Encourage Technologies Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.29B
• Operating Income: ¥137M
• Net Income: ¥96M
• EPS: ¥14.51

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

Encourage Technologies (3682) reported FY2026 Q2 standalone results with steady top-line growth and notably stronger profitability. Revenue was 1,287 million yen, up 5.3% YoY, while operating income rose 35.1% YoY to 137 million yen, indicating substantial operating leverage and effective cost control. Gross profit reached 563 million yen, translating to a gross margin of 43.8%, a solid level for a software-oriented model. Operating margin expanded to roughly 10.6%, supported by a disciplined SG&A trajectory relative to sales. Ordinary income (141 million yen) exceeded operating income by about 4 million yen, suggesting modest net non-operating gains. Net income was 96 million yen, up 38.9% YoY, with a net margin of 7.5%, reflecting improved earnings conversion. EBITDA was 279 million yen (21.7% margin), showing that non-cash charges (notably D&A of 142 million yen) are a meaningful headwind between EBITDA and operating profit. Cash generation was strong: operating cash flow (OCF) of 178 million yen exceeded net income by 1.85x, indicating solid earnings quality for the period. The balance sheet appears robust with calculated equity ratio of approximately 71.5% (equity of 3,451 million yen over assets of 4,826 million yen) and a current ratio of 365%, implying ample liquidity and low financial risk. Leverage remains conservative with total liabilities-to-equity of 0.33x. The DuPont-based ROE is 2.78% for the interim period, constrained by low asset turnover (0.267x) typical for cash-rich, asset-light software models and by interim timing. While dividends are currently unreported (DPS 0), financing cash outflows of 134 million yen suggest possible capital returns or liability reduction; specifics are not disclosed. Several data points are unreported (e.g., cash balance, investing cash flows, shares outstanding), which limits depth on FCF and per-share analytics. Overall, the company demonstrates resilient growth, improving margins, high-quality cash flow, and a strong balance sheet, with seasonality and disclosure gaps as key caveats.

Profitability Analysis

ROE decomposition indicates a 2.78% interim ROE, driven by a 7.46% net margin, asset turnover of 0.267x, and financial leverage of 1.40x. Operating margin improved to 10.6% (137/1,287), outpacing revenue growth and highlighting positive operating leverage. Gross margin is robust at 43.8%, underlining healthy product economics; the spread between EBITDA margin (21.7%) and operating margin (10.6%) reflects a sizable non-cash D&A burden (approximately 11% of revenue). Ordinary margin at 11.0% modestly exceeds operating margin due to small net non-operating income. Based on income tax of 34.4 million yen and ordinary income of 141 million yen, the effective tax rate approximates 24% (notwithstanding a reported 0.0% placeholder). Expense discipline in SG&A and scale effects are the primary contributors to profit growth, with no indication of interest burden. Overall profitability quality is sound, with improved conversion from gross profit to operating profit and from operating profit to net income.

Growth Assessment

Revenue grew 5.3% YoY to 1,287 million yen, indicating steady but not high growth, consistent with a mature software licensing/maintenance mix. Operating income growth of 35.1% YoY significantly outpaced revenue, suggesting mix improvements and cost efficiencies rather than aggressive top-line acceleration. Net income growth of 38.9% YoY confirms flow-through benefits and potentially improved pricing or higher-margin product mix. Sustainability hinges on recurring maintenance/support revenue, renewal rates, and timing of larger licenses or projects, which can be seasonal and back-end loaded. Given the asset-light model and high gross margins, incremental revenue should continue to deliver attractive incremental margins. Non-operating items contributed modestly and are unlikely to be a major driver. With OCF exceeding net income, profit quality is supported by healthy cash conversion. Near-term outlook is cautiously positive on margin resilience; revenue acceleration would depend on pipeline conversion, upsell into installed base, and possibly subscription/ARR expansion. Absent backlog or ARR disclosure, we assume mid-single-digit growth continuity with scope for further operating leverage if cost discipline persists.

