HEIAN CEREMONY SERVICE CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥4.88B
• Operating Income: ¥563M
• Net Income: ¥464M
• EPS: ¥38.96

Income Statement

Balance Sheet

Cash Flow Statement

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: A soft quarter with mild top-line contraction and margin compression, solid balance sheet, but weaker cash conversion and low capital efficiency. Revenue declined 1.6% YoY to 48.81, while operating income fell 9.7% YoY to 5.63 and ordinary income decreased 3.2% YoY to 6.48. Net income slipped 3.2% YoY to 4.64, implying a net margin of 9.5%. Gross profit was 14.00 (gross margin 28.7%), and SG&A was contained at 8.37, yielding an operating margin of 11.5%. Non-operating income of 0.91 (including interest income 0.35) partially cushioned the operating pressure; non-operating expenses were minimal at 0.05. Operating margin contracted by about 105 bps YoY (from ~12.6% to 11.5%), and net margin compressed by roughly 15 bps (from ~9.65% to 9.50%). Cash conversion weakened: operating cash flow was 3.20 versus net income of 4.64 (OCF/NI 0.69x), flagging earnings quality risk in the period. Estimated free cash flow turned slightly negative when considering CapEx of 3.53 (FCF ≈ -0.33), while financing outflows of -3.64 reflect ongoing shareholder returns (share repurchases -1.49). The balance sheet remains robust with equity ratio ~63.6% and a very high current ratio of 8.1x; however, ROIC is low at 2.3%, indicating capital efficiency challenges. Asset turnover is low (0.143), consistent with an asset-heavy model and likely underutilization. Effective tax rate stood at 33.2%. Dividend payout ratio (calculated) appears high at 90.2%, which may strain coverage in a negative FCF quarter absent cash reserves. With cash and deposits of 56.60 and limited short-term obligations, near-term liquidity risk is low. Forward-looking, stabilizing demand, better cost control, and improving utilization are needed to lift ROIC above the 5% warning threshold; otherwise, earnings growth may remain muted.

Profitability Analysis

ROE decomposition: ROE 2.1% = Net Profit Margin 9.5% × Asset Turnover 0.143 × Financial Leverage 1.57x. The largest drag is the very low asset turnover (0.143), which significantly limits ROE despite a decent net margin. Operating margin contraction (~105 bps YoY) suggests weaker operating leverage or mix headwinds, partially offset by non-operating income (0.91). Business rationale: soft revenue (-1.6% YoY) against relatively sticky SG&A and D&A (3.05) compressed operating profit; interest income provided a buffer. Sustainability: net margin looks relatively resilient (only ~15 bps compression YoY), but without revenue reacceleration or cost efficiencies, ROE will remain constrained by low asset velocity. Watch for SG&A discipline: SG&A growth versus revenue is not disclosed, but the negative operating leverage this half is a concern.

Growth Assessment

Revenue declined 1.6% YoY, indicating a mild demand slowdown or pricing/mix softness. Operating income fell faster (-9.7% YoY) than sales due to negative operating leverage. Ordinary income and net income each decreased 3.2% YoY, cushioned by non-operating income. The EBITDA margin stands at 17.8%, but D&A of 3.05 implies a capital-intensive base pressing ROIC. With OCF under net income and estimated FCF slightly negative after CapEx, growth investments are likely funded by cash on hand rather than internally generated FCF this half. Outlook hinges on improving utilization of assets, stabilizing volumes, and continued cost control; absent that, growth will likely remain subdued.

Financial Health

Liquidity is strong: current ratio 810.8% and quick ratio 807.1%, with cash and deposits of 56.60 versus current liabilities of 10.50. Solvency is conservative: D/E 0.57x and equity ratio ~63.6% (217.04/341.52). Maturity profile shows low short-term liabilities and heavier noncurrent liabilities (113.98), limiting near-term refinancing risk; no warning on Current Ratio (<1.0) or D/E (>2.0). Interest-bearing debt breakdown is unreported, and interest coverage is not calculable, but cash levels provide a cushion. No off-balance sheet obligations disclosed in the provided data.

Cash Flow Quality

OCF/Net Income is 0.69x (<0.8), indicating weaker cash conversion and a potential earnings quality issue this period. With CapEx of 3.53 and OCF of 3.20, estimated FCF is approximately -0.33, implying internal cash generation did not cover investment needs this half. Working capital detail is limited; the OCF shortfall versus NI suggests either higher working capital absorption or timing effects. Sustainability: barring improvement in working capital and OCF conversion, funding dividends and buybacks will rely on the existing cash balance.

Dividend Sustainability

The calculated payout ratio is high at 90.2%, which is above the <60% benchmark for comfort. Given estimated negative FCF this half and additional outflows for share repurchases (-1.49), coverage from internally generated cash was insufficient in the period. However, ample cash (56.60) and low near-term liabilities provide flexibility to maintain distributions in the short term. Medium-term sustainability will require improved OCF conversion and/or moderated CapEx and shareholder returns; DPS data is unreported, limiting precision.

Risk Assessment

Business Risks:

• Demand softness leading to negative operating leverage (revenue -1.6% YoY, OI -9.7% YoY).
• Price/mix pressure compressing operating margin (~105 bps YoY).
• Low asset turnover (0.143) and ROIC (2.3%) indicating underutilized asset base.
• Cost inflation risk (labor, utilities) against relatively fixed cost structure (D&A 3.05).
• Industry-specific: demographic shifts and competition in ceremonial/funeral services affecting pricing and utilization.

Financial Risks:

• Earnings quality risk: OCF/NI at 0.69x.
• Negative estimated FCF after CapEx in the period, requiring cash reserves to fund dividends/buybacks.
• High noncurrent liabilities (113.98) relative to current liabilities, with debt composition and interest expense unreported.
• Potential sensitivity to interest income normalization (non-operating income 0.91 with interest income 0.35).

Key Concerns:

• Sustained ROIC below 5% (reported at 2.3%) may cap valuation and reinvestment returns.
• High payout ratio (90.2%) amid weak FCF raises medium-term distribution risk if OCF does not improve.
• Data gaps (investing CF details, interest expense, DPS, debt schedule) limit full risk quantification.

Investment Implications

Key Takeaways:

• Top-line softness and margin compression produced a modest earnings decline.
• Cash conversion deteriorated (OCF/NI 0.69x) and estimated FCF turned slightly negative.
• Balance sheet is strong (equity ratio ~63.6%, current ratio 8.1x), mitigating near-term risk.
• Capital efficiency is weak (ROIC 2.3%, asset turnover 0.143), a key structural headwind.
• Shareholder returns (high payout ratio, buybacks) relied on cash reserves this half.

Metrics to Watch:

• Operating margin trajectory and SG&A efficiency.
• OCF/Net Income and working capital movements.
• ROIC progression toward >5% and asset turnover improvements.
• CapEx intensity versus OCF to assess FCF durability.
• Non-operating income dependence (interest income) and interest-rate sensitivity.

Relative Positioning: Within domestic service peers, the company exhibits superior liquidity and conservative leverage but lags on capital efficiency (low ROIC/asset turnover). Near-term resilience is supported by cash, yet earnings quality and negative operating leverage temper momentum until utilization and cash conversion improve.

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