SRE Holdings Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥8.10B
• Operating Income: ¥309M
• Net Income: ¥60M
• EPS: ¥1.62

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

FY2026 Q2 was a weak quarter with sharp earnings compression and stressed cash flow despite ample reported liquidity. Revenue declined 20.3% YoY to 80.95, while operating income fell 76.0% YoY to 3.09 and ordinary income dropped 84.5% YoY to 1.85. Net income plunged 96.1% YoY to 0.26, implying a net margin of just 0.3% and a calculated ROE of 0.2%. Gross margin printed at 43.2%, but SG&A of 31.86 absorbed nearly all gross profit, leaving limited operating leverage. Operating margin compressed to 3.8% from roughly 12.7% a year ago (about -880 bps), ordinary margin contracted to 2.3% from ~11.8% (about -950 bps), and net margin contracted to 0.3% from ~6.6% (about -620 bps). Non-operating expenses (1.34) were dominated by interest expense (1.14), weighing further on pre-tax profit. The effective tax rate was an elevated 66.6%, exacerbating the decline from already thin pre-tax profit. Cash flow quality deteriorated materially: operating cash flow was -48.60 versus positive net income of 0.26 (OCF/NI of -186.9x), indicating significant working capital outflows, likely inventory build. Inventory is sizable at 181.58 (63% of current assets), contributing to a negative OCF despite reported current ratio strength. Leverage is high in cash flow terms: Debt/EBITDA is 34.6x and interest coverage is only 2.7x, highlighting sensitivity to funding costs. Liquidity optics are strong (current ratio 377.7%, quick ratio 144.2%), but dependence on inventory conversion and debt financing increases execution risk if sales momentum stays weak. Intangibles and goodwill total 56.33 (about 16% of assets), introducing potential impairment risk if profitability remains subdued. ROIC at 0.6% is far below a typical 7–8% cost-of-capital benchmark, implying value dilution absent a sharp recovery. Near term, management must restore operating margins and convert inventory to cash; otherwise, refinancing risk and interest burden could increasingly constrain growth. The forward look hinges on demand normalization and cost discipline, as well as normalizing tax rate and stabilizing non-operating expenses.

Profitability Analysis

ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 0.3% × 0.226 × 2.52 ≈ 0.2%. The component that deteriorated most is net profit margin, which collapsed on a steep revenue decline and sticky SG&A, compounded by higher non-operating burden and an outsized effective tax rate. Business-wise, lower sales throughput against relatively fixed cost bases (personnel, rent, platform costs within SG&A) eroded operating margin, while higher interest expenses and a punitive tax rate further compressed net returns. Asset turnover is low at 0.226 as inventories expanded relative to revenue, indicating slower cycle times and weaker utilization of assets to generate sales. Financial leverage is elevated at 2.52x and, while it supports ROE mathematically, the benefit is offset by low profitability and higher interest drag. The margin compression appears partly cyclical (demand softness and mix) but also reflects cost stickiness; without actions to lower SG&A or accelerate sell-through, recovery may be gradual. Watch for any SG&A containment; given revenue -20.3% YoY versus likely sticky operating costs, operating deleverage is the main driver of ROE decline rather than changes in leverage.

Growth Assessment

Top-line contracted 20.3% YoY to 80.95, signaling demand softness and/or adverse mix. Gross margin at 43.2% is reasonable, but the inability to flex SG&A led to operating margin falling to 3.8%. Ordinary income fell more sharply than operating income due to interest costs, indicating financing headwinds. Net income fell 96.1% YoY to 0.26, with the effective tax rate of 66.6% amplifying the decline; normalization of the tax rate would be a tailwind if pre-tax profit recovers. Revenue sustainability hinges on converting the large inventory balance (181.58) into sales without heavy discounting; discounting could pressure margins further. EBITDA of 5.34 and interest coverage of 2.71x suggest limited capacity to support aggressive growth without balance sheet risk mitigation. Outlook: near-term growth likely subdued until inventory turns improve and SG&A is right-sized; stabilization of funding costs and tax normalization are key for profit recovery. Execution on cash conversion will be central to enabling any growth reacceleration.

