JAPAN RELIANCE SERVICE CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.74B
• Operating Income: ¥71M
• Net Income: ¥48M
• EPS: ¥16.80

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

Verdict: FY2026 Q2 was a weak quarter operationally with sharp profit contraction on softer sales, but cash generation and liquidity remained solid. Revenue fell 26.3% YoY to 37.44, driving operating income down 70.8% YoY to 0.71 and net income down 70.2% YoY to 0.48. Operating margin compressed to 1.9% from an estimated 4.8% a year ago (approximately -289 bps), reflecting negative operating leverage in a labor-intensive model. Net margin declined to 1.3% from an estimated 3.2% (-189 bps), despite modest non-operating income of 0.13 and low interest expense. Gross profit was 6.98 with an 18.6% gross margin, indicating cost absorption issues as revenue contracted. SG&A of 6.26 stayed high relative to gross profit, limiting operating flexibility. Ordinary income was 0.82 (-67.3% YoY), and an elevated effective tax rate of 41.4% further dampened net profit given the low earnings base. Cash earnings quality was strong: operating cash flow of 1.05 exceeded net income by 2.19x, aided by working capital inflows. Liquidity is ample with cash and deposits of 17.14 and a current ratio of 254.5%, providing a buffer against near-term volatility. Balance sheet risk is contained with liabilities/equity at 0.80x and interest coverage at 29.1x. ROE degraded to 2.2%, driven primarily by margin compression; asset turnover is just under 1x and leverage is moderate at 1.80x. ROIC of 6.5% sits below the 7–8% target range, suggesting value creation is marginal after tax. Financing cash outflows of -1.56 include share repurchases of -0.38, implying ongoing shareholder returns despite earnings pressure. The reported payout ratio of 147% indicates dividends (or total shareholder return policy) may be outpacing near-term earnings capacity, though OCF provides temporary coverage. Forward-looking, stabilization requires either revenue recovery or decisive cost actions to restore operating margin to prior levels. Overall, the quarter underscores sensitivity to demand and wage dynamics; with solid liquidity, the company has time to adjust, but profitability repair is the key watchpoint.

Profitability Analysis

ROE (2.2%) = Net Profit Margin (1.3%) × Asset Turnover (0.948x) × Financial Leverage (1.80x). The largest deterioration came from net profit margin, which fell roughly 189 bps YoY (from ~3.2% to 1.3%), while asset turnover remained below 1x and leverage was steady and modest. Margin pressure reflects negative operating leverage as revenue fell 26.3% YoY, while SG&A (6.26) remained high relative to gross profit (6.98), compressing operating margin to 1.9% from an estimated ~4.8% a year ago (about -289 bps). Non-operating items were small (income 0.13, expenses 0.02) and did not offset core weakness; a high effective tax rate (41.4%) further squeezed net margin on a low earnings base. The driver is structural for a labor-intensive service mix: wage inflation and utilization declines create rapid margin erosion when volumes drop. Sustainability: unless pricing is raised and/or capacity is flexed, margins are unlikely to revert quickly; recovery would require revenue normalization and tight cost control. Concerning trends include SG&A intensity remaining high and operating income declining much faster than revenue (-70.8% vs -26.3%), indicating adverse operating leverage.

Growth Assessment

Top-line contracted 26.3% YoY to 37.44, pointing to weaker demand or slower order intake in core services. Operating income fell 70.8% YoY to 0.71, materially outpacing the revenue decline, signaling limited variable cost flexibility. Non-operating income (0.13) provided marginal support; core growth remains the issue. With EBITDA at 0.86 (2.3% margin), earnings power is currently thin. Revenue sustainability will hinge on client retention, new contract wins, and ability to pass through wage increases; current gross margin (18.6%) leaves little room for shock absorption. Outlook: Near-term growth likely subdued absent a demand rebound; focus should be on mix optimization, pricing adjustments, and productivity to rebuild margins. ROIC at 6.5% suggests returns are below management target ranges; improving ROIC requires both margin uplift and better asset utilization.

