MKSystem Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.53B
• Operating Income: ¥2M
• Net Income: ¥-12M
• EPS: ¥-1.85

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment 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 weak FY2026 Q2 with near-breakeven operations, negative bottom line, and elevated leverage, partially offset by strong operating cash flow. Revenue grew modestly by 1.6% YoY to 15.31, but operating income was just 0.02, indicating limited operating leverage. Gross profit was 6.16 with a gross margin of 40.2%, while SG&A consumed almost all gross profit at 6.14, leaving a 0.13% operating margin. Ordinary income was 0.05 as non-operating income (0.30) largely offset non-operating expenses (0.27), but net income fell to -0.10 due to a heavy tax charge (0.17), implying an effective tax rate of 321.2% on minimal pre-tax profit. EBITDA was 1.84 (12.0% margin), evidencing cash earnings capacity, yet interest coverage on an operating basis was only 0.31x, signaling pressure from financing costs. ROE printed at -1.6% (DuPont: -0.7% margin × 0.747 asset turnover × 3.20x leverage), and ROIC was just 0.2%, well below a 5% warning threshold. Liquidity is adequate but not robust with a current ratio of 121.5% (above 1.0 but below the 1.5 comfort level), and leverage is high with D/E at 2.20x. Notably, the company holds net cash of roughly 0.19 (cash 6.77 vs total loans 6.58), which provides a cushion against short-term obligations. Operating cash flow was strong at 3.48 despite the net loss, yielding an OCF/NI ratio of -34.77x—indicating a large divergence due to working capital and non-cash charges (depreciation and amortization of 1.82). Capex was minimal at -0.04, suggesting likely positive FCF, though full investing cash flow details are unreported. Margin change in basis points cannot be quantified YoY due to missing prior-period margin data; however, the current operating margin near zero implies no meaningful operating leverage despite revenue growth. Earnings quality is mixed: cash generation is solid, but accounting profitability is weak and taxed unfavorably. The balance sheet shows meaningful intangible assets (5.25) and goodwill (0.39), indicating capitalized development and acquisition history that depresses ROIC. Forward-looking, the company must execute cost control and improve pricing/mix to convert modest growth into operating profit, while refinancing or lowering interest costs would meaningfully lift coverage. Sustained OCF, if repeated, can support maintenance capex and small dividends, but high D/E and subpar ROIC keep the risk-reward skewed to execution. Data limitations (many items unreported) constrain deeper margin and cash-use diagnostics, so future disclosures on SG&A components and investing cash flows will be crucial.

Profitability Analysis

ROE decomposition: ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-0.7%) × 0.747 × 3.20x ≈ -1.6%. The dominant negative driver is the net profit margin, which is near zero at the operating line (0.13% OM) and turns negative at the bottom due to a disproportionate tax burden. Asset turnover at 0.747 is modest for a software/service-oriented balance sheet with sizable intangibles, and leverage at 3.20x amplifies margin outcomes. The largest change driver vs a normalized model is margin, given SG&A (6.14) nearly fully absorbing gross profit (6.16), yielding minimal operating leverage. Business reason: cost base (notably personnel and fixed overheads embedded in SG&A) did not flex down, while revenue growth was only +1.6%, and non-operating items and taxes drove bottom-line loss. Sustainability: the margin pressure looks structural unless pricing, utilization, or cost reductions occur; the tax anomaly (321% effective rate) appears one-time or timing-related given low PBT and could normalize. Concerning trends: the SG&A envelope is effectively fixed at current scale; while we lack YoY SG&A, the near 100% SG&A-to-gross-profit ratio is unsustainably high; interest expense (0.06) meaningfully erodes thin operating income, keeping interest coverage at 0.31x.

Growth Assessment

Top-line growth was modest at +1.6% YoY to 15.31, indicating stable but slow demand. Revenue growth did not translate into profit growth due to flat gross margin (40.2%) and SG&A absorption leaving operating income at 0.02. EBITDA margin at 12.0% shows latent earnings capacity, but D&A (1.82) and financing costs consume this cushion. Non-operating income (0.30) is helpful but largely offset by non-operating expenses (0.27), suggesting limited recurring lift from below-the-line items. Net income was -0.10, dragged by an unusually high tax charge relative to PBT; normalization of tax could improve reported earnings without operational change. Outlook hinges on cost discipline and conversion of pipeline to higher-margin recurring revenues; minimal capex suggests growth is not capex-constrained but execution-constrained. With high leverage and weak coverage, growth that lifts operating margin above financing costs is critical for sustainable EPS recovery.

