Hirota Group Holdings Co., Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥883M
• Operating Income: ¥-138M
• Net Income: ¥-115M
• EPS: ¥-4.37

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

Verdict: FY2026 Q2 was very weak, with a deep operating loss and an extremely thin equity base that amplifies downside risk. Revenue was 8.83 (100M JPY), down 26.1% YoY, and gross profit of 2.53 implies a 28.7% gross margin that is far too small to cover SG&A of 3.91. Operating income fell to -1.38 (operating margin -15.6%), and ordinary income was -1.44 as modest non-operating expenses (0.07) exceeded non-operating income (0.01). Net income was -1.14 (net margin -12.9%), translating to EPS of -4.37 JPY and total comprehensive income equal to net loss. DuPont shows ROE at -154.1%, driven by a negative margin (-12.9%), low asset turnover (0.562x), and extraordinarily high financial leverage (21.22x). OCF was -1.43, which is slightly worse than net income but OCF/NI of 1.26x indicates no immediate red flag on earnings quality despite both being negative. Liquidity is mixed: current ratio is 126.3% (above 1.0 but below the 1.5 comfort threshold) and quick ratio is 91.6% (below 1.0), suggesting reliance on inventory to meet obligations. Solvency risk is acute with D/E at 20.22x and equity of only 0.74 (100M JPY), implying very limited loss-absorption capacity. Interest coverage is deeply negative (-33.16x), highlighting debt service vulnerability if losses persist. Working capital remains positive at 2.44, and cash of 2.27 covers short-term borrowings of 0.28, but not the broader 9.26 in current liabilities. Capex was small (-0.04), so the approximate FCF (OCF - capex) is around -1.47, indicating the business is consuming cash. With retained earnings at -2.74, distributable reserves look constrained, limiting dividend flexibility. Absent a revenue recovery and meaningful SG&A/COGS restructuring, near-term profitability is unlikely to improve. Forward-looking, management likely needs to accelerate cost actions, reassess underperforming lines, and secure liquidity buffers to avoid erosion of the already minimal equity base.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-12.9%) × 0.562 × 21.22 ≈ -154.1%. The largest driver is the negative net profit margin, compounded by very high financial leverage; asset turnover is modest at 0.562x. Business drivers: Revenue decline (-26.1% YoY) and a gross margin of 28.7% could not cover SG&A (44.3% of sales), producing a -15.6% operating margin and cascading into a net margin of -12.9%. Non-operating items were small and did not change the picture materially. Sustainability: The compression in margin appears driven by topline contraction and fixed cost absorption; without a sales rebound or structural SG&A reduction, losses may persist. Watch for SG&A trend; SG&A at 3.91 vs revenue 8.83 implies limited operating leverage and necessitates cost base resizing. No signs of one-off gains/losses are visible in the reported items; current profitability pressure looks recurring rather than one-time.

Growth Assessment

Topline contracted sharply (-26.1% YoY to 8.83), suggesting demand weakness or intentional pruning; details are not disclosed. Gross margin at 28.7% is insufficient to absorb SG&A of 44.3% of revenue, implying negative operating leverage. Operating margin (-15.6%) and net margin (-12.9%) indicate deterioration versus a typical breakeven profile; however, lack of prior-period margin disclosure limits precise bps comparisons. The cost base appears misaligned with scale; absent a rebound, restructuring is required to restore breakeven. Non-operating income is minimal (0.01), offering no buffer. Near-term outlook hinges on revenue stabilization and gross margin improvement, plus SG&A cuts. Given the very small equity buffer, even modest further revenue declines could trigger additional losses and potential covenant pressure. Management updates on order trends, pricing, and cost actions will be critical for assessing recovery potential.

