 4.58% (matches reported 4.58%) margin_quality: Gross margin is 15.5% based on disclosed gross profit of ¥1,358m; this level suggests limited headroom given wage and subcontractor cost pressures typical in SI/outsourcing. Operating margin is approximately 5.5% (¥486m/¥8,785m), down YoY in absolute operating profit despite strong revenue growth, indicating cost inflation or unfavorable mix. Net margin at 3.81% reflects normal tax and minimal interest burden. operating_leverage: Revenue grew +21.4% YoY while operating income fell -2.1% YoY, evidencing negative operating leverage in the period. This likely stems from higher personnel costs, subcontracting ratios, or SG&A investments outpacing gross profit gains. Restoring operating leverage will require improved pricing, utilization, and cost discipline.

Growth Assessment

revenue_sustainability: Top-line growth of +21.4% YoY is robust for a mid-sized IT services company and likely underpinned by secular demand for systems integration, managed services, and digital transformation. Sustainability depends on backlog visibility, repeat business in outsourcing/maintenance, and ability to execute larger projects without eroding margins. profit_quality: Ordinary income marginally exceeded operating income, indicating limited financial income/expense noise; earnings quality is anchored in core operations. However, the decline in operating and net income vs. strong sales growth signals margin compression, reducing profit quality in the short term. outlook: Absent guidance here, the near-term outlook will hinge on capacity utilization, hiring and wage trends, subcontractor dependence, and pass-through pricing. If cost pressures stabilize and utilization improves, margin recovery is plausible; otherwise, growth may continue to be dilutive to margins.

Financial Health

liquidity: Current ratio 331% and quick ratio 331% (inventories unreported) indicate strong short-term liquidity. Working capital stands at ¥4,970m (¥7,122m current assets minus ¥2,152m current liabilities), offering ample cushion for receivable cycles common in project work. solvency: Financial leverage is modest at 1.39x with debt-to-equity at 0.35x, and interest expense is de minimis (¥0.45m) with coverage over 1,000x, indicating low solvency risk. capital_structure: Equity is ¥7,308m versus total assets of ¥10,140m, implying conservative capitalization. The reported equity ratio of 0.0% is an unreported metric rather than an actual value.

Cash Flow Quality

earnings_quality: OCF/Net income of 0.87 suggests decent but not perfect cash conversion; working capital likely consumed cash (e.g., receivables growth alongside revenue acceleration). Depreciation is modest (¥21m), so earnings are not heavily influenced by non-cash charges. FCF_analysis: Free cash flow cannot be reliably assessed due to unreported investing cash flows (investing CF shown as 0 indicates non-disclosure). Using OCF alone (¥292m) without capex data would overstate sustainable FCF. working_capital: Strong growth typically lengthens receivables; with current assets materially exceeding current liabilities, the company can support growth, but cash conversion may remain below 1.0 if DSOs extend.

Dividend Sustainability

payout_ratio_assessment: EPS is ¥62.60; DPS is unreported (0.00 shown). Therefore, payout ratio indicated as 0.0% should not be interpreted as a policy shift; dividend information is unavailable in this dataset. FCF_coverage: FCF coverage is not assessable because investing cash flows are unreported; OCF of ¥292m would likely cover modest dividends in principle, but no conclusion can be drawn without capex and actual DPS. policy_outlook: Given conservative leverage and stable cash generation, a dividend is plausible in general for the sector; however, absent disclosed DPS or policy commentary, no view on sustainability or direction can be formed from this data alone.

Risk Assessment

Business Risks:

• Project margin pressure from wage inflation and subcontracting cost increases
• Utilization volatility and potential bench costs amid rapid hiring or uneven demand
• Price competition in SI and outsourcing leading to lower win-rate pricing
• Execution risk and potential cost overruns on fixed-price projects
• Client concentration risk typical of mid-sized IT service providers
• Demand cyclicality tied to corporate IT budgets and macro conditions

Financial Risks:

• Working capital swings impacting cash conversion during high growth
• Receivables concentration and potential delays in client payments
• Limited disclosure of cash and investing flows obscures FCF and liquidity buffers
• Potential off-balance obligations (e.g., leases) not visible in the snapshot

Key Concerns:

• Negative operating leverage despite +21% revenue growth
• ROE at 4.58% is subdued for the sector, driven by thin margins
• OCF/Net income below 1.0 indicating some cash absorption in growth
• Data gaps for key items (cash balance, investing CF, dividend, share count) constrain precision

Investment Implications

Key Takeaways:

• Strong topline momentum (+21.4% YoY) but earnings declined, indicating margin compression
• ROE of 4.58% reflects low net margins more than balance sheet constraints
• Liquidity and solvency are strong; low interest burden provides flexibility
• Cash conversion is acceptable but below 1.0; watch working capital discipline
• Lack of investing CF and dividend disclosure limits assessment of FCF and capital returns

Metrics to Watch:

• Operating margin and EBITDA margin trajectory over coming quarters
• Subcontracting ratio, personnel expenses, and billing rate improvements
• Utilization rates and order backlog/book-to-bill
• DSO and OCF/Net income to gauge cash conversion
• Capex/investing cash flows to derive true FCF
• Any updates on dividend policy and share count changes
• Mix shift toward higher-margin recurring services

Relative Positioning: Versus domestic IT services peers, Quest shows above-average revenue growth but below-average profitability and ROE this quarter; balance sheet strength is a positive, yet sustaining growth while restoring margins is key to narrowing the gap with higher-ROE peers.

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