Quick View
| Metric | Current Period | Prior-year period | YoY |
|---|---|---|---|
| Revenue | ¥208.8B | ¥170.8B | +22.3% |
| Operating Income | ¥19.8B | ¥10.9B | +82.3% |
| Ordinary Income | ¥20.4B | ¥11.4B | +79.1% |
| Net Income | ¥14.7B | ¥7.6B | +94.1% |
| ROE | 9.3% | 5.2% | - |
Executive Summary
For FY2026 cumulative to Q3, Revenue was ¥208.8B (YoY +¥38.0B +22.3%), Operating Income was ¥19.8B (YoY +¥8.9B +82.3%), Ordinary Income was ¥20.4B (YoY +¥9.0B +79.1%), and Net Income was ¥14.7B (YoY +¥7.1B +94.1%), showing significant increases across all indicators. Operating leverage materialized as selling, general and administrative expenses were contained relative to topline growth, improving the operating margin to 9.5%. By segment, Information Processing Services ¥91.2B (Operating Income ¥16.3B), Software Development ¥75.0B (¥14.5B), Value-added Information Services ¥26.6B (¥5.0B), and IT Equipment Sales ¥16.0B (¥0.8B), with the core information processing and development units maintaining high profitability. Full-year forecast calls for Revenue of ¥280B (YoY +12.6%), Operating Income of ¥23.5B (YoY +27.0%), and Net Income of ¥16.9B, with progress through Q3 at 74.6% for Revenue, 84.4% for Operating Income, and 87.0% for Net Income, tracking well.
Key Financial Metrics
[Profitability] Operating margin 9.5% (improved by +3.1pt from 6.4% a year earlier), net margin 7.0% (improved by +2.5pt from 4.5%), and ROE 9.3% (improved by +4.1pt from 5.2%), indicating a substantial enhancement in profitability. A DuPont breakdown explains ROE 9.3% as net margin 7.0% × total asset turnover 0.954x × financial leverage 1.39x. The primary driver of operating income growth was operating leverage from restraining SG&A relative to the 22.3% increase in revenue; gross margin also improved to 26.3% (+0.9pt from 25.4% a year earlier). Operating CF/Net Income ratio was 0.87x, and with EBITDA of ¥29.0B (Operating Income ¥19.8B + Depreciation ¥9.2B), OCF/EBITDA was 0.44x, indicating room to improve profit cash conversion. [Cash Quality] Cash and deposits ¥57.3B (down -¥11.0B from ¥68.3B a year earlier), Operating CF ¥12.8B, Investing CF -¥2.9B, FCF ¥9.9B, and dividend FCF coverage 2.40x. A ¥1.6B gain on sale of investment securities lifted Ordinary Income, warranting attention as a non-recurring factor. [Investment Efficiency] Total asset turnover 0.954x; with Capex at ¥2.3B versus Depreciation at ¥9.2B, the Capex/Depreciation ratio was 0.25x, suggesting investment restraint. Inventories decreased sharply from ¥7.3B to ¥4.4B (-40.6%), contributing to improved working capital efficiency. [Financial Soundness] Total assets ¥218.9B, net assets ¥157.5B, financial leverage 1.39x, current ratio 280.7%, quick ratio 271.2%, and interest coverage 74.24x, indicating strong short-term solvency and financial health. Lease liabilities were ¥0.5B current and ¥1.0B non-current, implying a light financial burden. The debt-to-equity ratio was 0.39x, maintaining a conservative capital structure.
Cash Flow Analysis
Cash and deposits decreased by -¥11.0B from ¥68.3B to ¥57.3B, while investment securities increased by +¥6.2B from ¥16.3B to ¥22.5B, resulting in a slight decrease in total current assets from ¥131.5B to ¥129.3B. Operating CF was ¥12.8B, equivalent to 0.87x of Net Income of ¥14.7B, providing broadly adequate cash backing; however, at 0.44x of EBITDA of ¥29.0B, it is low, signaling room to improve working capital recovery and cash realization of earnings. Investing CF was -¥2.9B, mainly due to ¥2.3B in Capex, generating FCF of ¥9.9B. Against expected dividend payments of approximately ¥4.1B (annual ¥16, based on 16,720 thousand shares), FCF coverage was 2.40x, indicating ample dividend sustainability. Inventories decreased by -¥3.0B, improving working capital efficiency, while accounts receivable declined by -¥1.6B from ¥54.4B to ¥52.8B and accounts payable decreased by -¥1.0B from ¥14.8B to ¥13.8B, reflecting changes in transaction volume. Short-term liabilities of ¥46.1B are covered by cash and deposits of ¥57.3B for a cash coverage of 1.24x, and including current assets of ¥129.3B yields a current ratio of 280.7%, indicating extremely low liquidity risk. The fact that Capex is well below depreciation warrants monitoring from the standpoint of medium- to long-term growth investment.