Financial Health

Liquidity: Current ratio 1.215 (>1.0 but <1.5) and quick ratio 1.215 indicate adequate short-term coverage but below comfort benchmarks. Working capital is 2.22, supported by cash (6.77) and AR (5.03) exceeding current liabilities (10.32), mitigating near-term stress. Solvency: D/E is 2.20x (warning >2.0); total loans are 6.58 (ST 3.00, LT 3.58) against cash 6.77, implying slight net cash (~0.19) but elevated total liabilities relative to equity. Interest coverage is weak at 0.31x on an operating basis, highlighting sensitivity to rate and income fluctuations. Maturity mismatch: current assets (12.54) comfortably exceed current liabilities (10.32); short-term loans (3.00) are covered by cash on hand, limiting refinancing risk near term. Off-balance sheet obligations: none reported. Equity base is modest at 6.41 with intangibles of 5.25, implying low tangible equity and heightened sensitivity of covenants and ROIC to impairments.

Cash Flow Quality

OCF was strong at 3.48 despite a net loss of -0.10, yielding an OCF/NI ratio of -34.77x, which flags a large divergence but in this case reflects non-cash D&A (1.82) and favorable working capital movements. Investing CF is unreported; capex is minimal at -0.04, implying that maintenance needs are low and that OCF likely converts to FCF in the absence of large acquisitions. Financing CF was -2.03, indicating net debt service or distributions; combined with OCF, cash generation appears sufficient to manage obligations. Potential working capital signs: without detailed breakdown, the OCF uplift could reflect timing of receivables/payables; however, AR is 5.03 vs revenue scale that appears reasonable, and there is no evidence of aggressive payables extension (AP only 0.51). Overall earnings quality is mixed: cash generation is better than accounting profit, but sustainability depends on repeating working capital gains and stabilizing operating margins.

Dividend Sustainability

DPS and total dividends are unreported; the calculated payout ratio of -217.1% is mechanically distorted by negative net income and should not be taken at face value. With OCF at 3.48 and minimal capex (-0.04), the company appears capable of funding a modest dividend from cash flow if such a policy is in place. However, high D/E (2.20x) and weak operating earnings argue for balance sheet strengthening over distributions. Coverage on a free cash flow basis cannot be confirmed due to missing investing cash flows, but current period cash generation supports at least maintenance obligations. Policy outlook will depend on restoring positive net income and improving interest coverage; a stable or conservative dividend stance would be prudent until operating margins normalize.

Risk Assessment

Business Risks:

• Margin compression risk from SG&A rigidity vs modest revenue growth
• Execution risk in converting pipeline to higher-margin recurring revenue
• Product/technology obsolescence and cybersecurity risks typical for software/service providers
• Pricing pressure in enterprise/SME HR and back-office solutions markets

Financial Risks:

• High leverage with D/E at 2.20x
• Weak interest coverage at 0.31x, vulnerable to rate increases or earnings dips
• Low ROIC at 0.2%, raising risk of value dilution
• Tax volatility evidenced by a 321% effective tax rate on minimal pre-tax profit

Key Concerns:

• Operating margin at 0.13% leaves no buffer against shocks
• Negative net income despite positive ordinary income due to outsized taxes
• Reliance on working capital and non-cash items to support OCF
• Intangible-heavy balance sheet (intangibles 5.25) reduces tangible equity protection

Investment Implications

Key Takeaways:

• Top line grew 1.6% YoY but operating profit was essentially breakeven at 0.02
• Gross margin 40.2% is reasonable, but SG&A absorption nearly eliminates operating earnings
• Net loss of -0.10 driven by heavy tax expense on minimal PBT
• OCF of 3.48 and capex of -0.04 suggest underlying cash generation despite accounting loss
• Leverage is elevated (D/E 2.20x) with weak operating interest coverage (0.31x)
• Slight net cash vs loans (cash 6.77 vs loans 6.58) eases near-term liquidity pressure
• ROE -1.6% and ROIC 0.2% highlight subpar capital efficiency

Metrics to Watch:

• Operating margin progression (basis points QoQ/YoY)
• SG&A trend vs revenue growth for operating leverage
• Interest coverage (EBIT/interest) and refinancing terms
• Working capital movements driving OCF (AR days, unreported AP trends)
• Effective tax rate normalization vs statutory baseline
• Investing cash flows for M&A or capitalized development impacting future amortization

Relative Positioning: Within small-cap Japanese software/service peers, the company shows average gross margin but weak operating leverage and inferior ROIC/ROE, offset by decent OCF and manageable near-term liquidity; balance sheet leverage and interest coverage are weaker than typical conservative peers.

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