FLECT Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.81B
• Operating Income: ¥414M
• Net Income: ¥250M
• EPS: ¥40.75

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 resilient but slightly softer Q2 FY2026 with modest top-line and operating softness, strong balance sheet, and weak cash conversion. Revenue was 38.13 (100M JPY), down 2.4% YoY, with operating income of 4.14 (-3.9% YoY) and net income of 2.50 (-2.7% YoY). Gross profit was 17.36, implying a gross margin of 45.5%. Operating margin was approximately 10.9%, and net margin was 6.6%. Using the reported YoY rates, we estimate operating margin compressed by about 18 bps YoY (from ~11.04% to ~10.86%), while net margin compressed by about 2 bps. SG&A was 13.05 (34.2% of sales), with Salaries & Allowances 4.86 (12.7% of sales), indicating continued investment in headcount/capability despite flat revenue. Ordinary income was 4.15 (-2.9% YoY) with negligible non-operating contribution (non-op income 0.00; non-op expenses 0.04), so earnings quality hinges on core operations. OCF was -2.09 against positive net income of 2.50, resulting in an OCF/NI ratio of -0.83x, a material divergence and a key quality concern this quarter. Capex was manageable at 0.37, but implied FCF is negative given OCF weakness. Liquidity remains robust with a current ratio of 375.5% and cash/deposits of 21.28, providing ample cushion for working capital swings. Leverage is conservative with reported D/E at 0.49x and interest coverage at 98.6x, mitigating solvency risk. ROE is calculated at 8.4% via DuPont (NPM 6.6% × AT 0.911 × FL 1.40x), broadly acceptable for a small-cap IT/services profile. The effective tax rate is elevated at 39.8%, dampening net profit conversion. Shareholder returns were tilted to buybacks (0.97) with dividends unreported, which, combined with negative OCF, implies returns likely funded by balance sheet strength. Forward-looking, the main watchpoints are cash conversion (working capital discipline), utilization/margin management amid wage pressure, and sustaining demand in core verticals to re-accelerate growth. With a strong balance sheet and controllable opex base, the company appears positioned to stabilize margins, but near-term cash flow normalization is the critical swing factor.

Profitability Analysis

ROE decomposition: ROE 8.4% = Net Profit Margin 6.6% × Asset Turnover 0.911 × Financial Leverage 1.40x. The component most evidently under pressure is Net Profit Margin given revenue -2.4% and operating income -3.9% YoY, implying slight operating margin compression (~18 bps); asset turnover likely softened marginally as well given lower sales versus a stable-to-high asset base, but prior asset levels are not disclosed. Business drivers: softer topline and a steady SG&A cost base (34.2% of sales) suggest limited operating leverage; Salaries & Allowances at 12.7% of sales highlight continued personnel investment that weighs on short-term margins. Sustainability: the margin pressure appears cyclical/operational rather than structural—non-operating items are negligible and depreciation is modest (0.58), so margin recovery hinges on utilization/pricing and project mix. Operating leverage is muted in the near term because SG&A did not flex down with revenue; if growth resumes, margins could expand. Concerning trends: SG&A growth vs revenue is not fully disclosed, but with revenue -2.4% and operating income -3.9%, operating efficiency tightened; stable absolute SG&A against declining revenue would imply deleverage risk. Tax burden is high (39.8% ETR), which depresses NPM—if normalized, ROE could improve. Overall, profitability remains solid for a services business but lacks operating momentum this quarter.

Growth Assessment

Revenue declined 2.4% YoY to 38.13, indicating a pause in growth amid potential demand timing or project phasing. Operating income fell 3.9% to 4.14, a slightly larger decline than sales, implying modest negative operating leverage. Net income declined 2.7% to 2.50, cushioned by minimal non-operating drag. EBITDA was 4.72 (12.4% margin), consistent with a people-heavy services model and suggesting manageable non-cash expenses (D&A 0.58). With ARR-like or project backlog metrics unreported, visibility into forward growth is limited. The mix of costs (Salaries 4.86) indicates continued capacity building, which can support future growth if utilization recovers. Near-term outlook: stabilization with upside contingent on improved project starts, utilization, and pricing; watch for recovery in bookings and backlog commentary. Medium term: if topline returns to growth and SG&A scales, operating margin could re-expand from ~10.9%.

