FaithNetwork Co.,Ltd FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥8.62B
• Operating Income: ¥757M
• Net Income: ¥359M
• EPS: ¥12.11

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: A solid profit rebound at the operating level with significant margin expansion, but cash flow quality deteriorated sharply and leverage remains high. Revenue rose 6.5% YoY to 86.19, while operating income surged 250.4% YoY to 7.57, lifting the operating margin to 8.8%. Ordinary income increased 21.7% YoY to 5.40, and net income rose 22.8% YoY to 3.58, bringing the net margin to 4.2%. Based on the YoY growth rates, prior-year operating income was approximately 2.16 and prior-year revenue roughly 80.96, implying the operating margin expanded by about 611 bps (from ~2.7% to ~8.8%). Net margin expanded by about 54 bps (from ~3.6% to ~4.2%), showing improved profitability even after non-operating factors. Gross margin printed at 27.4%, and SG&A of 16.08 yielded a much improved operating spread versus last year. However, operating cash flow was deeply negative at -89.80 versus net income of 3.58, driving an OCF/NI ratio of -25.1x, a clear earnings quality red flag. Financing cash inflow of 54.72 partially offset the OCF deficit, indicating reliance on external funding this quarter. The balance sheet shows high leverage with D/E at 2.84x and Debt/EBITDA at 21.1x, while liquidity is ample with a current ratio of 267%. Interest coverage of 4.25x is below the strong threshold (5x), highlighting sensitivity to interest rate increases. ROE is modest at 3.9% and ROIC at 2.4% remains well below a 5% warning level, signaling capital efficiency challenges. The negative OCF is likely linked to working capital build consistent with the real estate development cycle (inventory build and project expenditures), but the magnitude requires monitoring. Taxes were 1.80, implying an effective tax rate of 33.4%, consistent with structural tax levels. Forward-looking, sustaining the improved operating margin while normalizing cash conversion and deleveraging will be key to durability. Without disclosed dividend data, payout capacity should be judged against FCF, which is currently negative. Overall, the quarter demonstrates operating momentum but raises concerns on cash flow sustainability and balance sheet risk.

Profitability Analysis

DuPont ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 4.2% × 0.245 × 3.84 ≈ 3.9%. The component that changed the most versus last year appears to be Net Profit Margin, driven by a sharp rebound in operating margin (OPM up ~611 bps YoY, from ~2.7% to ~8.8%). Business driver: higher gross profit versus a relatively contained SG&A base, and disciplined cost control, led to strong operating leverage. Non-operating headwinds (interest expense 1.78) tempered the flow-through from operating to net level, explaining the smaller net margin expansion (+54 bps YoY). Sustainability: part of the OPM improvement may be cyclical/project-mix driven in real estate development; sustainability depends on continued successful project deliveries and cost control amid construction cost inflation. Watch that SG&A growth does not outpace revenue; while quarterly SG&A absolute levels are disclosed, YoY SG&A growth is not available here, so we cannot confirm operating discipline beyond current-period ratios. Asset turnover at 0.245 is low, consistent with inventory-heavy development balance sheets; improvement would require faster inventory turns/closings. Financial leverage at 3.84x is elevated; while it amplifies ROE, it raises risk and interest burden, limiting net margin expansion.

Growth Assessment

Revenue grew 6.5% YoY to 86.19, reflecting steady top-line execution. Operating income growth of 250.4% signifies strong operating leverage and favorable project deliveries/mix. Non-operating expenses (2.24) largely reflect interest burden, muting ordinary income growth to 21.7% YoY. Net income rose 22.8% to 3.58, translating to a net margin of 4.2%. Profit quality is mixed: accounting profitability improved but cash conversion was very weak (OCF -89.80), implying heavy working capital absorption typical in development cycles. Outlook hinges on scheduled property handovers, presales strength, and construction cost control; absent segment detail, we assume continued focus on margin accretive projects. Monitoring order backlog/presales (not disclosed here) and inventory turnover will be key to assessing sustainability.

