SM ENTERTAINMENT JAPAN Co.,Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥7.46B
• Operating Income: ¥225M
• Net Income: ¥305M
• EPS: ¥3.98

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: Mixed quarter with resilient headline net income but deteriorating core profitability and sub-target capital efficiency. Revenue was 74.63 (100M JPY), down 0.8% YoY, indicating a modest top-line contraction. Gross profit totaled 16.17, translating to a 21.7% gross margin. Operating income fell sharply to 2.25 (-38.1% YoY), compressing operating margin to roughly 3.0%. Ordinary income was 2.36 (-35.2% YoY), while profit before tax was notably higher at 3.85, implying significant extraordinary gains. Net income rose 49.8% YoY to 4.60, lifting net margin to 6.2%, a disconnect from the weak operating trend. We estimate operating margin compressed by about 180 bps YoY (from ~4.8% to ~3.0%), driven by negative operating leverage. The effective tax rate stood at 20.8%, supporting the jump in bottom-line profitability alongside extraordinary items. Liquidity remains strong with a current ratio of 211% and cash and deposits of 40.10. Balance sheet leverage is conservative on a liabilities-to-equity basis at 0.81x, with interest-bearing debt data unreported. ROE was 5.7% (DuPont: 6.2% net margin × 0.511 asset turnover × 1.81x leverage), and ROIC was 4.4%, flagging sub-par capital efficiency versus typical 7–8% targets. Earnings quality cannot be validated due to unreported OCF, and the reliance on extraordinary gains to support net income raises sustainability questions. Working capital is sizable, with accounts receivable and accounts payable both at ~51, suggesting meaningful counterpart risk and cash conversion sensitivity. Dividend affordability appears reasonable with a calculated payout ratio of 25.2%, though FCF coverage is unassessable. Forward-looking, restoring operating margin and lifting ROIC above 5% are the key priorities; continued revenue softness or SG&A rigidity would prolong pressure on core earnings. Overall, solid liquidity provides a cushion, but underlying profitability needs improvement to sustain the current earnings trajectory.

Profitability Analysis

ROE (5.7%) = Net Profit Margin (6.2%) × Asset Turnover (0.511) × Financial Leverage (1.81x). The largest change YoY appears in net profit margin, which improved despite weaker operations, due to extraordinary gains and a moderate tax burden; meanwhile, operating margin deteriorated materially. Business drivers include negative operating leverage from flat-to-declining revenue against relatively sticky SG&A, compressing operating margin to ~3.0%, while extraordinary income boosted PBT and net income. The margin improvement at the net level looks one-time in nature given the extraordinary gain implied by PBT > ordinary income by 1.49; without recurring non-operating support, net margin would align with weaker operating trends. Sustainability is therefore questionable: absent extraordinary gains, profitability likely reverts lower until operating efficiency improves. Concerning trends include operating income declining 38.1% YoY versus revenue down 0.8%, indicating SG&A growth or limited cost flexibility outpacing revenue and undermining operating leverage.

Growth Assessment

Revenue declined 0.8% YoY to 74.63, suggesting a flat demand environment or timing effects in entertainment-related activities. Gross profit margin of 21.7% indicates constrained pricing power or mix, with no evidence of cost tailwinds to offset soft top line. Operating income fell 38.1% YoY to 2.25, implying deleveraging of fixed costs and/or higher content, production, or promotion costs. Ordinary income declined 35.2% YoY, reinforcing that core profit sources weakened; net income’s +49.8% YoY growth was supported by extraordinary gains and a modest tax rate. With OCF and capex unreported, we cannot validate cash-backed growth or assess reinvestment intensity. ROIC at 4.4% is below the 5% warning threshold, indicating current investments are not earning an adequate spread; improving asset turnover or operating margins is necessary for sustainable growth. Outlook hinges on restoring operating margin via better utilization (events, IP monetization, merchandise mix) and tighter SG&A control. Absent a rebound in high-margin activities or cost discipline, profit growth may stall once one-time gains normalize.

