Computer Institute of Japan (4826) FY2026 Q2 Earnings Report

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Executive Summary

FY2026 Q2 consolidated results showed solid performance with revenue of 14.23 billion yen (YoY +7.7%), operating income of 1.425 billion yen (YoY +45.2%), ordinary income of 1.437 billion yen (YoY +45.1%), and net income attributable to owners of 936 million yen (YoY +47.2%). Operating margin expanded to 10.0% from 7.4% in the prior year period, driven by effective cost management as selling, general and administrative expenses grew at a slower pace than revenue. The substantial profit growth demonstrates strong operating leverage, though ROE of 6.2% remains moderate. Total assets reached 19.80 billion yen with equity of 15.22 billion yen, maintaining a conservative balance sheet structure with an equity ratio of 76.9%.

Performance Drivers

Revenue growth of 7.7% reflects steady top-line expansion, though specific segment drivers are not disclosed in the available data. The revenue increase translated into gross profit of 3.149 billion yen, representing a gross margin of 22.1%. The primary driver of the 45.2% surge in operating income was effective management of selling, general and administrative expenses, which totaled 1.723 billion yen and grew at a rate significantly below the revenue growth rate, resulting in operating leverage effects. Operating margin improved by 2.6 percentage points from 7.4% to 10.0%. Non-operating income contributed modestly with net non-operating income of approximately 12 million yen, comprising interest and dividend income that offset financial expenses. The progression from operating income of 1.425 billion yen to ordinary income of 1.437 billion yen shows minimal non-operating impact. Net income of 936 million yen reflects an effective tax rate of 34.9%, which represents a notable tax burden that constrains bottom-line profitability. The gap between ordinary income (1.437 billion yen) and net income (936 million yen) of approximately 501 million yen is primarily attributable to income taxes, with no significant extraordinary items disclosed. This represents a revenue up/profit up pattern with particularly strong profit growth due to operating leverage.

Key Metrics

[Profitability] ROE of 6.2% calculated through DuPont analysis with net profit margin of 6.6%, asset turnover of 0.719, and financial leverage of 1.30, showing improvement from prior period primarily due to margin expansion. Operating margin improved to 10.0% from 7.4% YoY, representing a 2.6 percentage point improvement driven by cost discipline. The effective tax rate of 34.9% remains elevated and constrains net profitability. [Cash Quality] Cash and deposits totaled 8.897 billion yen, representing 44.9% of total assets and providing strong liquidity coverage. The company maintains 14.35 times coverage of short-term debt through cash holdings. Days sales outstanding extended to approximately 101 days, indicating room for improvement in receivables collection efficiency. [Investment Efficiency] Total asset turnover of 0.719 reflects moderate asset utilization, with current assets of 14.355 billion yen comprising 72.5% of total assets. The work-in-process inventory ratio is notably high relative to total manufacturing inventory, suggesting extended production cycles or project-based operations requiring monitoring. [Financial Health] Equity ratio stands at 76.9% with total equity of 15.22 billion yen, demonstrating a conservative capital structure. Current ratio of 331.9% and quick ratio of 331.8% indicate substantial short-term liquidity. Interest-bearing debt totals 633 million yen with debt-to-equity ratio of 0.04, representing minimal leverage. However, short-term debt comprises 97.9% of total debt, warranting attention to refinancing timing despite ample cash coverage.

Cash Flow Analysis

Cash and deposits increased 420 million yen YoY to 8.897 billion yen, supported by improved profitability with net income growth of 47.2%. Working capital dynamics show accounts payable increased to 1.894 billion yen, representing effective supplier credit utilization. The extended days sales outstanding of 101 days and notable work-in-process inventory accumulation suggest cash conversion efficiency has room for improvement despite strong absolute cash position. Cash coverage of current liabilities stands at 2.06 times, providing substantial liquidity cushion. Total assets expanded from 18.68 billion yen to 19.80 billion yen, with the increase funded primarily through retained earnings as equity grew from 14.52 billion yen to 15.22 billion yen. Investment securities holding of 5.146 billion yen represents 26.0% of total assets, contributing to comprehensive income through valuation gains during the period. The company's cash generation capability appears adequate based on balance sheet movements, though validation through operating cash flow statements would strengthen this assessment.

