SD ENTERTAINMENT,Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥2.31B
• Operating Income: ¥-76M
• Net Income: ¥-66M
• EPS: ¥-7.38

Income Statement

Balance Sheet

Cash Flow Statement

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

FY2026 Q2 was mixed: strong top-line growth but continued losses, with liquidity and leverage risks remaining elevated. Revenue grew 21.8% YoY to 23.10, while operating loss narrowed to -0.76 (YoY change labeled -11.4% but the loss size appears slightly improved on our reconstruction). Gross profit was 21.23 and gross margin was a very high 91.9%, suggesting a service-heavy mix and low recognized cost of sales. SG&A of 22.00 exceeded gross profit, keeping operating profit negative. Operating margin improved to -3.3% from roughly -4.5% a year ago, an estimated expansion of about 120 bps, implying better operating leverage despite higher scale. Conversely, net margin deteriorated to -2.9% from about -1.6% a year ago (c.-130 bps), as non-operating burden and interest expense weighed on bottom line. Ordinary loss improved to -0.91 from roughly -1.38, implying an ordinary margin improvement of about 330 bps YoY. Operating cash flow was solidly positive at 2.12 versus net loss of -0.66, yielding an OCF/NI of -3.21x; this divergence improves cash but flags earnings quality volatility relative to accrual profit. Free cash flow, approximated as OCF minus capex, was positive at about 0.84, providing some flexibility despite losses. Liquidity is tight: current ratio is 0.60, quick ratio 0.60, and short-term loans of 12.60 dominate current liabilities of 20.53. Leverage is elevated with D/E at 1.75x and interest coverage at -4.28x, highlighting refinancing and rate sensitivity risk. ROE is -4.3% driven by negative margins; ROIC is -2.6%, well below a 5% warning threshold, indicating value dilution absent improvement. Reported EPS was -7.38 yen; book value per share is ~170 yen, and equity of 15.20 provides a cushion but is pressured by ongoing losses. With revenue momentum and improving operating margin, the path to break-even hinges on SG&A discipline and financing stability. Near term, management focus should be on tightening cost structure, reducing short-term debt dependence, and sustaining OCF to bridge the earnings gap. Data are limited in several breakdowns (SG&A details, investing CF), so conclusions on mix and sustainability should be revisited when fuller disclosures are available.

Profitability Analysis

ROE decomposition (DuPont): ROE -4.3% = Net Profit Margin (-2.9%) × Asset Turnover (0.552x) × Financial Leverage (2.75x). The weakest link is net margin, which is negative despite strong gross margin because SG&A (22.00) exceeds gross profit (21.23), keeping operating income in the red. Asset turnover at 0.55x is moderate for a service-heavy business with significant fixed/intangible assets (noncurrent assets 29.50), and leverage at 2.75x magnifies the negative margin into a negative ROE. QoQ/YoY dynamics: based on reconstructed prior figures implied by the YoY tags, operating margin appears to have improved by roughly +120 bps while net margin worsened by about -130 bps, suggesting non-operating drag (interest expense 0.18 and other non-op expenses 0.19) offset operating progress. Business driver: revenue scale-up (+21.8% YoY) is working through a largely fixed SG&A base, improving gross-to-operating conversion, but the financing cost burden is delaying net profitability. Sustainability: operating margin improvement looks partially sustainable if growth continues and SG&A is contained; however, interest burden will persist until leverage is reduced or rates fall. Concerning trends: SG&A remains higher than gross profit, indicating inadequate operating leverage at current scale; interest coverage is negative (-4.28x), and ROIC (-2.6%) is below the 5% warning threshold, pointing to sub-economic returns.

Growth Assessment

Revenue grew 21.8% YoY to 23.10, indicating solid demand recovery or footprint expansion. Gross margin remains extremely high at 91.9%, consistent with a service/fee-heavy model where cost of sales is limited; however, this does not translate into operating profit due to elevated SG&A. Operating income improved in margin terms (estimated +120 bps YoY) but remains negative at -0.76; sustaining double-digit revenue growth without proportional SG&A increases is essential to reach break-even. EBITDA was 0.31 (1.3% margin), indicating limited cash earnings capacity before D&A and interest. Non-operating items (interest expense 0.18 and expenses 0.19 vs income 0.04) continue to weigh on ordinary and net income, a headwind that scales with leverage rather than revenue. Outlook hinges on cost discipline (particularly fixed SG&A), financing cost reduction, and maintaining revenue momentum; any slowdown in growth would quickly reverse the modest operating margin gains.

