Neural Group Inc. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥2.54B
• Operating Income: ¥24M
• Net Income: ¥-155M
• EPS: ¥-3.41

Income Statement

Balance Sheet

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

Verdict: FY2025 Q3 was mixed—operational profitability improved materially, but bottom line remained negative due to non-operating/extraordinary items and an unusual tax burden, keeping ROE in the red. Revenue declined slightly to 25.35 (−1.3% YoY), while operating income rose sharply to 0.24 (+350% YoY), lifting the operating margin to roughly 0.9%. Gross profit was 16.84, implying a high gross margin of 66.4%, consistent with a service/solution-heavy mix. SG&A at 17.66 exceeded gross profit, but other operating gains likely bridged the gap to deliver a positive operating income. Ordinary income fell to −0.09 as non-operating expenses (0.27), including interest expense (0.13), outweighed non-operating income (0.09). Profit before tax declined to −1.00, indicating additional extraordinary losses not detailed in the disclosure. Net income was −0.52, producing a net margin of −2.0% and EPS of −3.41 JPY. Operating margin expanded by about 70 basis points YoY (from ~0.2% to ~0.9%), despite the minor revenue contraction. However, earnings quality cannot be confirmed due to unreported cash flow data, and the effective tax rate was an anomalous −55.2%, suggesting valuation allowance movements or non-deductible items. The balance sheet shows ample liquidity with a current ratio of 212.7% and cash of 21.39, but leverage is moderate with D/E at 1.16x and interest coverage at a weak 1.79x (a warning level). Intangibles are sizable (intangible assets 10.19 including goodwill 8.66), elevating potential impairment risk relative to equity (goodwill ≈ 45% of equity). ROIC was low at 2.0%, signaling subpar capital efficiency versus typical cost of capital benchmarks. Overall, the quarter demonstrates operational progress but insufficient to offset financing costs and below-the-line charges, keeping overall returns negative. Near term, the focus should be on sustaining operating improvement, reducing non-operating drag, and improving ROIC. With cash on hand, liquidity risk is contained, but debt service capacity needs attention given coverage below 2x. Forward-looking, stabilizing margins, tightening SG&A, and avoiding further extraordinary losses are key to restoring positive ROE. Data gaps (notably cash flow and SG&A detail) limit a full quality-of-earnings assessment.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (−2.0%) × 0.606 × 2.16 ≈ −2.7% (matches reported). The dominant driver of the negative ROE is the net margin, which remained −2.0% due to non-operating/extraordinary losses and a negative effective tax rate, despite improved operating profit. Asset turnover at 0.606 reflects modest efficiency for a service-oriented business with a sizable cash and intangibles base; with revenue slightly down, turnover likely softened YoY. Financial leverage at 2.16x is moderate and amplifies the negative margin into a negative ROE. Business explanation: while gross margin is healthy (66.4%), SG&A remains heavy relative to gross profit, and interest and other below-the-line costs (and probable extraordinary losses) eroded ordinary income and PBT. Sustainability: the operating margin improvement (approx. +70 bps YoY) appears tied to better cost discipline and/or higher other operating income; sustaining this requires continued SG&A control and repeatable operating gains. The below-the-line drag from interest and extraordinary items is not sustainably positive and must be reduced to consistently deliver positive ROE. Watch-outs: lack of SG&A detail prevents confirming whether fixed cost growth outpaced revenue; interest coverage at 1.79x indicates limited operating cushion against financing costs.

Growth Assessment

Top-line contracted slightly (−1.3% YoY to 25.35), suggesting a stable-to-soft demand environment. Operating income surged to 0.24 (+350% YoY), indicating improved execution and/or cost control versus a low prior-year base. Gross margin remained strong at 66.4%, consistent with higher-value services or software mix. However, profit quality is diluted by non-operating and extraordinary losses that turned ordinary income negative (−0.09) and PBT to −1.00. The negative effective tax rate (−55.2%) is likely non-recurring in nature (valuation allowance movements or non-deductibles), but it complicates comparability. ROIC is low at 2.0%, highlighting that growth to date has not translated into adequate returns; future growth must be accretive to ROIC. Near-term outlook depends on sustaining operating leverage while addressing financing costs and curbing extraordinary losses. Without cash flow data, we cannot validate whether growth is cash-generative; monitoring OCF and working-capital intensity is essential. With ample cash and working capital, the company has runway to invest; success depends on converting pipeline to revenue and improving utilization. Overall, growth sustainability hinges on recurring revenue expansion and SG&A efficiency rather than one-off gains.

