VLC Security Co., Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥612M
• Operating Income: ¥-248M
• Net Income: ¥-264M
• EPS: ¥-19.74

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

VLC Security's FY2026 Q2 consolidated results under JGAAP were weak, with a decisive swing to operating and net losses amid a sharp revenue decline. Revenue was 6.12 (100M JPY), down 21.4% YoY, while operating income fell to -2.48 (100M JPY) and net income to -2.63 (100M JPY). Gross profit was 2.48 (100M JPY), yielding a gross margin of 40.5%, but SG&A of 4.96 (100M JPY) exceeded gross profit by 2.48 (100M JPY), resulting in an operating margin of -40.5%. Ordinary income was -2.39 (100M JPY), only slightly cushioned by 0.13 (100M JPY) in non-operating income, with interest expense at 0.01 (100M JPY). Although net income was deeply negative, total comprehensive income was positive at 3.14 (100M JPY), implying sizable unrealized valuation gains—likely on investment securities—flowing through OCI. EBITDA was -2.47 (100M JPY), with an EBITDA margin of -40.4%, reinforcing the magnitude of operating stress. The company’s calculated ROE was -24.7%, driven by a -43.0% net margin, asset turnover of 0.328, and financial leverage of 1.75x. ROIC was -31.6%, well below the 5% warning line, indicating poor capital efficiency in the period. Liquidity remains adequate: current assets of 6.18 (100M JPY) versus current liabilities of 3.09 (100M JPY) yield a current ratio of 200.2%. The debt-to-equity ratio is 0.75x, which is within conservative bounds, and long-term loans are modest at 0.91 (100M JPY). Earnings quality is a concern: operating cash flow was -0.84 (100M JPY), only 0.32x net income in absolute terms, and below the 0.8x threshold. Notably, investment securities of 11.50 (100M JPY) account for roughly 61.7% of total assets, underscoring balance sheet market-risk exposure and explaining the positive comprehensive income despite losses. Financing cash inflow of 1.85 (100M JPY) covered the OCF shortfall and minimal capex (0.03 (100M JPY)), but reliance on external funding to bridge negative OCF is not a durable solution. With revenue contracting and fixed costs elevated, margin repair will require either a pronounced top-line recovery or aggressive SG&A rightsizing. In the near term, the company’s equity base (total equity 10.66 (100M JPY), BVPS ~76–77 JPY) remains intact due to OCI gains; however, this buffer could reverse if market valuations soften. Forward-looking, stabilizing core operations, curbing SG&A, and improving cash conversion are critical; performance will also be sensitive to the valuation of investment securities held on the balance sheet.

Profitability Analysis

ROE decomposition: ROE (-24.7%) = Net Profit Margin (-43.0%) × Asset Turnover (0.328) × Financial Leverage (1.75x). The largest driver of deterioration is the net profit margin, reflecting a swing to an operating loss as SG&A (4.96) exceeded gross profit (2.48). Business reason: a 21.4% YoY revenue decline compressed operating scale while the cost base remained high; with gross margin at 40.5%, the SG&A-to-sales ratio ballooned to ~81%, producing an operating margin of -40.5%. Asset turnover of 0.328 indicates low utilization of a balance sheet dominated by investment securities (11.50, ~61.7% of assets), which contribute little to current-period sales. Financial leverage at 1.75x is moderate and not the key driver. Sustainability: the net margin pressure appears operational (revenue contraction, fixed SG&A), suggesting improvement is possible if sales recover or costs are cut; absent that, losses could persist. Watch for concerning trends: SG&A intensity (81% of sales) is unsustainably high; revenue fell 21.4% YoY while we lack SG&A YoY data, but the level indicates cost growth or insufficient cost flex relative to sales. Non-operating items are small (income 0.13 vs expense 0.04) and not a swing factor. Effective tax rate is distorted (-7.5%) due to losses.

Growth Assessment

Top-line contracted 21.4% YoY to 6.12, signaling weak demand or delayed project/order intake. Gross margin held at 40.5%, suggesting pricing/mix not the main issue; the problem is insufficient volume to cover fixed SG&A. Ordinary income and NI turned negative, confirming lack of operating leverage. We lack segment data and prior-period margins to quantify basis-point changes, but current operating margin at -40.5% is well below normal levels for profitable operations. Near-term growth sustainability is uncertain; the business must either restore volumes or rationalize costs. Non-operating tailwinds are limited in recurring terms; comprehensive income likely benefits from unrealized security valuation gains, which are inherently volatile and non-cash. Outlook hinges on order recovery, utilization, and SG&A controls; without these, revenue softness will continue to translate into losses. Leading indicators to monitor: bookings/backlog (if disclosed), customer activity, and pipeline conversion.

