FALCO HOLDINGS Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥21.63B
• Operating Income: ¥1.08B
• Net Income: ¥803M
• EPS: ¥79.87

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

Verdict: Solid Q2 with modest top-line growth and clear operating leverage, but low capital efficiency (ROIC 3.9%) and a high indicated payout ratio temper the quality of the print. Revenue rose 1.2% YoY to 216.3, while operating income increased 10.8% YoY to 10.78, demonstrating disciplined cost control. Ordinary income advanced 14.1% YoY to 11.81, aided by 1.13 in non-operating income (notably 0.71 in dividends), with minimal non-operating expenses (0.10). Net income edged up 1.1% to 8.03, implying a largely flat net margin as a higher effective tax rate (37.7%) absorbed part of the operating gain. Gross margin stands at 31.9%, and operating margin at approximately 5.0%, reflecting a roughly 44 bps expansion YoY by our calculations. Ordinary margin improved by roughly 62 bps YoY, while net margin was effectively flat. Leverage remains conservative with D/E at 0.44x and current ratio at 229.7%, underpinned by cash and deposits of 90.49 and limited interest-bearing loans disclosed (short-term 4.00, long-term 7.59). Interest coverage is exceptionally strong at 359x, signifying very low financial risk. The DuPont ROE is 3.2%, driven by a 3.7% net margin, 0.595x asset turnover, and 1.44x financial leverage—indicating profitability rather than leverage is the main constraint on equity returns. ROIC at 3.9% is below a 5% warning threshold, highlighting underwhelming capital efficiency relative to typical cost of capital. Earnings quality cannot be fully assessed due to unreported operating cash flow; thus, the durability of profit conversion into cash remains a key watch point. The indicated payout ratio of 166.7% suggests dividends may exceed earnings capacity near term, raising sustainability questions without corroborating FCF data. Forward-looking, steady revenue, improving operating margin, and a strong balance sheet support stability, but improving ROIC and validating cash flow coverage for dividends are critical for medium-term value creation.

Profitability Analysis

DuPont decomposition: ROE 3.2% = Net Profit Margin (3.7%) × Asset Turnover (0.595x) × Financial Leverage (1.44x). The largest YoY change appears in margins: operating margin improved from ~4.55% to 5.00% (+44 bps), and ordinary margin from ~4.84% to 5.46% (+62 bps), while net margin remained roughly flat due to a higher effective tax rate (37.7%). Business drivers: SG&A discipline relative to sales drove operating leverage (SG&A 58.18 vs gross profit 68.97), and higher dividend income supported ordinary income; however, tax expense (+4.85) offset bottom-line gains. Sustainability: Operating margin gains from cost control are likely sustainable if volume/mix holds and wage/rent inflation is managed; dividend income is recurring but less controllable, and tax rate normalization could help net margin. Asset turnover at 0.595 indicates moderate efficiency for a diagnostics/services model; no clear evidence of deterioration. Financial leverage remains low (assets/equity 1.44x), so future ROE expansion will rely on margin and turnover improvements rather than leverage. Watch for concerning trends: if SG&A grows faster than revenue in coming quarters (currently revenue +1.2% vs operating income +10.8%), the operating leverage could reverse; also, non-operating reliance (1.13 in income) modestly inflates ordinary profits.

Growth Assessment

Top-line growth was modest at +1.2% YoY to 216.3, consistent with a stable demand environment. Profit growth outpaced sales: operating income +10.8% and ordinary income +14.1% YoY, reflecting cost control and non-operating tailwinds (dividend income 0.71). Net income growth was muted at +1.1% due to a high effective tax rate (37.7%). Operating margin expanded ~44 bps YoY to ~5.0%, evidencing operating leverage despite limited revenue growth. Revenue sustainability hinges on test volume/mix and pricing; no segment detail was provided to assess drivers or one-offs. Non-operating income provided an incremental boost, but it is less predictable; core operating improvement is the more durable growth pillar. Outlook: With a strong balance sheet and limited debt, the company can continue investing in operational efficiency; however, capital efficiency (ROIC 3.9%) needs improvement to sustain EPS growth absent leverage. The absence of D&A and capex data constrains visibility on organic growth investments and potential margin trajectory. Overall, growth quality is acceptable but not robust; margin discipline is a positive, while limited revenue momentum and high tax rate cap bottom-line expansion.

