Wellness Communications Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥7.52B
• Operating Income: ¥610M
• Net Income: ¥404M
• Earnings per Unit (EPU): ¥69.23

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution 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 FY2026 Q2 with healthy top-line growth and clear operating leverage, translating into double-digit profit growth and strong cash generation. Revenue grew 6.5% YoY to 75.20, while operating income rose 22.0% YoY to 6.10, and net income increased 16.3% YoY to 4.04. Gross profit of 13.41 implies a gross margin of 17.8%, and operating margin reached 8.1%. Using reported growth rates, prior-period estimates suggest operating margin expanded by roughly 103 bps (from ~7.1% to 8.1%). Net margin improved by about 45 bps YoY to 5.4%, aided by disciplined SG&A and scale benefits. Ordinary income of 5.89 (margin ~7.8%) underscores stable non-operating items, with negligible non-operating income (0.02) and no interest burden. Earnings quality is strong: OCF of 12.01 is 2.97x net income, pointing to robust cash conversion and likely working-capital discipline. Liquidity is ample with a current ratio of 237% and cash/deposits of 27.86 versus current liabilities of 16.69. Balance sheet leverage is low (D/E 0.32x) and there is no evidence of interest-bearing debt pressure. ROE is 7.5% (Net Margin 5.4% × Asset Turnover 0.822 × Leverage 1.69x), approaching an 8% threshold, while reported ROIC at 16.1% is excellent versus typical 7–8% targets. Capex remains minimal (0.03), supporting high FCF conversion and capacity to fund dividends and growth investments. The reported payout ratio is 65.9%, slightly above our 60% benchmark, but comfortably covered by operating cash flow. Some disclosure gaps remain (e.g., dividend yen amount, inventory, debt detail, segment data), but available metrics point to improving profitability with conservative financial risk. Forward-looking, the margin trajectory appears favorable if the company sustains operating efficiency and revenue momentum, though maintaining growth with a relatively asset-light, cash-rich structure may cap asset turnover upside. Overall, performance is healthy with upside from continued operating leverage and disciplined cost control, while balance sheet strength limits downside risk.

Profitability Analysis

ROE decomposition: 7.5% = Net Profit Margin (5.4%) × Asset Turnover (0.822) × Financial Leverage (1.69x). The most notable change YoY appears to be margin-driven; using growth back-solves, operating margin expanded ~103 bps (from ~7.1% to 8.1%) and net margin ~45 bps, implying operating leverage as the key driver. Business explanation: revenue grew 6.5% while operating profit rose 22.0%, indicating SG&A grew slower than revenue and fixed-cost dilution improved. Non-operating items were negligible, so core operations drove the improvement. Sustainability: margin gains tied to scale and cost discipline are partly sustainable if pricing and utilization hold; however, easy comps and mix effects may moderate. Asset turnover at 0.822 is reasonable for a services/IT-enabled model; further gains may be limited without faster revenue growth than asset base expansion. Watchpoints: if SG&A growth accelerates above revenue or if gross margin remains thin at 17.8%, operating leverage could reverse. No red flags from interest burden, but the effective tax rate at 30.8% leaves limited tailwind from below-the-line items.

Growth Assessment

Revenue rose 6.5% YoY to 75.20, a steady pace consistent with organic growth in a services-oriented model. Operating income grew 22.0% and ordinary income 17.5%, indicating positive operating leverage and modest non-operating impact. Net income increased 16.3%, with net margin expanding to 5.4%. The operating margin of 8.1% marks improved efficiency; estimated YoY expansion is ~103 bps based on reported growth, suggesting better cost absorption. EBITDA of 7.35 implies a 9.8% EBITDA margin, providing a buffer for continued investment. Outlook: sustaining mid-single-digit revenue growth with disciplined SG&A should support further incremental margin gains; however, the relatively low gross margin (17.8%) constrains upside and leaves sensitivity to wage inflation or vendor pricing. With minimal capex (0.03), incremental growth likely relies on human capital and software/intangibles (intangible assets 7.84), emphasizing the importance of retention and utilization. Near term, cash generation supports selective investments to reinforce growth, but disclosure gaps (e.g., pipeline, customer concentration) limit visibility on growth durability.