Quality of Earnings
Against Ordinary Income of ¥20.4B, Operating Income was ¥19.8B, with net non-operating income of about ¥0.6B. Components include non-operating income of ¥1.9B such as interest income of ¥0.08B and gain on sale of investment securities of ¥1.6B, accounting for 0.9% of revenue. Interest expense of ¥0.3B is minimal, and interest coverage of 74.24x indicates an extremely low interest burden. The ¥1.6B gain on sale of investment securities is non-recurring and should be excluded when assessing recurring earnings power. While Operating CF is 0.87x of Net Income and broadly sound, OCF/EBITDA of 0.44x is low, indicating earnings are not sufficiently monetized, leaving room to improve earnings quality. The tax burden coefficient (NI/EBT) is 0.679 with an effective tax rate of approximately 32.1%, a standard tax cost on earnings. The substantial decline in inventories suggests a one-off working capital improvement from inventory rationalization; however, excessive compression could entail supply constraint risk. Overall, Operating Income growth is driven by structural operating leverage, but one-off items such as gains on securities and the low cash conversion partly constrain earnings quality.
Risk Factors
- Deterioration in cash conversion efficiency: OCF/EBITDA at 0.44x is below the industry norm, indicating earnings are less readily converted to cash. Improving efficiency in working capital recovery and accounts receivable management is urgent and could affect sustainable cash generation.
- Loss of growth opportunities due to underinvestment: Capex of ¥2.3B is just 0.25x of Depreciation of ¥9.2B, risking deferral of medium- to long-term growth infrastructure. Falling behind in technological innovation or capacity expansion could erode competitiveness.
- Adverse effects from inventory compression: Inventories decreased significantly by -40.6% YoY, improving working capital efficiency, but excessive reduction could cause delivery delays or lost sales opportunities. The IT Equipment Sales segment’s operating margin of 4.9% is low, reinforcing the need to monitor appropriate inventory levels.
Industry Benchmark (Reference / Our Survey)
[Position within Industry] (Reference information / Our survey) Profitability: Operating margin 9.5% (industry median 6.4%, top quartile 13.5%) exceeds the industry median by +3.1pt, indicating solid profitability within the industry. Net margin 7.0% (industry median 4.8%) is also +2.2pt higher. ROE 9.3% (industry median 7.3%) is +2.0pt above, positioned above the median though short of the top quartile at 12.1%. Revenue growth of 22.3% (industry median 12.0%, top quartile 24.5%) indicates a top-tier growth pace within the industry. Soundness: Current ratio 280.7% (industry median 208%), net debt/EBITDA multiple around -2.0x (cash and deposits ¥57.3B - estimated interest-bearing debt / EBITDA ¥29.0B, industry median -2.88x) indicates high liquidity and low leverage roughly in line with the industry average. Debt-to-equity ratio of 0.39x is conservative, placing financial soundness in the upper tier within the industry. Efficiency: Return on assets 6.7% (Net Income ¥14.7B / Total assets ¥218.9B) significantly exceeds the industry median of 3.8%, indicating good asset efficiency. Capex/Depreciation of 0.25x is estimated to be low even within the industry, suggesting investment aggressiveness may be below the industry average. Industry: IT & Telecommunications (N=68 companies); comparison set: FY2025 Q3 results; source: public financial data aggregated by us. In this result, the Company ranks high in both profitability and growth within the industry and maintains good financial soundness, while lower investment levels and cash conversion efficiency emerge as relative challenges.
Highlights from the Results
- Manifestation of operating leverage: Operating Income rose 82.3% against revenue growth of 22.3%, demonstrating high earnings elasticity. With SG&A containment and gross margin improvement, the operating margin improved by 3.1pt to 9.5%, a key highlight of the quarter. Progress has reached 84.4% of the full-year Operating Income forecast of ¥23.5B by Q3, leaving room for potential upside.
- Strong liquidity and financial soundness: With a current ratio of 280.7%, cash and deposits of ¥57.3B, and investment securities of ¥22.5B, the Company holds ¥79.8B in liquid assets. A debt-to-equity ratio of 0.39x and interest coverage of 74.24x indicate extremely low financial risk, supporting dividend sustainability and capacity for strategic investment.