Financial Health

Liquidity is strong: current ratio 229.7% and quick ratio 216.4% comfortably exceed benchmarks, with working capital of 100.46. Cash and deposits (90.49) substantially exceed disclosed short-term (4.00) and long-term loans (7.59), indicating a net cash position on disclosed items. Solvency is conservative: D/E 0.44x; by our calculation, equity/asset ratio is ~69.5% (252.69/363.52), implying low financial risk. Interest coverage is 359x, reflecting minimal interest burden (0.03) and stable operating profit. Maturity mismatch risk appears low: current assets (177.90) exceed current liabilities (77.44), and receivables (57.95) plus cash (90.49) comfortably cover accounts payable (44.13). No off-balance sheet obligations were reported. No warnings: Current Ratio well above 1.0 and D/E well below 2.0.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income and free cash flow cannot be assessed—this is a key limitation to evaluating earnings quality. With net income at 8.03 and strong cash on hand (90.49), near-term liquidity looks ample, but sustainability of dividend and capex coverage by internally generated cash is unverified. Working capital appears stable (A/R 57.95 vs A/P 44.13; inventory 10.29 modest), and there are no visible signs of WC-driven earnings management from the disclosed data. Absent capex and D&A, we cannot judge maintenance vs growth investment needs or FCF durability.

Dividend Sustainability

The calculated payout ratio is 166.7%, implying dividends exceeding earnings—unsustainable over time without strong FCF or balance sheet support. However, actual DPS and dividends paid are unreported, and OCF/FCF are not available, so this ratio may reflect timing or interim calculation effects. Balance sheet strength (net cash on disclosed debt and high liquidity) provides short-term coverage capacity, but medium-term sustainability requires FCF alignment with dividends. Policy outlook cannot be inferred from the data provided; monitoring guidance and full-year cash flow will be essential.

Risk Assessment

Business Risks:

• Pricing pressure and reimbursement revisions in clinical testing potentially squeezing margins
• Volume/mix volatility in testing demand post-pandemic normalization
• Wage inflation and staffing constraints driving SG&A pressure in a services-heavy model
• Customer concentration risk with hospitals/clinics (not disclosed but typical for the sector)

Financial Risks:

• Low capital efficiency (ROIC 3.9%) relative to cost of capital limiting value creation
• High effective tax rate (37.7%) dampening net margins and EPS growth
• Potential overdistribution risk implied by a 166.7% payout ratio if sustained
• Dependence on non-operating income (dividends 0.71) to support ordinary income

Key Concerns:

• Unreported operating, investing, and financing cash flows obscure earnings quality assessment
• Limited disclosure on SG&A composition and D&A/capex constrains visibility on cost structure and reinvestment needs
• Net margin flat despite operating improvements due to tax burden, limiting ROE expansion

Investment Implications

Key Takeaways:

• Operating leverage evident: operating margin expanded ~44 bps on +1.2% sales growth
• Ordinary income benefited from non-operating dividends; net margin capped by a 37.7% tax rate
• Balance sheet is robust with strong liquidity and minimal leverage
• ROIC at 3.9% highlights a need for efficiency improvements to lift returns
• Dividend sustainability is uncertain given a calculated payout ratio of 166.7% and absent FCF data

Metrics to Watch:

• Operating cash flow and free cash flow conversion vs net income
• SG&A growth vs revenue to confirm sustained operating leverage
• Effective tax rate trajectory and any structural tax planning
• Capex and D&A to gauge maintenance vs growth investment and ROIC path
• Test volume/mix trends and pricing/reimbursement updates
• Non-operating income volatility, especially dividend income from securities

Relative Positioning: Within Japanese diagnostics/testing peers, Falco shows solid balance sheet strength and improving operating margins but lags on capital efficiency (ROIC 3.9%) and exhibits uncertain dividend cover due to missing cash flow data; earnings quality assessment remains incomplete pending OCF/FCF disclosure.

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