Financial Health

Liquidity is weak: current ratio 0.60 and quick ratio 0.60 are below 1.0 (explicit warning). Working capital is negative at -8.19, with current liabilities (20.53) materially exceeding current assets (12.34). Short-term loans of 12.60 and accounts payable of 2.03 dominate near-term obligations, creating a maturity mismatch since cash (4.97) and receivables (2.80) cover only a fraction. Solvency: D/E is 1.75x (elevated vs a conservative <1.5), though not above the 2.0 explicit red line; total liabilities are 26.63 against equity of 15.20. Interest coverage is -4.28x, highlighting debt service pressure. Long-term loans are 4.26 vs short-term 12.60, reinforcing refinancing risk over the next 12 months. No off-balance sheet obligations were disclosed in the provided data. Equity remains positive with BVPS about 170 yen, but continued losses and high leverage could constrain financial flexibility.

Cash Flow Quality

OCF was 2.12 while net income was -0.66, yielding an OCF/NI of -3.21x, which triggers an earnings quality flag per benchmark but in this case reflects positive cash generation against accounting losses. The positive OCF likely benefited from working capital releases and add-backs (D&A 1.07), though detailed working capital line items are not disclosed. Capex was 1.28, implying an approximate FCF of 0.84, which is positive and helpful for deleveraging or operations. Sustainability: without recurring operating profit, sustaining positive OCF depends on continued working capital management and growth; one-time working capital benefits may not repeat. No signs of aggressive working capital manipulation can be confirmed or dismissed due to limited disclosure (inventories and detailed SG&A not reported).

Dividend Sustainability

Dividend data are unreported; with negative net income and tight liquidity, distributable capacity likely relies on OCF rather than earnings. Estimated FCF of 0.84 covers modest distributions if any, but priority should logically be debt service and liquidity restoration given the current ratio of 0.60 and negative interest coverage. Payout ratios cannot be calculated from available data; policy outlook is likely conservative until sustained operating profitability and improved coverage metrics are achieved.

Risk Assessment

Business Risks:

• Execution risk in reducing SG&A to align with revenue scale while preserving growth
• Competitive intensity in the entertainment/service segments (pricing and traffic sensitivity)
• Cost inflation (labor, rent) pressuring SG&A given high fixed-cost structure
• Potential demand volatility affecting utilization and membership/traffic

Financial Risks:

• Liquidity risk: current ratio 0.60 and negative working capital (-8.19)
• Refinancing risk: short-term loans of 12.60 dominate the liability structure
• Interest rate risk: negative interest coverage (-4.28x) with limited buffer for rate increases
• Leverage risk: D/E 1.75x and ROIC -2.6% indicate sub-economic returns under current capital structure

Key Concerns:

• Sustained operating losses despite revenue growth; SG&A exceeds gross profit
• Non-operating burden (interest and other expenses) offsets operating margin gains
• Earnings quality flag: OCF/NI -3.21x indicates cash/earnings divergence; sustainability uncertain
• Data limitations: lack of SG&A breakdown, investing CF details, and inventory data constrain analysis

Investment Implications

Key Takeaways:

• Top-line growth (+21.8% YoY) with estimated operating margin improvement but still loss-making
• Positive OCF (2.12) and positive estimated FCF (0.84) provide near-term breathing room
• Liquidity is strained (current ratio 0.60); heavy short-term debt (12.60) creates refinancing pressure
• Leverage elevated (D/E 1.75x) and negative interest coverage (-4.28x) weigh on bottom line
• ROE -4.3% and ROIC -2.6% signal value dilution until margins improve

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio
• Interest coverage and net debt/EBITDA
• Current ratio and short-term debt rollover profile
• OCF consistency vs changes in working capital
• Capex discipline and returns on incremental growth

Relative Positioning: Within small-cap Japan service/entertainment peers, the company shows stronger recent revenue growth but weaker liquidity and higher refinancing risk; profitability metrics remain below peer medians until SG&A is right-sized and financing costs are reduced.

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