CHANGE Holdings,Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥22.27B
• Operating Income: ¥2.50B
• Net Income: ¥1.60B
• EPS: ¥22.45

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

CHANGE Holdings (3962) delivered strong top-line momentum in FY2026 Q2 (cumulative) with revenue of 222.66 (100M JPY), up 34.9% YoY, but profitability contracted, as operating income fell 34.4% YoY to 25.00 and net income declined 24.7% YoY to 15.61. The DuPont breakdown indicates a modest ROE of 3.1%, driven by a thin net margin of 7.0%, low asset turnover of 0.185x, and financial leverage of 2.38x. Despite EBITDA of 36.59 and an implied operating margin around 11.2% (25.00/222.66), cash generation was weak: operating cash flow was 4.29 (OCF/NI 0.27x) and free cash flow was slightly negative at -0.53, reflecting working capital consumption. The effective tax rate was elevated at 44.0%, weighing on after-tax profitability versus peers typically in the high-20s to low-30s in Japan. Balance sheet scale expanded to total assets of 1,206.51 with equity of 505.88; the reported equity ratio is 34.9%, while simple equity/asset math suggests a higher 41.9%, pointing to definitional differences (e.g., owners’ equity vs total equity). Leverage appears manageable with debt-to-equity of 1.09x and short-term loans of 58.38, but interest coverage cannot be assessed due to unreported interest expense. Liquidity assessment is constrained by missing current liability and cash balance details (only period-end cash and equivalents of 301.85 are available), limiting interpretation of current and quick ratios. Working capital dynamics look stretched: accounts receivable of 177.60 are high relative to the half-year revenue base, implying long DSO typical for public-sector and enterprise project work. The company returned substantial capital: dividends paid were 13.50 and share repurchases were 44.85, driving financing cash outflows of -79.81; the calculated payout ratio is 98.9% and FCF coverage of dividends is -0.03x, suggesting distributions exceeded internally generated cash in the period. Comprehensive income of 23.88 exceeded net income, indicating positive OCI contributions (e.g., investment revaluations), partially offsetting profit pressure. Profit before tax of 27.44 exceeded operating income, implying net positive non-operating items of roughly 2.44, though ordinary income was unreported. SG&A was 50.58, and D&A was 11.59, consistent with EBITDA reconciliation, but the cost-of-sales and gross profit subtotals appear presentation-sensitive under IFRS, with reported gross margin of 32.2% aligning to the gross profit figure provided. Overall, the quarter shows vigorous growth but weaker margins, heavy working capital needs, and sizable shareholder returns outpacing free cash flow. Data limitations exist for several line items (ordinary income, current liabilities, interest expense, DPS), and zeros should not be interpreted as actual zeros but as unreported. The near-term focus is on converting growth into cash, normalizing tax rate, and stabilizing margins amid ongoing investment.

Profitability Analysis

ROE_decomposition: ROE 3.1% = Net margin 7.0% x Asset turnover 0.185x x Leverage 2.38x. The low ROE is primarily constrained by subdued net margin and low asset turnover, partly offset by moderate leverage. margin_quality: Revenue 222.66 with operating income 25.00 implies an ~11.2% operating margin; EBITDA margin is 16.4%. Reported gross profit of 71.68 corresponds to a 32.2% gross margin. Note: the provided cost of sales (93.43) does not reconcile to the gross profit subtotal, likely due to IFRS presentation differences; we rely on the gross margin metric given. operating_leverage: YoY: revenue +34.9% vs operating income -34.4% indicates negative operating leverage this half, likely from higher personnel/subcontracting costs, mix shift to lower-margin projects, or increased SG&A (50.58, 22.7% of sales). D&A of 11.59 suggests continued investment weighing on EBIT.

Growth Assessment

revenue_sustainability: Top-line growth of +34.9% YoY is strong and likely driven by digital transformation demand and possibly consolidation effects; sustainability hinges on backlog, renewal rates, and public-sector budget cycles. profit_quality: Net margin at 7.0% and effective tax rate of 44.0% dilute earnings conversion. Positive non-operating contributions (PBT 27.44 vs OP 25.00) aided pre-tax results, but core profitability softened. outlook: To sustain growth with healthier earnings, the company needs to improve project mix and utilization, manage subcontracting costs, and normalize the tax rate. Working capital discipline (AR collections) is key to translating growth into cash.

