SD ENTERTAINMENT,Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥2.31B
• Operating Income: ¥-76M
• Net Income: ¥-22M
• 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

SD Entertainment Co., Ltd. reported FY2026 Q2 consolidated results under JGAAP with strong top-line growth but persistent operating losses. Revenue rose 21.8% year over year to ¥2.31 billion, indicating solid demand recovery or successful commercial initiatives. Gross profit reached ¥1.80 billion, translating to an unusually high gross margin of 77.9%, suggesting a service-heavy mix and/or the inclusion of low cost-of-sales items relative to revenue. Despite robust gross margin, operating income remained negative at -¥76 million, pointing to elevated SG&A and limited operating leverage in the period. Ordinary income deteriorated to -¥91 million, reflecting net financial and other non-operating burdens including interest expense of ¥18.6 million. Net loss narrowed to -¥66 million, and EPS was -¥7.38, with net margin at -2.86%. Depreciation and amortization totaled ¥93.7 million, implying limited EBITDA of ¥17.7 million and an EBITDA margin of 0.8%. Operating cash flow was positive at ¥168 million, indicating favorable cash conversion in the half despite the accounting loss, likely from working capital release or timing effects. Financing cash flow was -¥308 million, consistent with net repayments or reduction in interest-bearing liabilities, which improves future interest burden but tightens liquidity. The balance sheet shows total assets of ¥4.18 billion and total liabilities of ¥2.62 billion, for total equity of ¥1.52 billion; leverage (D/E 1.73x) is elevated relative to the company’s loss-making status. Liquidity is tight with a current ratio of 68% and negative working capital of -¥640 million, suggesting near-term refinancing or cash management risks. DuPont analysis yields a ROE of -4.34%, driven by a negative net margin, moderate asset turnover (0.552x), and financial leverage of 2.75x. Interest coverage is negative (-4.1x) at the EBIT level, underscoring limited buffer against financing costs. The company paid no dividends (DPS ¥0), appropriate given losses and liquidity pressures. Several key items, including cash balance, inventories, investing cash flows, and share count, are unreported in the provided data, which constrains precision in per-share and free cash flow analysis. Overall, the quarter reflects improving revenue traction but a need to structurally reduce operating costs and stabilize liquidity to achieve sustainable profitability.

Profitability Analysis

ROE decomposition: Net margin (-2.86%) is the primary drag, with asset turnover at 0.552x and financial leverage at 2.75x resulting in a calculated ROE of -4.34%. The gross margin of 77.9% is very high, implying that cost-of-sales is not the main constraint; instead, SG&A intensity is the issue, as evidenced by negative operating income despite strong gross profit. Operating leverage appears weak this period: revenue grew 21.8% YoY, yet operating loss persisted, indicating that fixed costs or reinvestment in sales, marketing, or overheads are absorbing the incremental gross profit. EBITDA of ¥17.7 million (0.8% margin) versus D&A of ¥93.7 million shows that cash earnings from operations are thin relative to the asset base, which depresses EBIT. Interest expense of ¥18.6 million exceeds EBITDA, producing negative interest coverage on an EBIT basis (-4.1x), underscoring insufficient operating profitability to meet financing costs. Ordinary loss (-¥91 million) larger than operating loss (-¥76 million) suggests non-operating burdens (interest and possibly other items). Effective tax appears minimal in rate terms, though ¥17.1 million tax is recorded despite a loss, likely reflecting non-deductible expenses, fixed minimum taxes, or timing effects.

Growth Assessment

Revenue growth of 21.8% YoY to ¥2.31 billion appears robust and likely reflects recovery in core entertainment/fitness services or successful pricing/mix initiatives. The sustainability of this growth will depend on customer retention, capacity utilization, and the macro consumption backdrop. Profit growth quality is mixed: while net loss narrowed to -¥66 million, operating income remained negative, implying that profitability improvements stem more from non-operating/timing factors than structural cost efficiencies. The very high gross margin suggests the business can scale profitably if SG&A is controlled; however, the absence of operating leverage this quarter indicates further work needed to right-size costs. Positive operating cash flow (¥168 million) supports near-term operations, but it may include working-capital related tailwinds rather than recurring earnings power. Near-term outlook hinges on sustaining double-digit revenue growth while trimming fixed costs to move EBITDA margin meaningfully above interest burden. Monitoring sequential margin trends, store/club level contribution margins (if applicable), and membership growth or utilization metrics will be key to assessing durability.

