eSOL Co.,Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥8.63B
• Operating Income: ¥357M
• Net Income: ¥675M
• EPS: ¥13.97

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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

For FY2025 Q3 (cumulative), eSOL Co., Ltd. recorded revenue of ¥8,627 million (-2.0% YoY), with operating income of ¥357 million (-57.9% YoY) and net income of ¥265 million (-60.7% YoY), evidencing significant margin compression despite a modest top-line decline. Gross profit was ¥3,344.9 million, implying a solid gross margin of 38.8%, but SG&A rose as a share of sales, driving operating margin down to 4.1%. Ordinary income of ¥397 million exceeded operating income by ¥40 million, indicating non-operating gains (likely subsidies, FX, or investment-related income) partly cushioning weak core operations. Net margin fell to 3.07%, and DuPont decomposition yields ROE of 5.17% (net margin 3.07% × asset turnover 1.23 × financial leverage 1.37), notably below typical software peers, reflecting both compressed margins and conservative leverage. Asset turnover of 1.23x is healthy for a software/services model, suggesting decent utilization of the asset base. The balance sheet is strong: total assets ¥7,013 million and total equity ¥5,130 million imply an equity ratio around 73.1% (despite a reported 0.0%, which appears undisclosed rather than actual), and liabilities are modest at ¥1,999.8 million. Liquidity is ample with current assets of ¥5,730.2 million vs. current liabilities of ¥1,746.5 million, producing a current ratio of 328% and quick ratio of 322%, supported by low inventories (¥113.6 million). Working capital is sizable at ¥3,983.6 million, offering operational flexibility during demand or collections volatility. Operating leverage appears unfavorable this period: a small revenue decline led to a steep drop in operating profit, implying elevated fixed costs (notably personnel and R&D) or mix effects (less royalty/license, more services). The implied effective tax rate based on income tax expense (¥214.7 million) and estimated pre-tax profit suggests a mid-to-high 40% range, though the reported “effective tax rate 0.0%” is clearly a placeholder. Cash flow, D&A, interest expense, and share data are not disclosed in the feed (zeros indicate non-reporting), limiting direct assessment of cash conversion and per-share capital metrics; however, the strong liquidity position suggests no near-term funding stress. Dividend per share is shown as ¥0 and payout ratio 0%, consistent with either no interim dividend or data not yet finalized by Q3; sustainability is tied to free cash flow, which is not disclosed. Overall, eSOL remains profitable with a robust balance sheet, but profit quality and operating efficiency weakened, and the short-term outlook hinges on improving mix toward higher-margin license/royalty and disciplined SG&A control. Key areas to monitor include order backlog, royalty trends in automotive/embedded software, headcount and utilization, and any signs of recovery in operating margin. Data gaps (cash flow, D&A, share count) constrain precision, so conclusions rely on the available non-zero figures and reasonable inferences under JGAAP.

Profitability Analysis

ROE is 5.17%, driven by net profit margin of 3.07%, asset turnover of 1.23x, and financial leverage of 1.37x. ROA approximates 3.8% (¥265m / ¥7,013m), consistent with the DuPont math (3.07% × 1.23 ≈ 3.77%). Operating margin compressed to 4.1% (¥357m / ¥8,627m), down sharply YoY given the -57.9% drop in operating income against a -2.0% sales decline, indicating negative operating leverage. Gross margin remains solid at 38.8%, but SG&A intensity is elevated: implied SG&A of roughly ¥2,987.9m (gross profit ¥3,344.9m minus operating income ¥357m), about 34.6% of sales, suggesting higher fixed costs (personnel, R&D, go-to-market) and/or lower-margin services mix. Ordinary margin of 4.6% (¥397m / ¥8,627m) exceeds operating margin, reflecting ~¥40m of non-operating gains, which modestly offsets operational softness but is not a structural earnings driver. Net margin is 3.07%; the tax burden implied by income tax expense appears sizeable relative to pre-tax profit, contributing to reduced bottom-line profitability. With minimal leverage, financial gearing provides limited ROE enhancement, putting the onus on margin improvement to lift returns. Overall profitability quality is mixed: healthy gross margin but weak operating leverage and reliance on non-operating gains in the quarter.

Growth Assessment

Top-line declined 2.0% YoY to ¥8,627m, indicating soft demand or delayed project deliveries within embedded/automotive segments. The outsized decline in operating income (-57.9% YoY) suggests adverse mix (less license/royalty, more services) and/or temporary under-absorption of fixed costs (utilization pressure). Net income fell 60.7% YoY, indicating limited offset from non-operating items and a material tax burden. Sustainability of revenue depends on timing of software license and royalty recognition and service execution; modest sales contraction implies demand is resilient but not accelerating. Profit quality is currently weak given the step-down in operating margin; a recovery requires either mix improvement toward higher-margin royalty/license streams or SG&A normalization. Near-term outlook hinges on automotive program ramps and design wins that convert to royalties, as well as stabilization in engineering utilization. Without cash flow disclosure, we cannot confirm cash conversion; however, strong working capital provides buffer to support delivery and R&D. If order intake and backlog are constructive (not disclosed), revenues could stabilize; otherwise, cautious near-term growth expectations are appropriate based on available data.

