MEDICAL SYSTEM NETWORK Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥63.86B
• Operating Income: ¥1.29B
• Net Income: ¥472M
• EPS: ¥15.48

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: A mixed FY2026 Q2 with solid top-line growth and operating margin expansion, but weak cash conversion and elevated balance sheet risk. Revenue rose 6.9% YoY to 638.63, with operating income up 25.1% to 12.86, lifting the operating margin to about 2.01%. Gross profit reached 262.46, implying a gross margin of 41.1%, supporting improved operating leverage despite SG&A remaining heavy at 249.59. Ordinary income increased 19.1% to 12.15, though net non-operating items were a slight drag (non-op income 1.96 vs non-op expenses 2.67). Profit before tax was 10.66, and net income jumped 118.6% YoY to 4.52, aided by a low base and despite a high effective tax rate of 55.6%. EPS (basic) printed at 15.48 JPY, and total comprehensive income was 4.60. Operating margin expanded roughly 29 bps YoY (from about 1.72% to 2.01%) as revenue growth outpaced operating cost increases. EBITDA came in at 24.51 (EBITDA margin ~3.8%), with interest coverage at a healthy 8.69x. However, cash flow quality is weak: operating cash flow of 2.59 covers only 57% of net income, suggesting working capital headwinds or accrual-driven earnings. Capex of 13.97 far exceeded OCF, implying a negative FCF proxy (OCF − Capex) of approximately -11.4 this half. The balance sheet shows elevated leverage (D/E 3.28x) and tight liquidity (current ratio 0.84; quick ratio 0.84), with negative working capital (-42.75). Intangibles are sizable (goodwill 91.16; intangibles 100.17), increasing impairment risk if returns remain subpar. ROE is modest at 2.7% and ROIC is weak at 2.2%, indicating limited value creation versus capital costs. A calculated payout ratio of 81.4% looks stretched against negative FCF proxy and low ROIC. Forward-looking, sustaining margin gains and improving cash conversion, while de-risking the balance sheet, are key to support dividends and growth investments.

Profitability Analysis

DuPont decomposition indicates ROE of 2.7% = Net Profit Margin (0.7%) × Asset Turnover (0.898x) × Financial Leverage (4.28x). The primary constraint on ROE is the very low net profit margin, while leverage is high and asset turnover is near 0.9x. Versus last year, operating income grew faster than revenue (+25.1% vs +6.9%), implying margin expansion; we estimate operating margin increased by about 29 bps to ~2.01%. The largest driver of improvement is operating margin, likely from scale benefits in dispensing/wholesale and disciplined cost control, though SG&A remains heavy at 39.1% of sales. The improvement appears partly sustainable if revenue growth persists and cost discipline holds, but is vulnerable to reimbursement cuts and wage inflation for pharmacists. Non-operating items were a net drag this quarter (income 1.96 vs expenses 2.67), and the effective tax rate was elevated at 55.6%, suppressing net margins. Warning flags include: (1) SG&A ratio still high, limiting operating leverage; (2) ROIC at 2.2%, well below 5% threshold, suggesting core returns remain weak; and (3) dependency on accrual profits given OCF/NI at 0.57x.

Growth Assessment

Top-line growth of 6.9% to 638.63 appears volume-driven and/or mix-enhanced, consistent with steady prescription demand and network expansion. Operating profit growth of 25.1% outpaced sales, indicating improving operating leverage despite a heavy SG&A base. Net profit more than doubled to 4.52, aided by margin expansion and a low prior-year base, partially offset by a high tax burden. Gross margin of 41.1% supports profitability resilience, though pricing pressure from NHI revisions remains a structural headwind. With EBITDA margin at 3.8%, the earnings base remains thin and sensitive to cost inflation (labor, rents) and reimbursement changes. Non-operating income is modest and non-operating expenses outpaced it this period, limiting ordinary income growth versus operating income. Outlook hinges on sustaining sales momentum and further SG&A efficiency; otherwise, thin margins could quickly compress. ROIC of 2.2% signals that incremental growth must be productivity-led to create value.