Financial Health

Liquidity is strong: current ratio 237% and quick ratio 237% (no inventories reported), with cash/deposits of 27.86 exceeding current liabilities of 16.69. No warning thresholds breached (Current Ratio well >1.0; D/E at 0.32x <2.0). Maturity mismatch risk appears low given significant cash and accounts receivable (9.93) relative to accounts payable (9.91) and other current obligations. Total liabilities are modest at 17.25 against equity of 54.06. Interest expense is effectively zero, and interest coverage is extremely high by calculation, indicating minimal financial risk. Off-balance-sheet obligations are not disclosed; absence of lease breakdowns or guarantees constrains a full view of fixed commitments.

Cash Flow Quality

OCF/Net Income at 2.97x signals high-quality earnings with strong cash conversion. OCF of 12.01 comfortably covers estimated dividends (payout ratio 65.9% on NI 4.04 implies ~2.66) by roughly 4.5x. With capex at only 0.03, implied FCF is approximately 11.98, indicating ample capacity for dividends and reinvestment. No signs of aggressive working-capital management are visible from single-period data, but AR of 9.93 against half-year revenue suggests roughly ~24 receivable days (assumes 6-month cumulative revenue), which is healthy. Lack of investing cash flow detail limits assessment of capitalized development or acquisitions; intangible assets of 7.84 warrant monitoring for future amortization and impairment risk.

Dividend Sustainability

The calculated payout ratio is 65.9%, modestly above the <60% benchmark but well covered by OCF (coverage ~4.5x) and implied FCF. With strong net cash and minimal capex needs, near-term dividend capacity appears sustainable. Absent disclosed DPS and total dividend paid, we infer dividends around 2.66 from the payout ratio. Policy outlook: if earnings grow mid-teens and cash conversion remains strong, there is room to maintain or gradually raise dividends; however, maintaining payout discipline near or below 60% would enhance resilience against cyclical softness or investment needs.

Risk Assessment

Business Risks:

• Margin sensitivity to wage inflation and subcontractor costs given low gross margin (17.8%).
• Execution risk in scaling services/software delivery with limited capex-based leverage.
• Intangible asset concentration (7.84) raises amortization and impairment risk if projects underperform.
• Customer churn or concentration risk (not disclosed) could affect predictable revenue.
• Competition in wellness/IT-enabled services could pressure pricing and utilization.

Financial Risks:

• Payout ratio at 65.9% reduces buffer during earnings volatility.
• Potential undisclosed lease or off-balance sheet commitments.
• Tax rate at 30.8% leaves limited scope for below-the-line support if margins compress.

Key Concerns:

• Sustainability of operating margin expansion if revenue growth slows below mid-single digits.
• Dependence on human capital productivity; hiring or retention challenges could impact delivery.
• Limited disclosure on investing cash flows and debt composition constrains full risk assessment.

Investment Implications

Key Takeaways:

• Healthy quarter with 6.5% revenue growth translating into 22.0% operating profit growth via operating leverage.
• Margin expansion of ~103 bps at the operating line and ~45 bps at the net level.
• Strong cash generation: OCF 12.01 (2.97x NI) and minimal capex underpin robust FCF.
• Solid balance sheet with net cash and low leverage (D/E 0.32x) reduces downside risk.
• ROE at 7.5% is close to an 8% threshold; ROIC at 16.1% indicates efficient deployment of invested capital.

Metrics to Watch:

• Operating margin and SG&A-to-sales trend versus revenue growth.
• OCF/NI and working-capital intensity (AR days).
• Recurring revenue mix and customer retention/churn (not disclosed).
• Intangible asset roll-forward, amortization, and any impairment signals.
• Dividend policy versus FCF and growth investment needs.

Relative Positioning: Within small-cap, asset-light service models, the company is positioned favorably on cash generation and balance sheet strength, with improving profitability; however, ROE is only moderately attractive and relies on continued operating discipline for further improvement.

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