- Focus on restrained investment and cash conversion efficiency: With Capex/Depreciation at 0.25x, investment is restrained, and OCF/EBITDA at 0.44x indicates low cash conversion efficiency—medium-term issues. A recovery in growth investment and improvements in working capital management will be key to sustainable growth going forward.
This report is an earnings analysis automatically generated by AI based on XBRL earnings release data. It does not constitute a recommendation to invest in any specific security. The industry benchmark is reference information compiled by us based on public financial statements. Investment decisions are your own responsibility; consult a professional as needed before investing.
AI Financial Analysis
Executive Summary
AGS delivered a strong FY2026 Q3 cumulative result, with revenue growth translating into substantially faster operating-profit growth. Revenue rose 22.3% year on year to ¥20.88bn. Operating income increased 82.3% to ¥1.98bn, materially outpacing sales growth. Ordinary income rose 79.1% to ¥2.04bn. Net income increased 94.1% to ¥1.47bn, and EPS reached ¥87.92 versus ¥44.88 in the prior-year period. Gross margin expanded to 26.3% from 24.6%, an improvement of approximately 170bp. Operating margin expanded to 9.5% from 6.4%, an improvement of approximately 312bp. Net margin rose to 7.0% from 4.4%, up approximately 260bp. The margin expansion indicates favorable operating leverage, as SG&A increased 12.6%, materially below the 22.3% revenue increase. EBITDA rose to ¥2.90bn and the EBITDA margin reached 13.9%. Profitability was also supported by a ¥1.56bn gain on sale of investment securities recorded as extraordinary income, partly offset by ¥0.28bn of extraordinary losses. Therefore, reported net-income growth is stronger than the underlying operating trend alone. Operating cash flow was positive at ¥1.28bn and free cash flow was ¥0.99bn, supporting internal funding capacity. However, operating cash flow represented 0.87x net income and cash conversion from EBITDA was only 0.44x, indicating that accounting earnings were not fully converted into operating cash during the period. The balance sheet remains conservative, with a 280.7% current ratio, a 271.2% quick ratio, and 0.39x debt-to-equity. FY2026 full-year guidance appears achievable on revenue, while cumulative operating and net-income progress is already ahead of the normal Q3 run-rate. The principal forward issues are whether the high operating margin can be sustained after the securities-sale gain effect on net income, whether receivables convert into cash promptly, and whether low capital expenditure relative to depreciation constrains longer-term service and system-investment capacity.
Profitability Analysis
Annualized DuPont ROE is 12.4%, comprising a 7.0% net profit margin, 1.272x asset turnover, and 1.39x financial leverage. The primary contributor to the current profitability improvement is margin expansion rather than aggressive balance-sheet leverage, given the modest 1.39x leverage factor and 0.39x debt-to-equity ratio. Operating margin expanded by approximately 312bp year on year to 9.5%, placing profitability within the stated 8-15% good range. Gross margin improved by approximately 170bp to 26.3%, indicating improved revenue mix, pricing, project execution, or utilization relative to the prior-year period. SG&A rose to ¥3.50bn from ¥3.11bn, a 12.6% increase, which was significantly slower than the 22.3% revenue increase; this created favorable operating leverage. EBITDA was ¥2.90bn, representing a 13.9% EBITDA margin. The 9.5% EBIT margin and 7.0% net margin are solid for the reported benchmarks, although net income includes a ¥1.56bn gain on sale of investment securities. The tax burden was 0.679, corresponding to a 32.1% effective tax rate, and is slightly below the 0.70 normal-reference threshold. Interest burden exceeded 1.0x because profit before tax benefited from non-operating income and extraordinary gains relative to EBIT, rather than indicating a financing advantage. Interest coverage of 74.24x and EBITDA interest coverage of 108.57x demonstrate that interest cost is immaterial to earnings. The earnings base appears operationally stronger, but the reported net-income margin should not be treated as entirely recurring because the securities disposal gain was material.