Financial Health

Liquidity is strong: Current Ratio 375.5% and Quick Ratio 375.5% (no inventory disclosed), with working capital of 27.39. Cash and deposits of 21.28 cover current liabilities (9.94) by over 2x, minimizing short-term refinancing risk. Solvency is conservative: reported D/E is 0.49x and interest coverage is 98.6x, indicating ample headroom. Total assets are 41.87 and total equity is 29.85, implying an equity ratio of roughly 71% (analyst-derived), supportive of balance sheet resilience. Maturity mismatch risk appears low: long-term loans are 4.50 and current liabilities are well covered by liquid assets (cash + receivables = 35.40 vs CL 9.94). No off-balance sheet obligations are disclosed in the data provided. Explicit warnings: none on liquidity (CR well >1.0) and leverage (D/E well <2.0).

Cash Flow Quality

OCF was -2.09 vs net income of 2.50, yielding OCF/NI of -0.83x—a notable quality flag for this quarter. The negative OCF likely reflects working capital outflows (e.g., receivable build, timing of billings or tax payments), as non-operating items are minimal and D&A is modest. Implied FCF (OCF - Capex) is approximately -2.46, indicating that internal cash generation did not cover investment needs or shareholder returns in the period. With cash of 21.28 and strong liquidity, the company can bridge near-term cash deficits, but recurring negative OCF would be concerning. No clear signs of aggressive working capital manipulation can be concluded from the limited disclosure, but the divergence vs NI warrants close monitoring of DSO, unbilled receivables, and advances.

Dividend Sustainability

Dividend data are unreported; however, the company executed share repurchases of 0.97 in the period. Given negative implied FCF, buybacks appear funded by existing cash resources rather than operating cash. Without a disclosed DPS or payout policy, we cannot calculate a payout ratio. Sustainability hinges on normalization of OCF in subsequent quarters; current balance sheet capacity can support modest shareholder returns, but continuation under prolonged negative OCF would be imprudent. Policy outlook is uncertain absent guidance; watch for year-end policy updates and capital allocation priorities between growth investment, buybacks, and potential dividends.

Risk Assessment

Business Risks:

• Demand timing and project phasing risk leading to revenue volatility (Q2 revenue -2.4% YoY).
• Margin pressure from wage inflation and continued hiring (Salaries 12.7% of sales).
• Execution risk on fixed-price projects affecting gross margin (GPM 45.5%).
• Customer concentration or sector exposure risk (not disclosed).
• Talent retention and utilization risk inherent to IT/services models.

Financial Risks:

• Weak cash conversion this quarter (OCF/NI -0.83x) increasing reliance on cash reserves.
• Potential working capital stretch (receivables 14.12 vs sales scale) if collections slow.
• Tax burden risk (effective tax rate 39.8%) depressing net profitability.
• Data limitations on short-term borrowings; only long-term loans reported (4.50).

Key Concerns:

• Negative OCF despite positive earnings and EBITDA.
• Slight operating margin compression amid flat revenue trajectory.
• Unreported dividend policy creating uncertainty on capital returns cadence.

Investment Implications

Key Takeaways:

• Core operations remain profitable with operating margin ~10.9% and ROE 8.4%.
• Earnings quality is a watchpoint given OCF/NI -0.83x and implied negative FCF.
• Balance sheet strength (cash 21.28; current ratio 375.5%) mitigates near-term risk.
• Cost base appears sticky; restoring growth is key to re-expanding margins.
• Shareholder returns via buybacks occurred despite negative OCF, relying on cash.

Metrics to Watch:

• OCF and working capital components (DSO, unbilled receivables, advances).
• Bookings/backlog and utilization to gauge near-term revenue recovery.
• SG&A trajectory versus revenue growth for operating leverage.
• Effective tax rate normalization and its impact on NPM/ROE.
• Cash balance and any changes in short-term borrowings.

Relative Positioning: Within small-cap Japanese IT/services peers, Flect exhibits solid profitability and a conservative balance sheet but lags on cash conversion this quarter; near-term performance hinges on normalizing working capital and reigniting topline growth to unlock operating leverage.

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