eSOL Co.,Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥8.63B
• Operating Income: ¥357M
• Net Income: ¥675M
• Earnings per Unit (EPU): ¥13.97

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution Information

Segment 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: Soft quarter with sharp profit contraction despite stable topline; operating leverage turned negative and net profit fell materially. Revenue declined 2.0% YoY to 86.27, while operating income dropped 57.9% YoY to 3.57 and ordinary income fell 55.5% to 3.97. Net income was 2.65, down 60.7% YoY, translating to a net margin of 3.1%. Gross profit was 33.45, implying a gross margin of 38.8%, but operating margin compressed to 4.1%. Using the YoY deltas, prior-year operating income is inferred at roughly 8.48, indicating the operating margin fell from about 9.6% to 4.1% (-549 bps). Net margin contracted from roughly 7.7% to 3.1% (-459 bps). Ordinary margin declined from about 10.1% to 4.6% (-553 bps). Profit before tax printed at 8.90, well above ordinary income (3.97), implying approximately 4.9 of extraordinary gains; however, these did not prevent a sharp drop in bottom line. ROE calculated via DuPont is 5.2% (3.1% margin × 1.230 asset turnover × 1.37x leverage), in line with the reported 5.2%. Liquidity remains a strength with a current ratio of 348% and cash and deposits of 31.71, or roughly 45% of total assets. The balance sheet is conservative with total liabilities of 18.83 versus equity of 51.30 (D/E ~0.37x by total liabilities), and an equity ratio around 73%. Earnings quality cannot be fully assessed due to unreported operating cash flow, but the sizable gap between ordinary income and profit before tax suggests one-time items influenced the quarter. With SG&A at 24.97 (28.9% of sales), fixed cost pressure amid flat-to-declining sales likely drove the operating margin compression. The reported ROIC of 13.8% is strong versus common 7–8% targets, but sustaining this will require recovering operating profitability. Forward-looking, stabilization in demand, tighter cost control, and conversion of earnings to cash will be key, while the high cash position provides strategic flexibility. Dividend payout ratio is indicated at 41.5%, which appears manageable, but FCF coverage is unreported and should be verified once cash flows are available. Overall, the quarter underscores execution and cost discipline needs in a soft revenue environment, with balance sheet strength mitigating downside risk.

Profitability Analysis

ROE decomposition (DuPont): ROE 5.2% = Net Profit Margin 3.1% × Asset Turnover 1.230 × Financial Leverage 1.37x. The largest driver of deterioration this quarter is the net profit margin, which fell from an estimated ~7.7% in the prior year to 3.1% now, reflecting significant operating margin compression (from ~9.6% to 4.1%). Business reason: modest top-line decline (-2.0% YoY) against a largely fixed cost base (SG&A 28.9% of sales) reduced operating leverage; the gross margin of 38.8% could not offset higher opex intensity. Ordinary income also fell sharply (‑55.5% YoY), and the presence of extraordinary gains (PBT 8.90 vs OI 3.97) indicates non-recurring items influenced pre-tax results without improving core profitability. Sustainability: the margin compression appears cyclical/operational rather than structural if demand normalizes and costs are controlled; however, absent revenue acceleration or cost restructuring, depressed margins could persist. Asset turnover at 1.230 is reasonable for a software/embedded systems provider and relatively stable; leverage is low (1.37x assets/equity), so financial gearing is not a significant ROE lever. Concerning trends: operating income declined far more than revenue, signaling negative operating leverage; monitor whether SG&A growth (not disclosed YoY) outpaces revenue and whether headcount/wage inflation are pressuring margins.

Growth Assessment

Revenue declined 2.0% YoY to 86.27, indicating stagnation rather than structural contraction. Profitability deteriorated disproportionately: operating income -57.9% and net income -60.7%, reflecting adverse mix and/or cost inflation and utilization pressures. Gross margin of 38.8% is decent, but operating margin fell to 4.1%, suggesting elevated SG&A intensity and weak operating leverage. Ordinary income margin compressed to 4.6%, and net margin to 3.1%, indicating broad-based margin pressure. Non-operating income was modest (0.46), and the sizable gap between ordinary income and profit before tax signals non-recurring gains that are not a sustainable growth driver. With ROE at 5.2% and ROIC reported at 13.8%, the franchise still creates value, but sustaining ROIC will likely require margin normalization. Outlook hinges on stabilization in end markets (e.g., embedded/automotive projects), improved utilization of engineers, and cost discipline. Near-term catalysts would include backlog recovery, improved book-to-bill (if disclosed), and confirmation that extraordinary items do not mask core weakness. Absent revenue reacceleration, management may need to optimize SG&A and delivery productivity to restore mid- to high-single-digit operating margins. Overall growth quality is mixed: revenues are resilient, but profit quality depends on cost control and the mix of project-based work.

