CL Holdings Inc. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥25.81B
• Operating Income: ¥649M
• Net Income: ¥309M
• EPS: ¥30.06

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

Verdict: Mixed quarter—profitability rebounded sharply on operating income, but cash flow quality deteriorated materially and capital efficiency remains sub-par. Revenue was 258.06, down 2.7% YoY, while operating income surged to 6.49 (+465.1% YoY), lifting operating margin to roughly 2.5%. Gross profit was 79.81, implying a gross margin of 30.9%, broadly healthy for the business mix. SG&A totaled 79.00, nearly consuming gross profit; the gap to operating income suggests meaningful other operating income within the operating line. Profit before tax was 5.87, with net income of 3.26 (+97.6% YoY), translating to a net margin of about 1.26%. EPS (basic) was 30.06 JPY with the same diluted EPS, indicating no material dilution. Operating margin expanded by about 208 bps YoY (from ~0.43% to ~2.51%), while net margin expanded by roughly 64 bps YoY (from ~0.62% to ~1.26%). However, operating cash flow was -25.88 versus net income of 3.26 (OCF/NI = -7.94x), flagging a significant divergence and low earnings quality this quarter. Free cash flow was -31.84, necessitating heavy financing inflows of 54.55 to support liquidity. Balance sheet shows total assets of 224.80 and equity of 75.83 (equity ratio 33.3%), with interest-bearing loans of 61.59 and a D/E of 1.96x—elevated but below the explicit 2.0x warning threshold. Cash and equivalents ended at 59.38, but the negative OCF means near-term liquidity is reliant on external funding. ROE was 4.3% (DuPont: NPM 1.3% × AT 1.148 × leverage 2.96x), and ROIC was 3.3%, both below typical cost-of-capital benchmarks. The effective tax rate was 30.6%, consistent with a normalized level. Working capital appears to be a major cash drag (AR 60.63; inventory 21.83), though period-over-period changes are not disclosed. Dividend outflows (1.66) and buybacks (1.71) occurred despite negative FCF, leaning on financing cash inflows for coverage. Forward-looking, the key will be sustaining margin gains with tighter SG&A discipline while normalizing working capital to restore positive OCF and lift ROIC above 5–7%. Without cash conversion improvement, the improved earnings run-rate may not translate into shareholder value.

Profitability Analysis

ROE decomposition (DuPont): ROE 4.3% = Net Profit Margin 1.3% × Asset Turnover 1.148 × Financial Leverage 2.96x. The largest change driver this quarter was the margin component: operating income rose +465% YoY on a small revenue decline, implying significant operating margin expansion (~208 bps YoY to ~2.5%). Business reason: a combination of improved gross profit capture and the presence of other operating income within IFRS operating profit, set against tightly managed SG&A growth (SG&A at 79.00 roughly flat against gross profit 79.81). Asset turnover at 1.148 indicates decent utilization of the asset base; with revenue down 2.7% YoY, AT likely did not improve materially and was not the core driver. Financial leverage at 2.96x remains high and largely unchanged in driving ROE; leverage magnifies returns but also risk given OCF weakness. Sustainability: Margin gains tied to other operating income are less repeatable; sustaining improvement requires structural gross margin lift and SG&A control rather than one-off items. Flags: SG&A nearly equals gross profit (GP 79.81 vs SG&A 79.00), leaving limited operating leverage buffer; any GP softness will compress margins quickly.

Growth Assessment

Revenue declined 2.7% YoY to 258.06, indicating a soft topline environment. Profit growth was driven by operating line improvements (+465% YoY), not by revenue expansion, raising questions on repeatability. Gross margin at 30.9% is respectable, but with SG&A at 79.00, operating leverage remains thin. Net income rose 97.6% to 3.26, but net margin is still only ~1.3%, leaving limited cushion against demand or pricing volatility. The presence of other operating income within IFRS operating profit likely boosted the quarter; excluding such items would reduce the core run-rate. ROIC at 3.3% is below the 5–8% benchmark, signaling that growth is not yet value-accretive relative to capital employed. Outlook hinges on working capital normalization and consistent GP expansion; absent that, earnings momentum may fade. Management’s ability to moderate SG&A and improve conversion of earnings to cash will dictate sustainability. Near-term growth visibility is moderate at best given negative OCF and reliance on financing inflows.