Financial Health

Liquidity is tight: current ratio 0.84 and quick ratio 0.84, both below 1.0, triggering a warning. Working capital is negative at -42.75, and current liabilities (267.69) exceed current assets (224.94), raising near-term funding risk. Cash and deposits of 64.64 plus receivables of 60.80 cover only a portion of accounts payable (116.65) and short-term loans (37.88), suggesting a maturity mismatch. Leverage is high with D/E at 3.28x and total loans of 195.87 (short-term 37.88; long-term 157.99). Interest coverage is acceptable at 8.69x, mitigating immediate solvency concerns but leaving limited cushion if earnings weaken. Noncurrent liabilities (277.10) are sizable, and goodwill/intangibles total 191.33, heightening impairment risk under prolonged low returns. No off-balance sheet obligations were reported in the provided data.

Cash Flow Quality

OCF/Net Income of 0.57 indicates low cash conversion and potential working capital drag or accrual-heavy earnings. With capex of 13.97 and OCF of 2.59, an FCF proxy (OCF − Capex) is roughly -11.38 for the period, implying external funding reliance. Interest coverage is solid, but sustained negative FCF would strain liquidity given the sub-1.0 current ratio. No explicit signs of working capital manipulation are evident from levels alone, but the gap between OCF and NI warrants monitoring of receivables collections and payables timing. Investing and financing cash flows details are limited (investing CF unreported; financing CF 2.60), constraining deeper attribution analysis.

Dividend Sustainability

The calculated payout ratio is 81.4%, which is elevated relative to earnings and appears unsupportable against the negative FCF proxy this half. With OCF below NI and capex needs ongoing, dividend coverage from internal cash generation looks weak. High leverage (D/E 3.28x) and sub-1.0 current ratio limit flexibility to fund dividends via balance sheet without increasing risk. Absent a rebound in OCF and/or lower capex, maintaining the payout at this level would be challenging. Dividend policy disclosures and actual DPS were not provided; our assessment relies on the calculated payout ratio and cash flow proxy.

Risk Assessment

Business Risks:

• Reimbursement risk from NHI dispensing fee/drug price revisions pressuring margins
• Labor cost inflation for pharmacists and staff amid tight labor markets
• Competition and consolidation in pharmacy networks affecting pricing and volumes
• Execution risk on SG&A efficiency given high cost base (SG&A 39.1% of sales)

Financial Risks:

• Liquidity risk: current ratio 0.84 and negative working capital
• High leverage: D/E 3.28x with total loans ~195.9
• Negative FCF proxy (OCF − Capex ≈ -11.4) implying external funding needs
• Impairment risk from large goodwill/intangibles (191.3) relative to equity
• Tax rate volatility (effective tax 55.6%) impacting net margins

Key Concerns:

• Low ROIC (2.2%) and modest ROE (2.7%) indicate limited value creation
• OCF/NI at 0.57 suggests earnings quality concerns
• Non-operating items net negative this period, constraining ordinary income
• Sensitivity of thin operating margin (~2.0%) to cost and reimbursement shocks

Investment Implications

Key Takeaways:

• Revenue growth healthy at +6.9% with operating profit +25.1%, lifting margin ~29 bps YoY
• Cash conversion weak (OCF/NI 0.57) and FCF proxy negative despite EBITDA growth
• Balance sheet stretched: current ratio 0.84, D/E 3.28x, negative working capital
• ROIC 2.2% underscores need for efficiency gains and disciplined capital allocation
• Dividend payout (81.4% calc.) appears high versus cash generation and leverage profile

Metrics to Watch:

• OCF/Net Income and working capital turns (receivables, payables days)
• Operating and EBITDA margins, SG&A ratio trajectory
• ROIC versus WACC and any impairment indicators for goodwill/intangibles
• Liquidity metrics: current ratio, net debt/EBITDA, interest coverage
• Capex intensity and FCF (OCF − Capex) trend
• Effective tax rate normalization and its drivers

Relative Positioning: Within Japan’s pharmacy/medical services peer set, the company shows respectable revenue growth but operates with thinner margins, weaker cash conversion, and higher leverage than conservative peers, leaving it more exposed to reimbursement and cost volatility.

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