Financial Health

Liquidity is strong: current assets of 4,064 million yen versus current liabilities of 1,115 million yen yield a current ratio of about 3.65x; quick ratio equals the current ratio given no reported inventories. Solvency is solid with total liabilities of 1,147 million yen and equity of 3,451 million yen, implying a debt-to-equity proxy of 0.33x and a calculated equity ratio near 71.5%. Financial leverage of 1.40x (assets/equity) is low, consistent with a conservative capital structure. Interest expense is unreported (0), and interest coverage metrics are not meaningful; nonetheless, the absence of reported interest costs reduces refinancing risk. Working capital is ample at 2,950 million yen, providing a buffer for growth and seasonality. Overall, the balance sheet supports continued investment in product and potential shareholder returns without stressing solvency metrics.

Cash Flow Quality

Operating cash flow of 178 million yen versus net income of 96 million yen (OCF/NI = 1.85x) indicates strong cash realization of earnings and favorable working capital movements. D&A of 142 million yen underscores the non-cash portion of expenses and helps reconcile EBITDA to OCF. Investing cash flow is unreported (0), preventing a definitive free cash flow calculation; thus, the reported FCF of 0 should be treated as a placeholder rather than an economic measure. Financing cash outflows of 134 million yen suggest either shareholder returns (dividends/buybacks) or liability reductions; details are not disclosed. Given the current ratio, low leverage, and OCF coverage, earnings quality appears high. Working capital specifics (DSO/DPO, receivables, deferred revenue) are not provided, but the OCF/NI ratio implies either effective collections or upfront cash from customers this period.

Dividend Sustainability

Dividends are unreported for the period (DPS 0, payout ratio 0%), and FCF coverage is not assessable due to missing investing cash flow data. With interim EPS of 14.51 yen and strong liquidity, the capacity to pay dividends appears supported by fundamentals, but the actual policy is unknown from the provided data. Financing cash outflows of 134 million yen could indicate capital returns; however, absent a disclosed DPS, we cannot attribute the outflow to dividends. Sustainability would hinge on recurring cash generation (OCF), modest capex needs typical for software, and maintenance of the robust equity base. Until full-year data and cash/investing disclosures are available, we assume a conservative stance on payout assessability.

Risk Assessment

Business Risks:

• Revenue timing and seasonality of license/project sales impacting quarterly volatility
• Customer concentration risk if large deals drive a disproportionate share of revenue
• Competitive pressure in enterprise security/log management software affecting pricing and margins
• Transition risk if shifting from license to subscription/ARR models
• Dependence on skilled engineers and potential wage inflation raising SG&A
• Regulatory and cybersecurity standards changes requiring continuous R&D investment

Financial Risks:

• Limited disclosure on cash balance and investing cash flows constrains FCF visibility
• Potential volatility in working capital (receivables, deferred revenue) affecting OCF timing
• Non-cash D&A relatively high versus operating income, which could mask underlying margin trends
• Small scale risk: modest absolute earnings base exposed to deal slippage

Key Concerns:

• Unreported cash and investing CF prevent robust dividend/FCF analysis
• Interim ROE (2.78%) constrained by low asset turnover; improvement depends on sustained growth
• Reliance on margin improvements to drive profit growth amid moderate top-line expansion

Investment Implications

Key Takeaways:

• Top line grew 5.3% YoY while operating income grew 35.1% YoY, demonstrating strong operating leverage
• Gross margin of 43.8% and EBITDA margin of 21.7% reflect solid unit economics
• OCF of 178 million yen (1.85x net income) signals high earnings quality
• Balance sheet is conservative with an estimated equity ratio of ~71.5% and liabilities/equity of 0.33x
• ROE at 2.78% is modest due to low asset turnover and interim timing effects
• Disclosure gaps (cash balance, investing CF, DPS details) limit FCF and capital return analysis

Metrics to Watch:

• Order backlog/ARR and maintenance renewal rates for revenue visibility
• SG&A-to-sales ratio and operating margin for sustained operating leverage
• OCF/NI ratio, DSO, and deferred revenue for cash conversion quality
• Capex and investing CF to gauge true FCF and reinvestment needs
• Net cash position and equity ratio for capital allocation capacity
• YoY revenue growth trajectory through H2 to assess seasonality and pipeline conversion

Relative Positioning: Relative to domestic software peers, the company exhibits strong margins, low leverage, and robust liquidity, with moderate revenue growth and improving profitability; valuation context and competitive dynamics aside, its balance sheet strength and cash conversion compare favorably, while growth pace and disclosure depth are more middle-of-the-pack.

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