Financial Health

Liquidity: Current ratio 126.3% (above 1.0 but below the healthy benchmark of 1.5); Quick ratio 91.6% (below 1.0) signals reliance on inventories to meet obligations. Warning: D/E is 20.22x (>2.0), indicating extremely high leverage and thin solvency cushion. Balance sheet: Total assets 15.70 vs total liabilities 14.96 leaves equity at only 0.74 (book value per share 2.81 JPY). Maturity profile: Current liabilities 9.26 vs current assets 11.70; cash 2.27 covers short-term loans of 0.28, but accounts payable are sizable at 4.11 and receivables are unreported, adding uncertainty to short-term liquidity. Long-term loans are 3.48; with negative earnings and interest coverage (-33.16x), refinancing risk is meaningful. No off-balance sheet commitments disclosed in data; absence of disclosure does not imply absence of such obligations.

Cash Flow Quality

OCF was -1.43 vs net income -1.14, giving OCF/NI of 1.26x; while both are negative, this ratio does not flag aggressive earnings recognition. Free cash flow approximates -1.47 when using OCF - capex (-0.04); however, total investing CF beyond capex is unreported, so true FCF could differ. Working capital details are limited (receivables unreported), so we cannot attribute OCF drivers between inventory reduction, payables timing, or other items. With interest coverage deeply negative and OCF negative, internal cash generation is insufficient for debt service and any discretionary outlays. There are no signs of working capital manipulation identifiable from the limited disclosures, but data gaps constrain conclusions.

Dividend Sustainability

Dividend data is unreported this period. Given negative net income (-1.14), negative OCF (-1.43), approximate negative FCF (~-1.47), and retained earnings of -2.74, capacity to sustain dividends appears very limited under JGAAP constraints on distributable amounts. Absent a rapid return to positive FCF, dividends (if any) would likely require balance sheet resources that the company currently lacks. Policy outlook likely conservative until profitability and FCF normalize.

Risk Assessment

Business Risks:

• Revenue decline of 26.1% YoY indicates demand weakness or loss of customers
• Gross margin (28.7%) insufficient to cover SG&A (44.3% of sales), creating structural profitability gap
• Execution risk around cost restructuring and capacity utilization

Financial Risks:

• Very high leverage (D/E 20.22x) with minimal equity (0.74) increases insolvency risk
• Negative interest coverage (-33.16x) and ongoing operating losses strain debt service
• Refinancing risk on 3.76 of interest-bearing loans (0.28 short-term, 3.48 long-term) amid weak earnings
• Potential covenant breach risk if losses persist
• Liquidity reliance on inventories with quick ratio below 1.0

Key Concerns:

• Sustained negative FCF (~-1.47) limits reinvestment and shareholder returns
• Retained earnings deficit (-2.74) constrains dividend flexibility under Companies Act
• Thin buffer: further small losses could erase equity and raise going concern risk
• Data gaps (receivables, segment details) limit visibility on cash conversion and demand drivers

Investment Implications

Key Takeaways:

• Severe profitability pressure with operating margin at -15.6% and net margin -12.9%
• ROE of -154.1% driven by losses and extreme leverage (Assets/Equity 21.22x)
• Liquidity modest but fragile: current ratio 1.26x, quick ratio 0.92x, cash 2.27 vs ST loans 0.28
• Negative OCF (-1.43) and approximate negative FCF (~-1.47) suggest funding needs absent rapid improvement
• Balance sheet resilience is very limited (equity 0.74); risk management and cost actions are urgent

Metrics to Watch:

• Quarterly revenue trajectory and order intake vs prior year
• Gross margin recovery and SG&A run-rate (target SG&A-to-sales materially lower than 44%)
• OCF and working capital movements (receivables and inventory turns, when disclosed)
• Interest coverage and refinancing progress on long-term debt
• Equity level and any capital policy measures (equity raise, asset sales, alliances)

Relative Positioning: Relative to small-cap peers, the company is materially weaker on solvency (D/E ~20x), profitability (negative margins), and cash generation (negative OCF/FCF). Turnaround depends on restoring scale and cutting fixed costs; without these, financial flexibility remains constrained.

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