Financial Health

Liquidity is strong with a current ratio of 211.4% and a quick ratio of 211.4%, indicating ample current assets (126.31) against current liabilities (59.76). There is no warning on Current Ratio (<1.0), and D/E based on total liabilities to equity is 0.81x (note: this is not a true debt-to-equity, as interest-bearing debt data is unreported). Maturity mismatch risk appears low given cash and deposits of 40.10 and sizable accounts receivable of 51.07 versus current liabilities of 59.76; however, collection risk on receivables is a consideration. Interest-bearing debt is unreported, and interest expense is near-zero/unreported, reducing immediate refinancing risk signals. Noncurrent liabilities are modest at 5.43, limiting long-term solvency pressure. Off-balance sheet obligations are not disclosed in the provided data; thus, lease or commitment exposures cannot be assessed.

Cash Flow Quality

OCF is unreported, so OCF/Net Income cannot be calculated; we cannot confirm earnings conversion to cash and therefore cannot validate earnings quality quantitatively. Free cash flow is unreported, preventing an assessment of coverage for dividends and capex. Working capital indicators show large receivables (51.07) and payables (51.06), suggesting significant counterparty and timing effects; any stretch in receivables or pull-forward of payables could temporarily embellish reported earnings absent cash realization. With interest expense near-zero/unreported, interest coverage appears extremely high, but this is not a reliable quality metric in the absence of OCF data. Overall, earnings quality is uncertain and potentially inflated by extraordinary gains this quarter.

Dividend Sustainability

The calculated payout ratio is 25.2%, which is comfortably below the 60% benchmark and appears conservative relative to current earnings. However, FCF coverage is unassessable due to unreported OCF and capex, creating uncertainty on true cash affordability. With strong liquidity (cash 40.10) and low structural leverage, near-term dividend continuity looks manageable. That said, the uplift in net income is partly non-recurring; if operating income weakness persists, dividend headroom would narrow unless cash generation remains robust.

Risk Assessment

Business Risks:

• Operating margin compression amid flat revenue indicates negative operating leverage and cost rigidity.
• Dependence on extraordinary gains to lift net income raises sustainability concerns.
• Large receivables (51.07) imply collection and counterparty risks, particularly in event- and licensing-driven cycles.
• Entertainment industry volatility (event scheduling, artist activity, IP performance) can impact revenue and margins.
• Potential FX exposure between KRW/JPY and USD/JPY affecting royalties, talent contracts, and content costs.

Financial Risks:

• OCF and FCF unreported, obscuring cash conversion and dividend coverage.
• Interest-bearing debt profile unreported, limiting visibility on true leverage and refinancing risk.
• High reliance on working capital turnover; timing shifts in payables/receivables could pressure liquidity despite headline ratios.

Key Concerns:

• ROIC at 4.4% is below the 5% warning threshold, signaling subpar capital efficiency.
• Operating income down 38.1% YoY while revenue is down only 0.8% points to structural cost issues.
• Net income growth driven by one-time gains may reverse, risking earnings normalization lower.

Investment Implications

Key Takeaways:

• Core profitability weakened: operating margin fell to ~3.0% and operating income decreased 38.1% YoY.
• Net income strength (+49.8% YoY) was supported by extraordinary gains and a moderate tax rate.
• ROIC at 4.4% flags under-earning on invested capital; ROE at 5.7% is modest.
• Balance sheet is liquid and conservatively leveraged on a liabilities-to-equity basis.
• Earnings quality unverified due to missing OCF; sustainability hinges on operating recovery.
• Working capital heavy model with matched receivables/payables around 51 each increases sensitivity to counterpart timing.

Metrics to Watch:

• OCF/Net income ratio (target >1.0) and FCF after capex to confirm cash-backed earnings.
• Operating margin trajectory and SG&A-to-sales ratio for evidence of cost discipline.
• Extraordinary gains/losses and their recurrence.
• Days sales outstanding (DSO) and collection trends on accounts receivable.
• ROIC improvement toward >5% near-term and >7% medium-term.
• Revenue mix (events, merchandise, licensing) and pricing/mix impact on gross margin.

Relative Positioning: Versus domestic entertainment peers, the company exhibits strong liquidity and low apparent financial leverage but weaker core margin momentum and subpar ROIC; near-term resilience depends on stabilizing operating margins and converting earnings to cash, whereas peers with steadier operating leverage and verified OCF may be better positioned.

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