Financial Health

Liquidity: Current ratio 267% and quick ratio 267% indicate ample short-term liquidity; cash and deposits of 51.57 comfortably exceed short-term loans of 25.57. No warning on current ratio (<1.0) as it is well above threshold. Solvency: D/E at 2.84x exceeds the 2.0 warning threshold, signaling high leverage. Total liabilities are 260.32 against equity of 91.61; long-term loans of 140.73 and short-term loans of 25.57 dominate funding. Interest coverage at 4.25x is below strong levels (5x), leaving limited cushion if rates rise or earnings soften. Maturity mismatch risk appears manageable near term given current assets (315.03) exceed current liabilities (117.99), but the composition likely includes inventories; conversion risk should be monitored in a market downturn. No off-balance sheet obligations were reported in the provided data.

Cash Flow Quality

OCF/Net Income is -25.08x, a clear quality concern (threshold >1.0). The negative OCF likely stems from working capital build (e.g., land acquisition, construction-in-progress, inventory accumulation) common in the development cycle; however, the scale (-89.80) is material. With CapEx modest at -0.04, implied FCF is approximately -89.84, indicating that dividends and growth capex (if any) would be debt-funded near term. Financing CF of 54.72 partially bridged the cash shortfall, highlighting reliance on external funding this period. Working capital manipulation signs: not evident from disclosures, but the divergence between earnings and OCF warrants tracking payables, receivables, and inventory turns once available.

Dividend Sustainability

Dividend data are not disclosed; the reported payout ratio metric (822.1%) appears unreliable given missing DPS. Given negative FCF (~-89.8 plus minimal capex) and high leverage (D/E 2.84x), capacity to fund dividends from internally generated cash is currently weak. Retained earnings stand at 78.80, but recurring dividend capacity should be assessed against normalized cash flows tied to project deliveries. Until OCF normalizes and leverage trends down, dividend growth visibility is limited. Policy outlook cannot be inferred without management guidance; monitor DPS announcements, payout targets, and covenant headroom.

Risk Assessment

Business Risks:

• Project execution and delivery timing risk affecting revenue recognition and cash conversion
• Construction cost inflation compressing gross margins
• Real estate market slowdown impacting sales velocity and pricing
• Geographic concentration risk if projects are clustered (not disclosed here)
• Supply chain/labor constraints causing delays

Financial Risks:

• High leverage: D/E 2.84x and Debt/EBITDA 21.1x increase refinancing and covenant risk
• Interest rate risk with interest coverage at 4.25x below strong threshold
• Negative OCF (-89.80) requiring external financing (Financing CF 54.72)
• Maturity concentration risk in short-term loans (25.57) despite current liquidity
• ROIC at 2.4% below cost of capital, indicating value creation risk

Key Concerns:

• Earnings quality: OCF/NI of -25.08x suggests profit not converting to cash this period
• Sustainability of the 611 bps operating margin expansion amid cost pressures
• Dependence on financing to bridge cash needs
• Limited disclosure on inventories/receivables and dividend policy

Investment Implications

Key Takeaways:

• Strong operating income rebound with OPM at ~8.8% (+611 bps YoY)
• Net margin improved modestly to 4.2% (+54 bps YoY) due to interest headwinds
• Cash conversion extremely weak (OCF -89.80), indicating heavy working capital build
• Leverage elevated (D/E 2.84x; Debt/EBITDA 21.1x) and interest coverage only 4.25x
• ROIC at 2.4% highlights capital efficiency challenge despite margin gains

Metrics to Watch:

• Operating cash flow normalization and inventory/receivables turnover
• Gross and operating margins by project mix and construction cost trends
• Interest coverage and average borrowing cost trajectory
• Debt-to-equity and net debt movement; refinancing schedule
• Presales/backlog and handover schedule to support revenue visibility

Relative Positioning: Within Japan real estate developers, the company shows stronger near-term operating margin recovery but weaker cash flow conversion and higher leverage than conservative peers; improving cash conversion and deleveraging will be necessary to close the gap on quality metrics.

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