MKSystem Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.53B
• Operating Income: ¥2M
• Net Income: ¥-136M
• 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

MKSystem (3910) reported FY2026 Q2 (cumulative) revenue of ¥1,531m, up 1.6% YoY, indicating modest top-line growth. Gross profit was ¥540m, implying a 35.3% gross margin, which remains healthy for a software/service model with limited inventories. Operating income was essentially breakeven at ¥2m, unchanged YoY, highlighting limited operating leverage despite revenue growth. Ordinary income of ¥5m suggests some non-operating gains offset interest expense, but not enough to lift the bottom line. Net income was a ¥10m loss (EPS -¥1.85), reflecting continued margin pressure and heavier non-cash charges. EBITDA was ¥180m with an 11.7% margin, underscoring that D&A (¥178m) is a major drag from EBITDA to EBIT. Interest expense was ¥4.6m, and interest coverage was a weak 0.4x on EBIT, emphasizing thin earnings headroom. Operating cash flow was solid at ¥132m despite the net loss, implying supportive working capital movements and high non-cash charges; however, investing CF was unreported and thus free cash flow cannot be assessed from the dataset. The balance sheet shows current assets of ¥1,513m and current liabilities of ¥1,210m, yielding a current ratio of 125% and working capital of ¥303m, which is adequate but not ample. Total assets were ¥2,050m and reported equity was ¥641m; this implies an equity ratio of roughly 31% (despite the 0.0% placeholder) and financial leverage of 3.20x, consistent with the provided DuPont inputs. The reported total liabilities of ¥1,766m appear higher than assets minus equity would imply, so we rely on the provided leverage metrics and equity figure for interpretation. DuPont analysis shows a negative net margin (-0.65%), asset turnover of 0.747x, and financial leverage of 3.20x, producing an ROE of -1.56%. Profitability quality is mixed: gross margin is respectable, but the conversion to operating margin is exceptionally weak due to SG&A and D&A. Liquidity is reasonable, but solvency headroom is limited by weak coverage ratios and a debt-to-equity ratio of 2.76x. With DPS at ¥0 and payout at 0%, management is conserving cash, which is appropriate given thin earnings and the need to maintain balance sheet flexibility. Key near-term focus should be on driving operating leverage through cost control and mix improvements while sustaining cash generation.

Profitability Analysis

ROE decomposes to -1.56% = (-0.65% net margin) × (0.747x asset turnover) × (3.20x equity multiplier). The negative net margin is the primary driver of weak ROE, as asset efficiency and leverage are not unusually low for a small-cap software/service business. Gross margin at 35.3% is decent, but the operating margin was 0.1% (¥2m/¥1,531m), indicating SG&A intensity and high D&A are consuming gross profits. EBITDA margin of 11.7% shows underlying cash operating profitability exists, but heavy amortization/depreciation (¥178m) compresses EBIT. Interest coverage is 0.4x on EBIT, underscoring fragile profitability relative to financing costs. Operating leverage appears unfavorable this quarter: revenue grew 1.6% YoY yet operating income was flat at a very low base, suggesting limited cost elasticity or higher fixed cost absorption. Ordinary income exceeded operating income (¥5m vs. ¥2m), implying some non-operating support, but not a structural earnings driver. Effective tax rate presentation is distorted by small losses; reported income tax expense of ¥2.2m despite a net loss likely reflects minimum taxes or timing/valuation allowance effects.

Growth Assessment

Revenue growth of +1.6% YoY indicates a subdued growth environment, potentially reflecting slower new wins or pricing pressure. The small increase in revenue did not translate to profit growth, with operating income flat at ¥2m and net income in a slight loss, indicating poor flow-through. Gross margin stability (35.3%) suggests product/service mix is holding, but SG&A and D&A offset gains, limiting scalability. EBITDA of ¥180m implies the core business retains cash-generative capacity, but accounting amortization is substantial—possibly from past development capitalization or acquired intangibles. The sustainability of revenue hinges on recurring/contracted components; while not disclosed, the low inventory and service nature point toward a subscription/usage model with potential resilience. Outlook-wise, improving operating leverage through cost control and better utilization will be essential to convert modest growth into earnings. Without acceleration in topline growth or meaningful SG&A efficiency, profitability is likely to remain constrained in the near term.