Earnings Quality

Ordinary income of 1.437 billion yen versus operating income of 1.425 billion yen shows a modest non-operating net contribution of approximately 12 million yen, indicating earnings are predominantly driven by core operations. Non-operating income represents less than 1% of revenue, consisting primarily of interest and dividend income that modestly offset financial expenses. The minimal difference between operating and ordinary income demonstrates earnings are not reliant on non-recurring or non-operating items. Interest and dividend income provided stable financial income, while financial expenses remained contained due to the low debt burden with interest expense of only 1.4 million yen against interest-bearing debt of 633 million yen. While operating cash flow data is not available for direct comparison to net income, the substantial increase in cash and deposits alongside profit growth suggests reasonable earnings quality. However, the extended collection period for accounts receivable at 101 days and elevated work-in-process inventory indicate some working capital strain that may impact cash conversion. The effective tax rate of 34.9% is transparent and reflects the actual tax burden without indication of significant tax adjustments or irregularities.

Guidance Update

Full-year guidance targets revenue of 28.50 billion yen (YoY +5.9%), operating income of 2.25 billion yen (YoY +3.7%), ordinary income of 2.28 billion yen (YoY +3.4%), and net income of 1.50 billion yen with EPS of 26.44 yen. Q2 cumulative progress rates stand at 49.9% for revenue, 63.3% for operating income, 63.0% for ordinary income, and 62.4% for net income against full-year targets. Operating income and ordinary income progress rates exceed the standard 50% benchmark by approximately 13 percentage points, indicating stronger first-half performance potentially driven by seasonality, early cost control benefits, or front-loaded project recognition. The above-target profit progress provides cushion for full-year guidance achievement, though it suggests either conservative full-year assumptions or anticipated second-half headwinds. Revenue progress of 49.9% aligns closely with the standard 50% midpoint, indicating balanced sales pacing. The company has maintained its full-year forecast without revision, reflecting confidence in current trajectory. Annual dividend forecast of 8.0 yen per share remains unchanged.

Shareholder Returns

Interim dividend of 7.00 yen per share was paid, with year-end dividend forecast of 8.00 yen per share for a full-year total of 8.00 yen based on the company's stated policy. However, calculating against H1 net income of 936 million yen and assuming similar share count, the indicated dividend distribution rate would exceed 100% if both interim and year-end dividends are additive, raising questions about dividend sustainability. Based on full-year net income guidance of 1.50 billion yen and total annual dividend of 8.0 yen per share, the payout ratio would be approximately 73.3% using the forecasted EPS of 26.44 yen, which is elevated but more sustainable than the interim calculation suggests. The high payout ratio warrants monitoring of free cash flow generation to confirm dividends are adequately supported by operating cash flows rather than drawing down cash reserves. No share buyback program was disclosed for the current period. Given the substantial cash position of 8.897 billion yen, near-term dividend payment capacity appears secure, though the elevated payout ratio limits flexibility for both investment and additional shareholder returns.

Risk Factors

Working capital efficiency deterioration poses operational risk as evidenced by days sales outstanding extending to 101 days and elevated work-in-process inventory ratios. This extended cash conversion cycle constrains liquidity effectiveness despite strong absolute cash holdings, and prolonged collection periods increase credit risk exposure to customers. Should this trend continue, it could pressure operating cash flow generation and limit financial flexibility. Short-term refinancing concentration creates structural financial risk with 97.9% of debt classified as short-term, despite the low absolute debt level of 633 million yen. While current cash holdings provide substantial coverage at 14.35 times short-term debt, any deterioration in operating performance or unexpected cash needs could create refinancing pressure. Dividend sustainability concern emerges from the calculated payout ratio potentially exceeding 100% based on interim results, though full-year guidance suggests a more manageable 73.3% payout ratio. Without disclosed operating cash flow and free cash flow data to confirm cash generation adequacy, the high distribution rate relative to earnings constrains capital allocation flexibility and could pressure retained earnings growth if earnings trajectory weakens.