Financial Health

Liquidity is strong: current assets 57.25 vs current liabilities 16.45 yields a current ratio of 348% and a quick ratio of 339.5%, well above benchmarks. Cash and deposits of 31.71 cover nearly 1.9x total current liabilities, providing ample buffer. Solvency is conservative: total liabilities 18.83 vs equity 51.30 gives a D/E (total liabilities to equity) of ~0.37x, and equity ratio is approximately 73%. Interest-bearing debt is unreported; however, low total liabilities and high cash suggest minimal leverage and low refinancing risk. Maturity mismatch risk appears low given significant liquid assets relative to current liabilities. No off-balance sheet obligations are disclosed in the provided data. There are no threshold warnings: Current Ratio >> 1.0 and D/E well below 2.0.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income cannot be computed; earnings quality assessment is therefore constrained. Given the sizable difference between ordinary income (3.97) and profit before tax (8.90), one-time items likely influenced earnings, increasing the need to validate cash conversion once OCF is available. Free cash flow is unreported; hence, we cannot confirm coverage of dividends or capex. Working capital composition shows high accounts receivable (19.54) relative to payables (5.85) and significant cash (31.71); absent OCF data, changes in AR and unbilled revenue cannot be assessed for timing effects or potential revenue recognition/collection lags. No explicit signs of working capital manipulation can be identified from the limited dataset, but monitoring AR days and contract assets would be prudent when disclosed.

Dividend Sustainability

The payout ratio is indicated at 41.5%, which sits within the generally sustainable range (<60%). DPS and total dividends paid are unreported, and free cash flow is unavailable, preventing a cash coverage check. Balance sheet liquidity (31.71 cash, low liabilities) suggests near-term dividend capacity, but sustaining dividends longer term depends on restoring operating cash generation amid weaker profits. Policy clarity is not provided; if management targets a stable or progressive dividend, improved OCF and margin recovery will be necessary to maintain payout without drawing down cash.

Risk Assessment

Business Risks:

• Demand softness in embedded/automotive software projects leading to utilization pressure and margin erosion
• Project timing and milestone risk causing revenue recognition volatility
• Wage inflation and tight labor market for engineers elevating SG&A and COGS
• Customer concentration risk typical in Tier-1 automotive and industrial clients
• Execution risk in scaling safety-critical (e.g., AUTOSAR/RTOS) projects with stringent quality requirements

Financial Risks:

• Earnings quality risk from reliance on non-recurring/extraordinary gains (PBT materially above ordinary income)
• Cash conversion uncertainty due to unreported OCF and potential AR buildup
• Currency fluctuation risk if exposure to overseas clients or USD/EUR contracts exists (not disclosed)
• Potential impairment risk on investment securities (6.40) if market conditions deteriorate

Key Concerns:

• Operating margin compression from ~9.6% to 4.1% YoY (‑549 bps)
• Net income down 60.7% YoY with net margin at 3.1%
• High fixed cost absorption evidenced by SG&A at 28.9% of sales
• Visibility limited by unavailable cash flow data, SG&A breakdown, and R&D disclosures

Investment Implications

Key Takeaways:

• Core profitability weakened materially despite only a modest revenue decline
• Extraordinary gains inflated profit before tax but did not translate into stronger bottom-line momentum
• Balance sheet strength (cash-rich, low leverage) provides resilience and optionality
• ROE at 5.2% is subdued; margin normalization is necessary for improvement
• Reported ROIC of 13.8% is strong but at risk if operating margins remain depressed

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio
• Order backlog and book-to-bill (if disclosed) for demand visibility
• OCF/Net income and free cash flow once reported
• Accounts receivable days and collection trends
• Extraordinary items and their recurrence, along with effective tax rate normalization
• Utilization rates and headcount/productivity metrics

Relative Positioning: Within Japan’s embedded/automotive software peers, eSOL exhibits strong liquidity and conservative leverage but currently lags on profitability due to negative operating leverage; recovery in utilization and tighter cost control would be needed to close the margin and ROE 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