Financial Health

Liquidity: Current ratio 377.7% and quick ratio 144.2% indicate healthy near-term liquidity; no warning on current ratio (<1.0 not applicable). Working capital is ample at 215.92, but heavily tied up in inventories (181.58), which are less liquid than cash/receivables. Maturity structure: short-term loans are 55.53 versus cash 50.97 and receivables 22.35; near-term coverage looks adequate, but reliance on inventory conversion poses a maturity-mismatch risk if sell-through slows. Solvency: Debt-to-equity is 1.52x (slightly above the conservative benchmark), and long-term loans total 128.99, creating interest burden; interest coverage at 2.71x is below a strong threshold and should be monitored. Off-balance-sheet obligations: none reported in provided data.

Cash Flow Quality

OCF/Net Income is -186.9x (<0.8), signaling poor earnings quality this period. The large negative OCF likely reflects working capital outflows, especially inventory build relative to sales. With CapEx at -1.26, a proxy FCF (OCF - CapEx) would be about -49.86, indicating external funding dependence. Financing cash flow of +60.77 suggests the company leaned on debt financing to bridge cash needs. No clear signs of intentional working capital manipulation are evident from disclosures, but the scale of inventory relative to revenue and the timing of cash flows raise caution about cash conversion risk. Sustainability: current dividend capacity (if any) is not supported by operating cash generation this period.

Dividend Sustainability

Dividend disclosures are unreported, but the calculated payout ratio stands at 937.5%, which is inconsistent with earnings capacity and implies reliance on non-operating or financing sources if any distributions occurred. Given negative OCF and proxy negative FCF, coverage for dividends is weak. Policy outlook: prudent stance would be to conserve cash until OCF normalizes; any commitment to dividends would need explicit guidance and evidence of improving cash generation.

Risk Assessment

Business Risks:

• Demand softness leading to revenue decline (-20.3% YoY) and margin compression
• Inventory concentration (181.58) risking markdowns and cash conversion delays
• Cost stickiness in SG&A limiting operating leverage
• High effective tax rate (66.6%) depressing net profit

Financial Risks:

• High leverage relative to EBITDA (Debt/EBITDA 34.6x) and modest interest coverage (2.71x)
• Refinancing and interest rate risk given 55.53 short-term loans and rising funding costs
• Negative OCF (-48.60) necessitating external financing (Financing CF +60.77)
• Potential impairment risk with goodwill and intangibles totaling 56.33

Key Concerns:

• ROIC at 0.6% well below cost-of-capital benchmarks, implying value dilution
• Asset turnover at 0.226 highlights slow cycle times and revenue pressure
• Margin compression across operating (-~880 bps), ordinary (-~950 bps), and net (-~620 bps) levels
• Sensitivity to inventory sell-through and pricing, which could further pressure margins if discounts are used

Investment Implications

Key Takeaways:

• Severe earnings compression with net margin at 0.3% and ROE at 0.2%
• Operating deleverage from a 20.3% revenue decline drove margin erosion
• Cash flow quality weak: OCF -48.60 versus NI 0.26; heavy working capital drag
• Leverage elevated in cash flow terms (Debt/EBITDA 34.6x) with modest interest coverage
• Liquidity optics strong but reliant on inventory conversion; execution risk is elevated
• ROIC 0.6% indicates sub-par capital efficiency requiring turnaround

Metrics to Watch:

• Operating margin recovery and SG&A as a % of sales
• Inventory turnover days and sell-through rate
• OCF/NI ratio and working capital movements (especially inventory and receivables)
• Interest coverage and effective tax rate normalization
• Debt/EBITDA and net debt trajectory
• Revenue trajectory and pricing/mix effects

Relative Positioning: Within Japan small/mid-cap tech/proptech and real estate-related peers, profitability and cash conversion are currently weaker, leverage looks higher on an EBITDA basis, and near-term recovery depends on inventory monetization and cost discipline.

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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