Digital Garage,Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥20.01B
• Net Income: ¥1.73B
• EPS: ¥40.14

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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 top-line growth and very strong cash generation, but earnings quality leans heavily on equity-method gains and a tax benefit, with leverage higher than comfort. Revenue rose to 200.13, up 13.8% YoY, indicating continued momentum in core businesses (payments/marketing/investments). Profit before tax was 14.16 and net income 18.41, implying a tax credit of -3.14 and other below-PBT items that elevated bottom-line profit. Equity-method income of 18.76 exceeded pretax profit (132.5% of PBT), underscoring unusually high reliance on affiliates’ earnings this quarter. Operating profit was not disclosed, and gross profit was unreported, limiting insight into core margin trends. SG&A was 115.17, equating to 57.5% of revenue, suggesting limited operating leverage this period. Net margin printed at 9.2%; prior-period margin data are not disclosed, so bps expansion/compression cannot be quantified. Cash flow quality was excellent with OCF of 73.59, 4.0x net income, pointing to robust cash conversion and likely favorable working-capital swings inherent to the payments model. Free cash flow was 38.41, comfortably covering dividends (FCF coverage 1.52x) but not share repurchases (45.12) plus dividends combined. Balance sheet shows total assets of 2,204.02 and equity of 775.07, with an equity ratio of 34.2% and reported D/E of 1.84x, which is on the high side versus typical benchmarks. Accounts payable of 610.43 far exceeds receivables of 267.78, consistent with settlement-cycle dynamics in payments, but it concentrates liquidity management risk. Intangibles (goodwill 80.23; total intangibles 92.16) are meaningful but not excessive for a platform/fintech model. EPS (basic) was 40.14 yen; book value per share is calculated at 1,688.81 yen, implying modest ROE of 2.4% for the period. Effective tax rate was -22.2%, likely non-recurring, which boosted net income. Forward-looking, sustainability hinges on normalizing tax, diversifying profit drivers away from equity-method contributions, and maintaining OCF strength to fund shareholder returns while managing leverage.

Profitability Analysis

Step 1 (ROE decomposition): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 9.2% × 0.091 × 2.84 ≈ 2.4% (matches reported). Step 2 (what changed most): Without prior-period component disclosure, absolute attribution is limited; however, the current period’s ROE is primarily constrained by very low asset turnover (0.091), despite reasonable net margin and elevated leverage. Step 3 (business reason): Low asset turnover reflects a balance sheet heavy with cash/settlement assets and investments relative to half-year revenue—typical for a payments/investment platform—while net margin is flattered by equity-method income and a tax credit rather than operating expansion. Step 4 (sustainability): Asset turnover is structurally low unless revenue scales faster than balance sheet growth; net margin at 9.2% is not fully sustainable if equity-method income normalizes and tax credits reverse; leverage at 2.84x equity multiplier (D/E 1.84x) increases ROE but adds risk. Step 5 (concerning trends): SG&A at 57.5% of revenue looks heavy; with operating profit unreported, there is risk that SG&A growth is outpacing revenue growth, which would cap operating leverage. Overall margin quality is mixed: cash-backed, but profit mix is tilted to non-operating/equity-method items.

Growth Assessment

Revenue growth of +13.8% YoY to 200.13 is solid and likely driven by payments volume growth and stable marketing/investment-related revenues. Profit growth quality is uncertain because operating income was not disclosed and equity-method income (18.76) dominates profit composition. Net income of 18.41 benefits from a -22.2% effective tax rate, a likely non-recurring tailwind. With SG&A at 115.17 (57.5% of sales), operating leverage may be limited near term unless topline continues to outperform expense growth. Looking forward, revenue momentum appears sustainable given secular digital payments trends, but profit sustainability depends on: (1) normalization of tax, (2) stability of affiliate earnings, and (3) managing SG&A intensity. Equity-method dependency introduces volatility; commodity/currency is less relevant here, but affiliate-specific performance (e.g., market-sensitive businesses) matters. Absent gross/operating margin disclosure, we cannot confirm core margin expansion. Near-term outlook: stable-to-improving revenue, but earnings trajectory may normalize lower if non-recurring boosts fade.