Financial Health

Liquidity: Current assets ¥1,512.9m vs. current liabilities ¥1,210.1m implies a current ratio of 125% and quick ratio effectively the same given no reported inventories. Working capital is ¥302.9m, providing a cushion but not a wide buffer. Solvency: Using provided figures, total assets ¥2,050m and equity ¥641m imply an equity ratio around 31% (the 0.0% shown should be treated as unreported). Debt-to-equity is 2.76x, indicating a leveraged balance sheet for a low-margin period. Interest coverage of 0.4x is weak, highlighting sensitivity to income volatility. There is an inconsistency between total liabilities reported and assets minus equity; we therefore prioritize the provided leverage metrics and equity balance for interpretation. Overall, financial flexibility exists but is constrained by thin earnings and leverage.

Cash Flow Quality

Earnings quality appears mixed: OCF of ¥131.9m versus a net loss of ¥10m yields an OCF/NI ratio of -13.19, driven by significant non-cash D&A (¥177.7m) and likely working capital inflows. This indicates cash generation is stronger than accrual earnings suggest in the period. Free cash flow cannot be determined because investing cash flow/capex is unreported (shown as 0 by placeholder). Financing CF was an outflow of ¥173.8m, implying debt repayment, lease payments, or other distributions; given DPS is zero, this likely reflects deleveraging or lease settlements. Working capital management appears supportive, given positive OCF despite minimal operating profit; monitoring receivables and contract liabilities is important to ensure this is sustainable. Overall, cash conversion is acceptable for now, but visibility is limited due to missing investing CF and cash balance data.

Dividend Sustainability

Current DPS is ¥0.00 and payout ratio is 0%, aligning with a conservative stance amid weak profitability. With FCF unobservable (investing CF not disclosed), we cannot assess cash-based dividend coverage; OCF of ¥132m is positive but must first support capex and debt service. Given interest coverage is only 0.4x and leverage is elevated at 2.76x D/E, retaining earnings and cash is prudent. Unless operating margins improve and FCF is demonstrably positive after capex, sustained dividends would be difficult to justify. Policy-wise, the company appears to prioritize balance sheet resilience over distributions.

Risk Assessment

Business Risks:

• Subdued revenue growth (+1.6% YoY) limiting operating leverage
• High SG&A intensity and heavy D&A suppressing EBIT
• Potential customer concentration and renewal risk typical in niche B2B software/services
• Pricing pressure and competitive intensity in HR/payroll/workflow systems
• Execution risk on cloud migration and product roadmap monetization
• Cybersecurity and data privacy risks inherent to cloud/services

Financial Risks:

• Weak interest coverage (0.4x) raising vulnerability to rate or earnings shocks
• Leverage of 2.76x D/E constraining financial flexibility
• Dependence on working capital timing to support OCF
• Limited visibility on capex/investing needs due to unreported investing CF
• Potential covenant or refinancing risk if profitability remains weak

Key Concerns:

• Operating margin near zero despite positive gross margin
• Negative net margin driving ROE to -1.56%
• Data limitations (equity ratio and cash/investing flows unreported) reduce transparency

Investment Implications

Key Takeaways:

• Top-line grew modestly (+1.6% YoY) but profit conversion was minimal (operating income ¥2m).
• Gross margin is healthy at 35.3%, yet SG&A and D&A compress EBIT to near zero.
• ROE is negative (-1.56%) mainly due to a negative net margin.
• OCF is solid at ¥132m, suggesting cash-generative operations despite accounting losses.
• Leverage is elevated (D/E 2.76x) and coverage is weak (0.4x), limiting solvency headroom.
• Dividend is suspended (DPS ¥0), appropriately preserving cash in the current earnings profile.

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio
• EBITDA and D&A trajectory (capitalized development amortization)
• OCF and working capital turns (DSO/DPO if disclosed)
• Capex/investing CF to assess true FCF
• Interest coverage and net debt/EBITDA (when debt data available)
• Revenue growth/ARR expansion and churn/retention metrics

Relative Positioning: Relative to domestic small-cap software/service peers, MKSystem shows weaker operating leverage and profitability at present, with respectable gross margins but below-average EBIT margins and coverage, and modest top-line growth.

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