Financial Health

Liquidity is strong: current ratio 212.7% and quick ratio 199.8%, supported by cash and deposits of 21.39 against current liabilities of 13.28. Solvency is moderate: D/E is 1.16x (within typical small-cap tolerances but not low). Interest coverage is weak at 1.79x (warning), indicating tight debt service capacity if operating income does not continue to improve. Maturity profile: short-term loans are 6.00 versus cash of 21.39 and current assets of 28.24, implying low near-term refinancing risk; long-term loans of 8.21 underpin the leverage. No off-balance sheet obligations are disclosed in the provided data. Intangibles total 10.19 (including goodwill 8.66), which is substantial relative to equity (19.39), posing impairment risk if performance underwhelms. Working capital is healthy at 14.96, with low trade payables (0.45) and manageable receivables (4.36).

Cash Flow Quality

Operating cash flow is unreported; thus, OCF/Net Income and free cash flow cannot be assessed. Without OCF, we cannot confirm whether the improvement in operating income is cash-backed or driven by non-cash items/working capital timing. Interest coverage below 2x elevates the need for positive OCF to service debt; absent visibility, we treat cash flow quality as uncertain. No signs of working capital manipulation can be identified given data gaps (AR, inventory, AP levels are point-in-time only). Dividend, capex, and financing cash flows are also unreported, preventing assessment of FCF coverage for shareholder returns or reinvestment needs.

Dividend Sustainability

Dividend information is unreported, and retained earnings are negative (−18.45), indicating accumulated deficits that typically constrain dividend capacity under JGAAP. With net loss (−0.52) and unknown OCF/FCF, sustainable dividends cannot be confirmed. Interest coverage is weak and ROIC is 2.0%, both arguing for internal reinvestment and balance sheet strengthening over distributions. Policy outlook cannot be assessed without management guidance; near-term distributions appear unlikely until profitability and retained earnings recover.

Risk Assessment

Business Risks:

• Revenue softness (−1.3% YoY) suggesting demand or pricing pressure.
• High SG&A relative to gross profit; operating leverage sensitive to top-line fluctuations.
• Large goodwill/intangibles (goodwill 8.66; intangibles 10.19) raise impairment risk if performance deteriorates.
• Extraordinary loss impact (PBT −1.00 vs ordinary income −0.09) indicates volatility from one-off items.
• Tax volatility (effective tax rate −55.2%) complicates earnings predictability.

Financial Risks:

• Interest coverage at 1.79x (<2.0) flags weak debt service capacity.
• Moderate leverage (D/E 1.16x) with reliance on both short-term (6.00) and long-term loans (8.21).
• Negative retained earnings (−18.45) limiting capital flexibility for dividends and potentially covenants.
• ROIC at 2.0% well below typical cost of capital, risking value erosion if not improved.

Key Concerns:

• Sustaining operating margin improvements while reducing non-operating/extraordinary losses.
• Potential goodwill impairment given size relative to equity (~45%).
• Cash flow opacity due to unreported OCF/FCF—cannot verify earnings quality.
• Refinancing sensitivity if rates rise or if operating recovery stalls (coverage <2x).

Investment Implications

Key Takeaways:

• Operational turnaround signs: operating income +350% YoY and operating margin ~0.9% despite slight revenue decline.
• Bottom-line remains negative (net margin −2.0%) due to non-operating/extraordinary items and tax effects.
• Liquidity is ample (cash 21.39; current ratio 213%), but debt service capacity is thin (interest coverage 1.79x).
• Capital efficiency is weak (ROIC 2.0%), necessitating margin and asset utilization improvement.
• High intangibles/goodwill elevate impairment and earnings volatility risk.

Metrics to Watch:

• Operating cash flow and OCF/NI ratio (target >1.0).
• SG&A-to-sales ratio and trajectory vs revenue growth.
• Interest coverage and net debt trend.
• Extraordinary items and non-operating gains/losses run-rate.
• Goodwill impairment testing outcomes and segment profitability (if disclosed).
• Asset turnover and ROIC progression toward >5–8%.

Relative Positioning: Versus domestic small-cap IT/services peers, liquidity is stronger due to a large cash balance, but profitability and capital efficiency lag: operating margin is sub-1% and ROIC at 2% is below peer medians. Leverage is moderate and interest coverage is weaker than peers with net-cash positions. Execution needs to focus on recurring revenue growth and SG&A efficiency to close the profitability gap.

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