Financial Health

Liquidity: Current ratio not calculable due to missing current liabilities, but current assets are sizable at 1,378.25 and cash & equivalents of 551.80 provide a meaningful buffer. Payables of 610.43 exceed receivables of 267.78, typical for payments settlement flows; maturity mismatch risk exists if settlement cash cycles tighten, but large cash balances mitigate. Solvency: Equity ratio is 34.2%; D/E is 1.84x (warning vs <1.5x benchmark), indicating elevated leverage. Off-balance sheet: Not disclosed; no explicit guarantees/commitments provided in the data. Capital structure: Equity 775.07 supports operations, but ongoing buybacks (45.12) and dividends (24.27) reduce flexibility if OCF weakens. No explicit interest coverage data; interest expense unreported.

Cash Flow Quality

OCF of 73.59 is 4.0x net income, signaling strong cash conversion and absence of immediate earnings-quality red flags (OCF/NI well > 0.8). FCF of 38.41 (after -35.18 investing CF; capex modest at -0.92) covers dividends with 1.52x but not dividends plus buybacks (total distributions ~69.39). Working capital: The payments model can generate positive OCF from settlement timing; while healthy, this may reverse seasonally—monitor changes in payables/receivables. No signs of aggressive working-capital manipulation from available data, but absence of detail (inventory is minimal at 3.82) limits assessment. Cash balance (551.80) adds resilience.

Dividend Sustainability

Reported payout ratio is 137.3%, which appears high versus earnings; however, FCF coverage at 1.52x indicates dividends are cash-supported this period. The discrepancy suggests either elevated shareholder returns relative to half-year earnings or the benefit of non-recurring items and cash flow timing supporting distributions. With leverage at 1.84x D/E and ongoing buybacks (45.12), sustaining the current total shareholder return pace would require continued strong OCF. Policy outlook: Expect management to prioritize cash-generative payments to fund stable dividends; buybacks may be more tactical and sensitive to OCF/investment needs. Monitor any guidance on payout and capital allocation, as earnings normalization (tax/affiliate volatility) could pressure payout ratios.

Risk Assessment

Business Risks:

• High dependency on equity-method income (18.76; 132.5% of PBT), exposing earnings to affiliate volatility.
• Tax benefit (-22.2% effective rate) may reverse, reducing net income.
• Elevated SG&A ratio (57.5% of sales) could constrain operating leverage if revenue growth slows.
• Payments industry dynamics: take-rate compression and competitive pricing pressure.
• Technology/cybersecurity and fraud/chargeback risks inherent in payments platforms.
• Goodwill/intangible impairment risk if acquired units underperform.

Financial Risks:

• Leverage: D/E at 1.84x above conservative benchmarks.
• Working-capital volatility tied to settlement cycles (large payables vs receivables).
• Shareholder returns (dividends + buybacks) exceeding FCF, potentially requiring balance sheet support if OCF moderates.
• Lack of disclosed interest expense/coverage obscures debt servicing capacity assessment.

Key Concerns:

• Non-operating income ratio >100% indicates bottom line driven by non-core/affiliate items.
• Operating income and gross margin unreported, limiting visibility into core profitability.
• Potential mean reversion in affiliate earnings and tax rate could lower net margin from 9.2%.

Investment Implications

Key Takeaways:

• Revenue growth is robust at +13.8% YoY, but profit quality is mixed.
• OCF is very strong (4.0x NI), supporting dividends; total buybacks + dividends exceed FCF.
• Earnings rely heavily on equity-method income and a tax credit; sustainability is uncertain.
• Leverage (D/E 1.84x) is elevated; monitor debt and coverage metrics when disclosed.
• SG&A intensity (57.5% of revenue) may cap operating leverage absent further scale.

Metrics to Watch:

• Equity-method income trajectory and concentration by affiliate.
• Normalization of effective tax rate and its impact on NI.
• Operating income and gross margin disclosure in subsequent filings.
• Working-capital movements (payables/receivables) and OCF durability.
• Capital allocation: pace of buybacks vs FCF; net debt and interest coverage.

Relative Positioning: Within Japanese digital payments/marketing platforms, the company shows stronger cash generation but higher reliance on affiliate earnings and higher leverage than peers with more transparent operating margin profiles; revenue momentum is competitive, but quality of earnings is less resilient given non-operating dependence.

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