TOHO SYSTEM SCIENCE CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥8.59B
• Operating Income: ¥884M
• Net Income: ¥600M
• EPS: ¥34.65

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: Solid profitability despite a slight revenue dip; margins expanded and earnings quality held up, supported by a cash-rich balance sheet. Revenue declined 2.2% YoY to 85.92, but operating income rose 17.9% YoY to 8.84 and net income increased 17.3% YoY to 6.00. Gross profit was 15.32, implying a gross margin of 17.8%. SG&A was 7.81 (9.1% of sales), and operating margin reached 10.3% (8.84/85.92). Net margin was 7.0% (6.00/85.92). Based on YoY deltas, operating margin expanded by approximately 176 bps (from ~8.5% to ~10.3%), and net margin improved by roughly 117 bps (from ~5.8% to ~7.0%). Ordinary income was 8.89 with a margin of 10.4%, aided by minimal non-operating items (income 0.07, expenses 0.00). Operating cash flow was 6.03, essentially matching net income (OCF/NI ≈ 1.00x), which indicates acceptable earnings quality for the period. The balance sheet is highly liquid with cash and deposits of 91.66 and a current ratio of 565%, while equity of 90.82 against total assets of 132.11 implies an equity ratio of about 68.7%. Financial leverage is modest at 1.45x, and calculated ROE is 6.6% via DuPont. An apparent mismatch between gross profit, SG&A, and operating income suggests other operating items (not separately disclosed) contributed roughly 1.33 to operating profit; this is likely a classification or additional operating income line rather than an error. Financing cash outflow of -3.67 includes minor buybacks (-0.02), implying dividends comprised most of the remainder. The reported payout ratio of 156% likely reflects timing effects (e.g., year-end dividends paid in the half-year period versus half-year earnings) rather than an ongoing overspend. With costs well controlled and a cash-rich position, the company enters the second half with capacity to sustain investment and dividends, provided demand holds and cost discipline continues. Key forward implication: operating leverage is favorable; sustaining the higher margin level will be the swing factor for full-year earnings. Watch for any normalization of tax rate (32.4% this period) and for working capital trends as project deliveries ramp into H2. Overall, a margin-led beat on operating and net profit with neutral-to-positive cash flow quality and robust liquidity.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (approx.) 7.0% × Asset Turnover 0.650 × Financial Leverage 1.45x = ROE 6.6%. The biggest change vs last year is the profitability component: operating income grew 17.9% despite a 2.2% sales decline, lifting operating margin to ~10.3% from ~8.5% (+~176 bps). This improvement likely stems from tight SG&A control (9.1% of sales) and a favorable mix/price in projects, plus about 1.33 in other operating items that lifted operating profit above gross profit minus SG&A. Asset turnover of 0.65x is steady for a cash-rich IT services company; leverage at 1.45x remains conservative and did not drive ROE. The margin expansion appears operationally driven and partly sustainable if the cost discipline continues; however, the contribution from other operating items may be one-off or less predictable. No clear red flags of cost slippage this quarter, but given revenue contraction, we note that any SG&A re-acceleration faster than revenue would pressure operating leverage in subsequent periods.

Growth Assessment

Top-line declined 2.2% YoY to 85.92, indicating softer demand or delivery timing effects. Profitability improved: operating income +17.9% to 8.84 and net income +17.3% to 6.00, driven by margin gains. Non-operating items were negligible (0.07), so growth was predominantly operational. The 10.3% operating margin vs an estimated 8.5% a year ago suggests improved execution/mix. Revenue sustainability is uncertain near-term given the YoY contraction; backlog visibility and H2 project start–finish timing will be key. Profit quality is acceptable with OCF ≈ NI, indicating earnings are supported by cash conversion for the period. Outlook hinges on maintaining SG&A discipline and preserving pricing/mix; if revenue stabilizes, current margins could deliver further profit growth. Absent segment disclosure, we assume no major one-off gains embedded in non-operating income.