Financial Health

Liquidity is adequate: current assets 6.18 vs current liabilities 3.09 imply a current ratio of 200.2% and a quick ratio of 200.2% (no inventories reported). No warning on current ratio (<1.0) or D/E (>2.0); D/E is 0.75x, conservative. Working capital stands at 3.10. Cash and deposits of 3.72 cover current liabilities (3.09), reducing near-term liquidity risk. Maturity mismatch risk appears limited given low current liabilities and modest long-term loans (0.91), though total noncurrent liabilities are 4.89; further detail on composition is not disclosed. Interest burden is low (interest expense 0.01), but EBIT is negative, resulting in negative interest coverage; solvency pressure could rise if losses persist. Balance sheet concentration in investment securities (11.50, ~61.7% of assets) introduces market valuation risk to equity and capital buffers. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF was -0.84 versus net income -2.63, yielding an OCF/NI ratio of 0.32 (<0.8), a quality red flag. The gap suggests accruals and/or non-cash losses are significant; absent working capital detail, the precise drivers are unclear. Capex was minimal at 0.03, so pre-financing cash burn largely reflects operating losses. Free cash flow is not fully reported but likely negative given negative OCF plus capex. Financing CF of +1.85 funded the operating shortfall; reliance on financing to support operations is not sustainable if losses continue. Potential working capital manipulation signs cannot be assessed due to limited disclosure (no inventories detail, partial receivables/payables). Monitor whether OCF turns positive as cost measures or revenue recovery take hold.

Dividend Sustainability

Dividend data are unreported, and payout ratios are not calculable. Given net losses (-2.63) and negative OCF (-0.84), internal coverage for any dividend would be weak in the period. Retained earnings are 2.26, providing a limited buffer, but sustaining cash dividends would depend on near-term FCF improvement. With capex requirements low (0.03), a resumed or continued dividend would still require stabilization of OCF; otherwise, it would risk drawing down cash or relying on financing, which is not prudent. Policy outlook cannot be inferred without management guidance; conservatism would suggest prioritizing cash preservation until profitability and OCF normalize.

Risk Assessment

Business Risks:

• Demand softness evidenced by a 21.4% YoY revenue decline, risking prolonged underutilization.
• High fixed-cost burden (SG&A 81% of sales) leading to operating losses at current volumes.
• Execution risk in winning and delivering projects/orders to restore operating leverage.
• Dependence on valuation of investment securities for comprehensive income, which is non-operational.

Financial Risks:

• Negative operating cash flow (OCF -0.84) and OCF/NI of 0.32 indicate low earnings quality.
• Interest coverage is negative due to operating loss, leaving limited cushion if financing costs rise.
• Balance sheet concentration in investment securities (11.50, ~61.7% of assets) exposes equity to market volatility and potential impairment risk.
• Potential need for external financing to fund ongoing losses if OCF does not improve.

Key Concerns:

• ROIC at -31.6% signals poor capital efficiency.
• Large gap between net income (-2.63) and comprehensive income (+3.14) highlights reliance on unrealized gains.
• Asset turnover of 0.328 reflects underutilization of assets in driving revenue.
• Limited disclosure on working capital and debt schedules constrains visibility on cash dynamics.

Investment Implications

Key Takeaways:

• Core operations loss-making: operating margin -40.5% with SG&A exceeding gross profit by 2.48.
• Revenue fell 21.4% YoY; scale insufficient to cover fixed costs.
• Earnings quality weak: OCF/NI at 0.32; FCF likely negative despite low capex.
• Balance sheet resilience presently supported by OCI gains from investment securities (comprehensive income +3.14), which are volatile.
• Liquidity is adequate (current ratio 200.2%, cash 3.72 vs CL 3.09), and leverage moderate (D/E 0.75x), but persistent losses would erode this cushion.
• ROE -24.7% and ROIC -31.6% underscore the urgency of cost actions and revenue recovery.

Metrics to Watch:

• Quarterly revenue growth and order/backlog trends (if disclosed).
• SG&A as a percentage of sales and progress on cost reductions.
• Operating margin and EBITDA margin trajectory.
• Operating cash flow and OCF/NI ratio improvement toward >1.0.
• Fair value changes and composition of investment securities; sensitivity of OCI to market moves.
• Asset turnover and utilization of core operating assets.
• Capital raising actions and debt levels relative to equity.

Relative Positioning: Within small-cap security/services peers, VLC Security currently lags on profitability and cash generation, albeit with acceptable liquidity and moderate leverage; near-term equity stability is unusually reliant on investment securities valuation rather than operating earnings.

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
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