Financial Health

Liquidity: Current ratio is not calculable due to missing current liabilities; however, current assets are 148.03 with cash and equivalents at 59.38, providing some buffer. Solvency: D/E is 1.96x—elevated but below the explicit 2.0x warning threshold; equity ratio is 33.3%. Interest-bearing loans total 61.59 (ST 19.74, LT 41.85); with EBITDA 16.63, gross Debt/EBITDA is about 3.7x, manageable but leaves less headroom if earnings soften. Maturity mismatch: Short-term loans (19.74) are well covered by current assets (148.03), but negative OCF increases refinancing risk; current liabilities details are unreported, limiting precision. Net cash position appears near neutral if comparing loans (61.59) to cash (59.38), but the cash burn from OCF means true liquidity relies on continued financing access. No off-balance sheet obligations are disclosed in the data provided.

Cash Flow Quality

OCF was -25.88 versus net income of 3.26 (OCF/NI = -7.94x), a clear quality concern. The shortfall likely stems from adverse working capital movements (e.g., higher receivables or inventory), though detailed changes are not disclosed. Free cash flow was -31.84 after modest capex of 2.59, indicating that the issue is operational, not investment intensity. Financing inflow of 54.55 funded both the OCF deficit and shareholder returns (dividends 1.66, buybacks 1.71). With OCF negative and ROIC at 3.3%, the current earnings level is not translating into cash returns; sustainability requires normalization of working capital and consistent profitability. Signs of manipulation are not evident from the limited data, but the scale of OCF divergence warrants close monitoring in subsequent quarters.

Dividend Sustainability

Calculated payout ratio is 17.7%, appearing conservative on an earnings basis. However, FCF coverage is deeply negative (-55.12x), meaning dividends (and buybacks) were not funded by internally generated cash this period. Given financing cash inflows of 54.55, distributions were effectively debt-funded in the quarter. With ROIC at 3.3% and OCF negative, sustainability hinges on a quick rebound in cash generation. Policy visibility is limited due to unreported DPS; future distributions should align with FCF normalization to avoid balance sheet strain.

Risk Assessment

Business Risks:

• Revenue softness (-2.7% YoY) amid potential demand or pricing pressure
• Thin operating margin (~2.5%) leaves little buffer against GP volatility
• Dependence on other operating income to achieve profit this quarter
• Potential customer concentration and project timing risk (typical for digital/IT services)
• Execution risk around SG&A discipline and gross margin management

Financial Risks:

• Negative operating cash flow (-25.88) creating liquidity reliance on financing
• Elevated leverage (D/E 1.96x) with Debt/EBITDA ~3.7x
• Refinancing risk if credit conditions tighten given short-term loans of 19.74
• Low ROIC (3.3%) below cost-of-capital benchmarks, risking value dilution
• Potential goodwill (7.20) and intangible (10.53) impairment risk if performance weakens

Key Concerns:

• OCF/NI of -7.94x indicates low earnings quality in the quarter
• FCF negative (-31.84) while dividends and buybacks were executed
• Margin improvements may be partly non-recurring within operating line
• Limited disclosure on current liabilities and non-operating items constrains analysis

Investment Implications

Key Takeaways:

• Strong YoY operating profit rebound with ~208 bps operating margin expansion despite lower revenue
• Earnings quality weak: OCF deeply negative and FCF shortfall funded by financing
• Capital efficiency below threshold: ROE 4.3%, ROIC 3.3%
• Leverage elevated (D/E 1.96x) but not yet at a critical threshold; liquidity sensitive to OCF recovery
• Sustaining margins without one-off operating items and normalizing working capital are the swing factors

Metrics to Watch:

• Operating cash flow and working capital turns (DSO, DIO, DPO)
• Recurring operating margin ex-other operating income
• ROIC progression toward >5–7%
• Net debt and refinancing profile (especially short-term debt rollovers)
• Gross profit trend vs SG&A growth to assess operating leverage

Relative Positioning: Within Japanese mid-cap services/IT peers, profitability recovery is notable but cash conversion and ROIC lag best-in-class; balance sheet flexibility is average-to-weak pending OCF normalization.

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
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