Financial Health

Liquidity: Current assets of ¥1.36 billion versus current liabilities of ¥2.00 billion produce a current ratio of 68% and negative working capital of -¥640 million, highlighting short-term funding pressure and reliance on cash generation or revolving facilities. Quick ratio equals current ratio given unreported inventories, reinforcing the tight position. Solvency: Total liabilities of ¥2.62 billion against equity of ¥1.52 billion put D/E at 1.73x and implied leverage (assets/equity) at 2.75x. Interest coverage is negative at the EBIT level, indicating vulnerability if financing costs rise. Capital structure: Financing cash outflows (-¥308 million) suggest debt reduction or lease repayments, which can lower future interest burden but reduce immediate liquidity. Equity ratio is unreported; based on totals, equity/asset is roughly 36%, offering some balance sheet buffer but not ample given ongoing losses. Overall, liquidity is the principal constraint; solvency is acceptable but could deteriorate if losses persist.

Cash Flow Quality

Earnings quality is mixed: operating loss contrasts with positive operating cash flow of ¥168 million, producing an OCF/Net Income ratio of -2.55 due to negative net income and positive OCF. This indicates cash generation benefited from non-income factors, likely working capital release (e.g., receivables collection or payables timing) and non-cash charges (D&A ¥93.7 million). Free cash flow cannot be fully assessed because investing cash flows are unreported (shown as zero), and capex is not disclosed; the provided FCF metric is 0, which likely reflects the absence of disclosed investing outflows rather than true zero investment. Financing outflows of -¥308 million point to debt/lease repayments or dividend absence; with DPS at zero, outflows are likely debt-related. Working capital: Negative working capital and current ratio below 1 suggest the company may be shrinking net working capital obligations (supporting OCF) but also faces rollover risk. Sustainability of positive OCF will depend on underlying EBITDA growth rather than continued working capital releases.

Dividend Sustainability

The company paid no dividend (DPS ¥0) with a payout ratio of 0.0%, which aligns with its loss-making status and liquidity needs. Given negative net income and tight liquidity (current ratio 68%, negative working capital), distributions would be imprudent near term. Free cash flow coverage cannot be judged accurately due to unreported investing cash flows; the displayed FCF coverage of 0.00x reflects missing data rather than true coverage. Policy outlook likely remains conservative until operating profitability and cash buffers improve, and until interest coverage turns positive on an EBIT basis.

Risk Assessment

Business Risks:

• Execution risk in achieving operating leverage despite high gross margins
• Sensitivity to consumer discretionary spending within entertainment/fitness segments
• Potential membership churn or utilization volatility impacting revenue run-rate
• Cost inflation in labor and utilities increasing SG&A and fixed costs
• Competition from alternative entertainment and wellness offerings

Financial Risks:

• Tight liquidity with current ratio at 68% and negative working capital
• Negative interest coverage and ongoing operating losses
• Refinancing and rollover risk if short-term obligations cannot be met from OCF
• Potential covenant pressure if leverage metrics worsen
• Exposure to interest rate increases given interest expense of ¥18.6 million

Key Concerns:

• Sustained operating losses despite 21.8% revenue growth
• Reliance on working capital movements to generate positive OCF
• Financing outflows (-¥308 million) amid tight liquidity
• Unreported cash balance and investing cash flows limiting visibility into runway
• Need to reduce SG&A to achieve positive EBITDA margin above financing costs

Investment Implications

Key Takeaways:

• Top-line momentum is strong (+21.8% YoY), but profitability remains negative at the operating and ordinary levels
• Gross margin of 77.9% indicates room for operating leverage if SG&A is right-sized
• Positive OCF (¥168 million) contrasts with accounting loss, likely aided by working capital
• Liquidity is constrained (current ratio 68%, working capital -¥640 million), elevating near-term funding risk
• Leverage is meaningful (D/E 1.73x) with negative interest coverage (-4.1x), necessitating EBITDA improvement or further deleveraging
• Dividend payout is suspended (DPS ¥0), appropriately preserving cash

Metrics to Watch:

• EBITDA margin progression versus interest expense run-rate
• Operating income trajectory and SG&A-to-sales ratio
• Operating cash flow sustainability excluding working capital swings
• Current ratio and short-term debt maturities/rollover status
• Revenue growth drivers (membership counts, ARPU, utilization) and churn
• Capex and maintenance investment once investing CF is disclosed

Relative Positioning: Within Japan-listed consumer services and fitness/entertainment peers, the company shows stronger near-term revenue growth but weaker profitability and liquidity, with high gross margins offset by elevated SG&A and negative 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
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