Growth Assessment
Revenue growth of 22.3% to ¥20.88bn is well ahead of the 12.6% full-year revenue growth embedded in company guidance. Gross profit increased 30.6% to ¥5.49bn, faster than revenue, confirming that the growth was margin accretive at the gross-profit level. Operating income increased 82.3% to ¥1.98bn, reflecting both gross-margin improvement and SG&A discipline. Cumulative Q3 revenue represents 74.6% of the ¥28.00bn full-year forecast, broadly in line with the standard 75% Q3 progress rate. Cumulative operating income represents 84.4% of the ¥2.35bn full-year forecast, 9.4 percentage points above the standard Q3 run-rate. Ordinary income progress is 85.2% against the ¥2.39bn full-year forecast, also ahead of the normal seasonal pace. Net income progress is 87.0% against the ¥1.69bn forecast, although this includes the gain on sale of investment securities. The implied Q4 requirement is ¥7.12bn of revenue, ¥0.37bn of operating income, and ¥0.22bn of net income. The relatively modest implied Q4 operating margin requirement suggests that the operating-income target has a meaningful cushion if current profitability holds. Revenue sustainability should nevertheless be assessed against collection discipline, as receivable days are 69 days, above the 60-day quality-alert threshold. Work in process accounts for 93.1% of inventory under the quality alert, which is consistent with execution-sensitive project work and can raise delivery, acceptance, and cost-overrun risk. Low capital expenditure at 0.25x depreciation may lift near-term free cash flow but may not be consistent with sustained investment in systems, infrastructure, and service capacity.
Financial Health
Liquidity is strong, with current assets of ¥12.93bn against current liabilities of ¥4.61bn. The current ratio is 280.7% and the quick ratio is 271.2%, both substantially above healthy reference levels. Cash and deposits were ¥5.73bn, equal to 26.2% of total assets, while trade receivables were ¥5.28bn, or 24.1% of assets. Working capital was ¥8.33bn, providing a substantial short-term liquidity buffer. Total liabilities were ¥6.14bn against total equity of ¥15.75bn, leaving the capital structure equity funded. Debt-to-equity of 0.39x is conservative and well below the 2.0x warning threshold. There is no maturity-mismatch concern evident from current assets materially exceeding current liabilities. Lease obligations were ¥1.45bn in aggregate, comprising ¥0.50bn current and ¥0.95bn non-current obligations; these are manageable relative to cash, EBITDA, and equity. Interest coverage of 74.24x reinforces the low refinancing and debt-service risk profile. Inventories declined 40.6% year on year, from ¥0.73bn to ¥0.44bn. This reduction releases capital and supports liquidity, but the concentration of work in process within inventory means execution and acceptance timing remain important. Investment securities increased to ¥2.25bn from ¥2.10bn, and the period's securities-sale gain demonstrates that non-operating portfolio movements can affect reported earnings and equity. Intangible assets represented only 5.6% of total assets, below the 20% benchmark, limiting intangible-asset concentration risk.
Notable B/S Changes
Inventories: -¥0.30bn (-40.6%) to ¥0.44bn - reduced working-capital absorption and supports liquidity, but the high work-in-process concentration makes project completion and customer acceptance timing important.
Cash Flow Quality
Operating cash flow was ¥1.28bn, positive and improved substantially from ¥0.37bn in the prior-year period. Free cash flow was ¥0.99bn after ¥0.23bn of capital expenditure, providing positive internally generated funding. Operating cash flow covered net income by 0.87x. This is above the 0.8x earnings-quality warning threshold but still means cash generation trailed reported net income. The accruals ratio was 0.9%, which is well below the 5% high-quality benchmark and does not indicate broad-based accrual inflation. Cash conversion, measured as operating cash flow divided by EBITDA, was only 0.44x and is below the 0.7x quality-alert threshold. The root cause is that EBITDA of ¥2.90bn has not translated proportionately into cash after working-capital and other operating cash-flow movements, despite positive contributions from a ¥0.17bn reduction in trade receivables and a ¥0.12bn inventory reduction. The low cash conversion is a material monitoring point because it limits the cash realization of otherwise strong operating-profit growth. Receivable days of 69 days exceed the 60-day alert threshold, indicating slower collection or a larger end-period billing balance relative to annualized sales. For an IT services business, elevated receivable days can reflect project billing and customer acceptance timing, but persistent elevation would increase credit, collection, and cash-flow risk. Work in process at 93.1% of inventory under the quality alert indicates a high concentration in unfinished project-related assets; this is typical of project-oriented activities but heightens risk of delayed completion, unbilled work, or cost overruns. CapEx/depreciation was only 0.25x, below both the 0.7x underinvestment alert and the 1.0x replacement-investment reference point. Capital expenditure was ¥0.23bn against depreciation and amortization of ¥0.92bn, while intangible asset purchases were ¥0.26bn. The low investment intensity supports near-term free cash flow, but it may signal deferred renewal or growth investment if maintained over time.