Financial Health

Balance sheet is strong and conservatively leveraged. Total assets are ¥7,013m and total equity is ¥5,130m, yielding an estimated equity ratio of ~73.1% (reported 0.0% likely undisclosed). Total liabilities stand at ¥1,999.8m, with current liabilities at ¥1,746.5m. Liquidity is ample: current assets ¥5,730.2m support a current ratio of 328% and a quick ratio of 322%, with inventories low at ¥113.6m, typical for a software/services model. Working capital is ¥3,983.6m, offering strong short-term coverage for operations and R&D. Debt-to-equity is 0.39x when measured as total liabilities over equity; specific interest-bearing debt is not disclosed, but the low ratio indicates modest solvency risk. Interest expense is not reported, preventing interest coverage analysis; however, low leverage and high equity cushion mitigate refinancing risk. No information on cash and equivalents is provided in the dataset, but given high current assets and low inventories, cash and receivables likely dominate current assets.

Cash Flow Quality

Operating, investing, and financing cash flows are not disclosed in the provided data (zeros are placeholders), so OCF/Net Income and FCF cannot be evaluated directly. Earnings quality assessment must therefore rely on accrual proxies. The sizable working capital position suggests the business has ample liquidity to absorb timing differences in receivables, though actual cash conversion cycles (DSO/DPO) cannot be computed. With gross margin holding at 38.8% but operating margin compressed, the quality of earnings is contingent on SG&A normalization and mix shift rather than revenue recognition issues. Depreciation and amortization are not disclosed; given the asset-light nature, D&A is likely modest, and cash EBIT likely tracks operating income, but this cannot be confirmed. Free cash flow coverage of dividends cannot be determined. Overall, cash flow quality cannot be conclusively assessed due to missing disclosures, but structural indicators (low inventories, strong working capital) are supportive.

Dividend Sustainability

Annual DPS is shown as ¥0 with a payout ratio of 0%, consistent with either no dividend declared year-to-date or data not yet finalized at Q3. With net income of ¥265m and strong liquidity, the capacity to pay a dividend exists; however, coverage by free cash flow cannot be assessed due to undisclosed cash flows. Given margin compression and the need to invest in R&D and talent in embedded software, a conservative payout posture is plausible. Sustainability would depend on consistent operating cash generation and stabilization of operating margin toward historical levels. Policy outlook cannot be inferred from the dataset; investors should consult management guidance and historical payout practices. On current data, dividend affordability appears secondary to margin recovery and growth investments.

Risk Assessment

Business Risks:

• Demand cyclicality and program timing risk in automotive/embedded software markets
• Revenue mix risk (services vs. license/royalty) impacting margins
• Project execution and utilization risk leading to under-absorption of fixed costs
• Talent retention and wage inflation for skilled engineers
• Customer concentration and dependency on key OEMs/Tier-1s
• Competitive pressure from global RTOS/platform vendors
• Potential delays in design wins converting to production royalties

Financial Risks:

• Profitability volatility leading to weaker cash generation in down quarters
• Limited operating leverage flexibility due to fixed cost base (personnel/R&D)
• Tax burden variability affecting net margin
• Receivables concentration and collection timing (cash conversion risk)
• Information gaps on cash, debt, and cash flows in interim disclosure feed

Key Concerns:

• Sharp decline in operating income (-57.9% YoY) despite only -2.0% sales decline
• Operating margin of 4.1% well below prior levels, indicating negative operating leverage
• Dependence on non-operating gains (~¥40m) to support ordinary income
• Unreported cash flow data prevents validation of earnings-to-cash conversion
• Effective tax burden appears high relative to pre-tax income, pressuring net margin

Investment Implications

Key Takeaways:

• Revenue resilience but pronounced margin compression; recovery hinges on mix and SG&A control
• ROE of 5.17% is sub-par for software peers due to low leverage and weak margins
• Balance sheet strength (estimated ~73% equity ratio, current ratio 3.3x) reduces solvency risk
• Non-operating gains modestly support earnings but are not a durable driver
• Data limitations (cash flows, D&A, share metrics) constrain precision of valuation and payout analysis

Metrics to Watch:

• Order backlog and book-to-bill, especially for license/royalty programs
• Gross margin by segment and royalty/license mix versus services
• SG&A run-rate, headcount, and utilization to gauge operating leverage
• Receivable days and cash balance to validate cash conversion
• Operating margin trajectory and ordinary income composition
• Effective tax rate normalization and any one-off tax impacts

Relative Positioning: Within TSE-listed software and embedded systems peers, eSOL shows strong liquidity and conservative leverage but currently underperforms on profitability (low single-digit operating margin, ROE ~5%). A shift toward higher-margin royalty/license revenue and tighter cost control is needed to close the gap with higher-ROE software 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