Financial Health

liquidity: Operating CF was 4.29; cash and equivalents were 301.85 at period end. Current ratio and quick ratio are not calculable due to unreported current liabilities. Accounts receivable 177.60 and inventories 4.37 suggest a service-heavy model with elongated collections. solvency: Total liabilities 552.50 vs equity 505.88 yields debt-to-equity of 1.09x; short-term loans are 58.38. Equity ratio is reported at 34.9%; simple equity/asset calculation equals ~41.9%, indicating definitional differences. Overall solvency appears acceptable with a substantial equity buffer. capital_structure: Leverage is moderate with some short-term borrowings and significant shareholder returns (buybacks, dividends). Interest coverage cannot be computed due to unreported interest expense, but EBITDA of 36.59 suggests headroom if interest is modest.

Cash Flow Quality

earnings_quality: OCF/NI of 0.27x is weak, pointing to working capital build and/or timing effects. The elevated effective tax rate further depresses after-tax cash conversion. FCF_analysis: FCF was -0.53 (OCF 4.29 minus capex 1.27), indicating limited internal funding capacity this half. Financing outflows (-79.81) were driven by buybacks (44.85) and dividends (13.50), resulting in net cash reduction despite a solid opening balance. working_capital: AR of 177.60 vs annualized revenue of ~445 implies DSO around ~145 days, high but not unusual for public/enterprise projects; AP is 121.40, partly offsetting. Tightening billing milestones and collections is a key lever for OCF improvement.

Dividend Sustainability

payout_ratio_assessment: Calculated payout ratio is 98.9%, indicating nearly full earnings distribution. This is high for a period with declining profit and weak cash conversion. FCF_coverage: FCF coverage of dividends is -0.03x, meaning dividends were not covered by free cash flow in the half; coverage relied on existing cash and other financing. policy_outlook: Given sizable buybacks (44.85) alongside dividends (13.50), shareholder returns are robust. Sustaining this level likely depends on improving OCF and maintaining cash reserves; monitoring future guidance and capital allocation commentary is essential.

Risk Assessment

Business Risks:

• Margin compression from rising personnel/subcontracting costs and less favorable project mix
• Elongated receivable cycles tied to public-sector and large enterprise customers
• Execution risk in scaling delivery capacity alongside rapid growth
• Tax rate volatility impacting net profitability
• Dependence on government DX spending cycles and budget processes

Financial Risks:

• Weak OCF relative to NI (0.27x) and negative FCF in the period
• High payout and buybacks exceeding internally generated cash
• Short-term borrowing reliance (58.38) with unreported interest expense limiting visibility on coverage
• Potential goodwill/intangibles exposure unreported in this dataset, which could imply impairment risk if present
• Equity ratio definition variance complicating solvency benchmarking

Key Concerns:

• Negative operating leverage despite strong revenue growth
• High DSO and working capital consumption
• Elevated effective tax rate (44.0%) depressing net margin
• Sustainability of shareholder returns without stronger FCF
• Data gaps on ordinary income, current liabilities, and DPS impede full ratio analysis

Investment Implications

Key Takeaways:

• Strong revenue growth (+34.9% YoY) but earnings contraction (OP -34.4% YoY) signals margin pressure
• ROE at 3.1% is modest due to thin net margin and low asset turnover
• Cash conversion is weak (OCF/NI 0.27x), with negative FCF and heavy buybacks
• Leverage moderate (D/E 1.09x) with ample absolute cash but incomplete liquidity data
• High payout ratio (98.9%) not covered by FCF; returns funded by balance sheet this period

Metrics to Watch:

• Operating margin trajectory and SG&A ratio
• OCF/NI and FCF, especially working capital movements (DSO, billing milestones)
• Effective tax rate normalization
• Backlog and book-to-bill (if disclosed) to gauge revenue visibility
• Capital allocation cadence: buybacks vs dividend vs investment
• Equity ratio and any changes in short-term borrowings

Relative Positioning: Within Japan’s DX/services peer set, the company shows above-peer revenue growth but below-peer cash conversion and near-term margin pressure; balance sheet strength provides flexibility, but sustained returns hinge on improving operating leverage and working capital discipline.

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