Dividend Sustainability
The Q2 dividend was ¥16.00 per share. The calculated cumulative payout ratio was 18.7%, based on the paid interim dividend relative to FY2026 Q3 cumulative net income, indicating low near-term pressure on retained earnings. The full-year dividend forecast is ¥32.00 per share, equivalent to an estimated 31.7% payout ratio based on forecast EPS of ¥101.07. This forecast payout level is comfortably below the 60% sustainability benchmark. Free cash flow of ¥0.99bn covered the reported dividend requirement by 3.60x, indicating adequate cash support for the interim distribution. Cash dividends paid were ¥0.53bn during the period and were funded from operating cash flow. Share repurchases were limited to ¥0.03bn, so the incremental effect on capital returns and liquidity was immaterial. The company retains significant financial flexibility because cash and deposits were ¥5.73bn, current liquidity was strong, and leverage was modest. Dividend capacity is therefore supported by balance-sheet strength and positive free cash flow. The main consideration for the durability of future dividend growth is whether operating cash conversion improves and whether low capital expenditure remains appropriate for maintaining the business base.
Risk Assessment
Business risks include Project execution risk: work in process represents 93.1% of inventory under the quality alert, creating exposure to delivery delays, customer acceptance delays, contract-margin pressure, and potential cost overruns., Collection-cycle risk: receivable days of 69 exceed the 60-day alert threshold; prolonged collection periods could weaken operating cash flow despite continued accounting-profit growth., IT services investment risk: CapEx/depreciation of 0.25x indicates investment is below depreciation; sustained underinvestment could impair service quality, cybersecurity resilience, technology renewal, and competitiveness., Earnings recurrence risk: the ¥1.56bn gain on sale of investment securities boosted profit before tax and net income, and is not a substitute for recurring operating earnings..
Financial risks include Cash-conversion risk: OCF/EBITDA of 0.44x is below the 0.7x quality-alert threshold, showing that EBITDA conversion into operating cash remains weak., Working-capital risk: receivables of ¥5.28bn are a material 24.1% of assets, making cash generation sensitive to billing and collection timing., Market-value risk in securities holdings: investment securities totaled ¥2.25bn, and securities valuations and disposal gains can introduce volatility into comprehensive income and reported earnings..
Key concerns include High likelihood/moderate impact: the 69-day receivables cycle and low 0.44x cash conversion should be monitored for evidence that profit growth is becoming cash generative., Moderate likelihood/high impact: the high work-in-process mix can produce material earnings volatility if projects are delayed or if estimated project costs rise., Moderate likelihood/moderate impact: sustained CapEx/depreciation below 0.7x may improve short-term free cash flow at the expense of future technology and delivery capacity., Low likelihood/high impact: the conservative 0.39x debt-to-equity ratio, 280.7% current ratio, and very high interest coverage materially mitigate liquidity and refinancing risk..
Investment Implications
Key takeaways include Revenue increased 22.3%, while operating income increased 82.3%, demonstrating strong operating leverage., Operating margin expanded approximately 312bp year on year to 9.5%, supported by a 170bp gross-margin improvement and SG&A growth below revenue growth., Annualized ROE of 12.4% is in the good benchmark range and is driven by profitability and asset turnover rather than high leverage., Cumulative operating-income progress reached 84.4% of the full-year forecast at Q3, above the standard 75% seasonal benchmark., The balance sheet is robust, with ¥5.73bn cash, a 280.7% current ratio, and a 0.39x debt-to-equity ratio., The principal quality issue is weak EBITDA-to-cash conversion at 0.44x, compounded by 69-day receivables and a high work-in-process inventory mix., Reported net income benefited from a ¥1.56bn gain on sale of investment securities; recurring operating performance should be evaluated separately from this gain..
Metrics to watch include Operating cash flow and OCF/EBITDA cash conversion, Trade receivable days and period-end receivable balance, Work-in-process balance, project acceptance timing, and project margin performance, CapEx/depreciation and intangible-investment trends, Q4 operating margin relative to the implied full-year guidance requirement, Recurring operating income excluding gains or losses on investment securities, Dividend coverage by free cash flow.
Regarding relative positioning, AGS combines good-range profitability, annualized ROE of 12.4%, strong liquidity, and low leverage with a cash-conversion profile that is weaker than the reported earnings trajectory. Its financial risk profile is conservative, while its relative operating-quality assessment depends on improved conversion of project-related earnings and receivables into cash.