Financial Health

Liquidity is strong: current ratio 254.5% and quick ratio 254.5%; no warning triggers. Cash and deposits (17.14) plus accounts receivable (9.40) comfortably cover current liabilities (10.70), indicating low maturity mismatch risk. Solvency is conservative: liabilities/equity at 0.80x; interest coverage at 29.09x shows ample headroom. Short-term loans are 0.45 and long-term loans 1.14, with overall leverage low relative to equity (21.96). No off-balance sheet obligations were reported in the provided data. Equity base remains healthy with retained earnings of 15.81 supporting resilience.

Cash Flow Quality

OCF of 1.05 is 2.19x net income (0.48), indicating high earnings quality this quarter, likely helped by working capital release. Capex was modest at -0.03, implying limited capital intensity; a proxy FCF (OCF minus Capex) would be approximately 1.02, though full investing CF was unreported. Financing CF of -1.56 includes share repurchases of -0.38; dividends paid were unreported. No clear signs of working capital manipulation: accounts receivable of 9.40 versus half-year revenue implies DSO roughly ~45 days, which appears reasonable for the business model. Overall, cash generation currently exceeds accounting earnings, providing some cushion for shareholder returns and debt service.

Dividend Sustainability

The calculated payout ratio of 147.0% indicates distributions (and/or total shareholder returns) exceed current earnings capacity. However, OCF exceeded NI this quarter (2.19x), and proxy FCF appears positive (~1.02), suggesting near-term cash coverage is possible. Sustainability will depend on normalizing earnings; if margins remain depressed, maintaining a >100% payout is not prudent over multiple periods. With strong liquidity and low leverage, the company retains flexibility to bridge temporarily, but a more earnings-linked policy would improve safety. DPS details are unreported, so assessment relies on the provided payout ratio and cash metrics.

Risk Assessment

Business Risks:

• Revenue contraction of 26.3% YoY indicating potential demand weakness or contract losses
• Negative operating leverage in a labor-intensive cost structure compressing margins
• Wage inflation and minimum wage hikes outpacing price pass-through
• Client pricing pressure and contract renewals at lower rates
• Execution risk in restoring gross margin from 18.6% amid utilization headwinds

Financial Risks:

• High effective tax rate (41.4%) reducing net profitability when earnings are low
• Payout ratio at 147% risking strain on capital if earnings do not recover
• Potential working capital volatility if collections slow (AR 9.40 vs. H1 revenue base)

Key Concerns:

• Operating margin compressed to 1.9% from an estimated ~4.8% YoY
• ROE at 2.2% and ROIC at 6.5% below typical target ranges
• Ordinary income down 67.3% YoY, limiting internal funding capacity if sustained

Investment Implications

Key Takeaways:

• Core profitability deteriorated sharply with operating income -70.8% YoY on -26.3% revenue
• Margins compressed materially (operating -289 bps; net -189 bps by estimate)
• Cash quality is good (OCF/NI 2.19x) and liquidity is strong (current ratio 254.5%)
• Leverage is modest (liabilities/equity 0.80x) with high interest coverage (29x)
• Payout ratio (147%) appears aggressive relative to depressed earnings
• ROIC at 6.5% below the 7–8% benchmark; margin recovery is needed to lift returns

Metrics to Watch:

• Operating margin trajectory and SG&A as a percentage of gross profit
• Order intake/contract renewals and pricing power to pass through wage increases
• OCF sustainability and working capital trends (DSO, payables)
• ROIC progression and asset turnover improvements
• Dividend policy signals and total shareholder return actions (buybacks vs earnings)

Relative Positioning: Within domestic security and facilities services peers, the company exhibits above-average liquidity and low leverage, but currently weaker profitability and returns (ROE/ROIC) due to pronounced negative operating leverage in H1.

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