NCD Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥14.94B
• Operating Income: ¥1.06B
• Net Income: ¥710M
• EPS: ¥85.97

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: Soft quarter—revenue edged up but margins compressed materially, driving a double‑digit profit decline. Revenue rose 1.2% YoY to 149.4, while operating income fell 24.4% YoY to 10.61 and net income declined 26.8% YoY to 7.03. Operating margin slipped to 7.1% this quarter from roughly 9.5% a year ago (about 241 bps compression). Net margin declined to 4.7% from about 6.5% a year ago (about 179 bps compression). Gross margin printed at 21.1%; with SG&A at 20.89 (14.0% of sales), operating leverage turned negative as modest top‑line growth failed to cover cost growth. Ordinary income decreased 24.8% YoY to 10.73, indicating pressure at the core earnings level beyond non‑operating items. Non‑operating balance was small (+0.12 net), with limited cushioning from interest/dividends. Effective tax rate was 33.9%, broadly normal and not a driver of the earnings decline. Liquidity remains strong: current ratio at 236.9% and cash/deposits of 74.31 comfortably exceed short‑term loans of 8.50. Balance sheet is conservative with implied equity ratio near 51% and interest coverage at 89x, indicating low financial risk. ROE calculated at 8.6% (DuPont: NPM 4.7%, asset turnover 0.941, leverage 1.95x), pressured by margin compression rather than leverage changes. Dividend payout ratio appears elevated at 87.6%, which may exceed medium‑term comfort if earnings pressure persists. Cash flow data are unreported, so earnings quality (OCF vs NI) cannot be validated—this is a key information gap. Forward‑looking, stabilization hinges on cost control (particularly personnel and project delivery costs) and pricing discipline to restore operating margin toward last year’s level. Seasonality in SI/IT services often favors 2H, but the degree of margin recovery is the swing factor for FY results.

Profitability Analysis

ROE decomposition (DuPont): ROE 8.6% = Net Profit Margin 4.7% × Asset Turnover 0.941 × Financial Leverage 1.95x. The largest adverse change this quarter is in margin, evidenced by operating income down 24.4% on only +1.2% revenue, implying operating margin compression of ~241 bps YoY (≈9.5% → 7.1%). Business drivers likely include higher delivery costs (subcontractor/personnel) and/or unfavorable project mix, with SG&A at 14.0% of sales and gross margin at 21.1%, leaving less room for operating profit. Asset turnover is reasonable for an IT services/system integration profile and likely stable given modest revenue growth and a steady asset base; leverage remains moderate (implied equity ratio ~51%), so leverage is not the driver. Sustainability: margin pressure could be transitory if tied to specific projects or timing, but if wage inflation/subcontractor rates remain elevated without pricing power, margins could stay compressed. Watch for warning sign: SG&A growth exceeding revenue growth; with revenue +1.2% and OI −24.4%, cost containment is a priority. Overall, ROE deterioration is margin‑led rather than balance‑sheet‑led.

Growth Assessment

Top line grew 1.2% YoY to 149.4, indicating stable demand but not robust expansion. Profitability contracted sharply (OP −24.4%, NI −26.8%), pointing to negative operating leverage and/or adverse mix. Operating margin deteriorated from ~9.5% to 7.1% and net margin from ~6.5% to 4.7%, reducing profit conversion of sales. Non‑operating contribution was minimal (+0.12), so core operations explain the decline. With many SI/integration businesses back‑half weighted, 2H could improve, but recovery depends on cost pass‑through and delivery productivity. Revenue sustainability appears intact near term given stable receivables and low inventories, but profit quality is under pressure from costs. Outlook drivers: order backlog, utilization rates, subcontractor cost trends, and pricing on new contracts; these will determine whether margins revert toward prior-year levels.

Financial Health

Liquidity is strong: current ratio 236.9% and quick ratio 234.2%, comfortably above benchmarks. No warning on liquidity (Current Ratio well > 1.0). Cash and deposits (74.31) cover short‑term loans (8.50) multiple times, limiting maturity mismatch risk; current assets (122.82) also exceed current liabilities (51.84) by 70.99 of working capital. Solvency: implied equity ratio ≈ 51.4% (81.65/158.85) indicates a solid capital base; reported D/E of 0.95x is within conservative bounds (<1.5). Interest coverage is very strong at 89.1x, pointing to low refinancing risk. No off‑balance sheet obligations were disclosed in the provided data. Overall, balance sheet resilience is high even as earnings soften.

Cash Flow Quality

OCF is unreported, so OCF/Net Income and FCF cannot be assessed—key limitation to evaluating earnings quality. Without OCF, we cannot confirm conversion of earnings to cash or the sustainability of dividend and capex outflows. Working capital indicators from the balance sheet look stable (receivables 38.07; inventories 1.44), and high cash suggests no immediate liquidity strain. However, absent OCF, we cannot rule out timing effects (e.g., receivable build) impacting cash conversion. No signs of working capital manipulation are identifiable from the limited data, but visibility is low.

Dividend Sustainability

Calculated payout ratio is 87.6%, which is high versus a <60% benchmark for comfort. With OCF and FCF unreported, coverage cannot be verified, raising caution on sustainability if earnings remain pressured. Cash on hand is ample (74.31) and could temporarily support dividends, but sustained high payouts alongside weaker margins may constrain reinvestment or require drawdown of cash. Policy outlook: management may aim for stability, but payout flexibility could be needed if profitability does not recover in 2H.

Risk Assessment

Business Risks:

• Margin pressure from wage inflation and subcontractor cost increases
• Project execution risk leading to cost overruns or acceptance delays
• Pricing pressure in systems integration/IT services affecting gross margin
• Mix shift toward lower‑margin projects reducing operating margin

Financial Risks:

• High payout ratio (87.6%) reducing financial flexibility if profits weaken
• Potential cash conversion shortfalls (OCF unreported) that could strain FCF
• Customer concentration risk reflected in receivables exposure (visibility limited)

Key Concerns:

• Operating margin compressed ~241 bps YoY despite modest revenue growth
• Net margin declined ~179 bps YoY; ROE constrained by weaker margins
• Limited non‑operating buffer; ordinary income fell in line with operating profit
• Information gap: no cash flow disclosure to validate earnings quality

Investment Implications

Key Takeaways:

• Earnings miss driven by margin compression; revenue was broadly stable
• Balance sheet and liquidity are strong, cushioning near‑term downside
• High payout ratio could be at risk if 2H margin recovery does not materialize
• ROE at 8.6% is acceptable but margin‑dependent; leverage discipline intact

Metrics to Watch:

• Operating margin trajectory and gross margin recovery
• Order backlog and book‑to‑bill in core segments
• Personnel/subcontractor cost trends and utilization rates
• OCF/Net Income once disclosed; FCF and dividend coverage
• Receivable days (DSO) and any buildup that could weaken cash conversion

Relative Positioning: Within Japanese mid‑cap IT services/SI peers, NCD shows solid liquidity and conservative capitalization but weaker operating momentum this quarter due to cost pressures; near‑term performance hinges on restoring margin discipline in 2H.

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