Financial Health

Liquidity is very strong: current assets 114.21 versus current liabilities 20.21 yields a current ratio of 565% and quick ratio equivalent given the large cash balance (cash and deposits 91.66). No warning on current ratio (<1.0) or leverage; D/E reported at 0.46x (likely total liabilities to equity), while interest-bearing debt is unreported. Equity ratio is approximately 68.7% (90.82/132.11), underscoring solvency strength. Maturity mismatch risk appears low given large cash versus current liabilities. Noncurrent liabilities (21.33) are meaningful relative to current liabilities, likely reflecting retirement obligations or leases, but serviceable given liquidity. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF of 6.03 was essentially equal to net income of 6.00 (OCF/NI ≈ 1.00x), indicating neutral-to-good earnings quality this period. With capex of only -0.18, a proxy FCF (OCF - capex) is about 5.85, implying healthy internal funding capacity. Working capital details (AR, inventories) are unreported, limiting granular attribution, but the OCF/NI ratio does not flag aggressive revenue recognition or material working capital build. No signs of working capital manipulation are evident from the limited data. Investing CF is unreported, so FCF on a full basis may differ if there were securities movements or M&A.

Dividend Sustainability

Dividend data are largely unreported; the calculated payout ratio of 156% likely reflects timing (e.g., payment of prior FY year-end dividend within the half-year) rather than a structural overspend versus current-half earnings. Financing CF of -3.67 includes buybacks of -0.02, implying dividend cash outflow near -3.65 for the period; compared with proxy FCF of about 5.85, coverage appears adequate (>1x) for this half. With a large net cash position, the company has capacity to maintain dividends in the near term. However, without full-year DPS guidance and given revenue softness, we treat the 156% figure as non-recurring on a half-year denominator. Policy outlook cannot be inferred from the dataset; monitor the year-end dividend proposal and payout policy commentary in management guidance.

Risk Assessment

Business Risks:

• Revenue softness (-2.2% YoY) indicating potential demand/timing risk in project deliveries
• Margin sustainability risk if favorable mix or other operating items prove non-recurring
• Talent cost inflation and hiring retention pressures typical for SI/IT services
• Project execution and acceptance timing risk that can swing quarterly revenue and cash

Financial Risks:

• Limited visibility on interest-bearing debt and lease liabilities due to unreported breakdowns
• Noncurrent liabilities (21.33) could include retirement benefit obligations, which may rise with discount rate changes
• Dividend payout timing may cause temporary FCF coverage volatility

Key Concerns:

• Apparent discrepancy between gross profit, SG&A, and operating income suggests other operating items (~1.33) that may not recur
• Revenue decline amid higher profits heightens sensitivity to cost control for sustaining margins
• Data gaps (investing cash flows, DPS) constrain assessment of long-term capital allocation

Investment Implications

Key Takeaways:

• Profit beat on margin expansion: operating margin ~10.3% vs ~8.5% a year ago (+~176 bps)
• Earnings quality acceptable with OCF≈NI (1.00x) and proxy FCF ~5.85
• Balance sheet strength: cash 91.66, equity ratio ~68.7%, current ratio 565%
• Revenue down 2.2% YoY; outlook depends on H2 delivery timing and demand
• Dividend appears serviceable from cash/FCF, though reported 156% payout is likely a timing artifact

Metrics to Watch:

• Order backlog and book-to-bill for H2 visibility
• SG&A ratio trend versus revenue growth
• Repeatability of other operating income that boosted OI this quarter
• OCF/NI and working capital movements as projects progress
• Effective tax rate normalization versus 32.4%

Relative Positioning: Within Japan IT services peers, the company exhibits above-average liquidity and conservative leverage, with current-period operating margin trending favorably; however, top-line contraction and limited disclosure on investing/debt reduce visibility compared to more transparent larger 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