Industry Benchmark (Reference - Proprietary Data)

[Industry Position] (Reference - Proprietary Analysis) The company's operating margin of 10.0% demonstrates notable improvement from the prior year's 7.4%, positioning profitability on an improving trajectory. Historical company data shows operating margin of 10.0% in FY2026 Q2, with revenue growth of 7.7% YoY. Net profit margin reached 6.6%, reflecting the moderating impact of the 34.9% effective tax rate despite strong operating performance. While specific industry median comparisons are limited in the available dataset, the company's ROE of 6.2% and asset turnover of 0.719 suggest moderate positioning relative to typical manufacturing or project-based business models. The conservative financial structure with equity ratio of 76.9% and minimal leverage (debt-to-equity of 0.04) indicates stronger financial health metrics than leveraged industry peers, though this conservative approach may also constrain return on equity potential. The company's revenue growth rate of 7.7% positions it in steady expansion mode, with operating leverage effects driving profit growth that substantially exceeds revenue growth at 45.2% YoY for operating income.

Key Takeaways from Earnings

Strong operating leverage demonstrates effective cost management with operating income growth of 45.2% substantially outpacing revenue growth of 7.7%, resulting in operating margin expansion of 2.6 percentage points to 10.0%. This suggests the company is successfully scaling operations and controlling fixed costs, creating a favorable earnings growth trajectory if top-line momentum continues. The progress rate against full-year guidance shows profit metrics at approximately 63% achievement versus the standard 50% midpoint, providing a cushion for forecast attainment and indicating potential for either guidance raise or second-half investment flexibility. However, this front-loaded performance also raises questions about second-half earnings sustainability and whether growth rates can maintain momentum. Working capital management requires attention as extended receivables collection at 101 days and elevated work-in-process inventory suggest operational inefficiencies that could constrain cash flow quality despite strong reported earnings. The combination of high cash holdings at 8.897 billion yen and elevated dividend payout ratios approaching 73% of full-year guidance indicates a shareholder-friendly capital allocation policy, though this limits retained earnings for growth investment and provides minimal margin of safety if operating performance weakens.

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This report was automatically generated by AI analyzing XBRL earnings data as an earnings analysis tool. This is not a recommendation to invest in any specific security. Industry benchmarks are reference information compiled from publicly available earnings data. Please make investment decisions at your own responsibility and consult professionals as needed.

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AI Financial Analysis

Executive Summary

CIJ delivered a strong FY2026 Q2 earnings result, with profit growth substantially outpacing sales growth. Revenue increased 7.7% year on year to ¥14.23bn. Operating income rose 45.2% to ¥1.43bn, producing a 10.0% operating margin. Ordinary income also increased 45.1% to ¥1.44bn. Net income grew 47.2% to ¥0.94bn, and basic EPS was ¥16.53. Gross profit increased 19.4% to ¥3.15bn, faster than revenue growth, indicating an improved project and service mix or better delivery economics. The gross margin expanded by 216bp year on year, to 22.1% from 20.0%. SG&A rose 4.1% to ¥1.72bn, materially below revenue growth, creating favorable operating leverage. Accordingly, the operating margin expanded by 259bp from 7.4% in the prior-year period to 10.0%. The net margin widened by 177bp from 4.8% to 6.6%. Net income growth was broadly supported by core operating improvement rather than non-operating items, as non-operating income represented only 0.2% of revenue. The small ¥0.01bn gain on sale of securities was not material to the earnings outcome. The annualized ROE of 12.3% is within the good benchmark range and reflects improved profitability rather than high balance-sheet leverage. Q2 cumulative operating income has already reached 63.3% of the full-year forecast, exceeding the standard 50% first-half progress rate by 13.3 percentage points. This creates a favorable earnings cushion, although the forecast implies a substantially lower second-half operating profit level than the first half. The balance sheet remains highly liquid, with cash of ¥8.90bn and a current ratio of 331.9%. The principal execution issues are the high proportion of work in process within project inventory, modest R&D intensity for an IT-services company, and the formal refinancing exposure created by predominantly short-term debt.

Profitability Analysis

The annualized DuPont ROE is 12.3%, decomposed into a 6.6% net profit margin, 1.438x asset turnover, and 1.30x financial leverage. The primary driver of the improved return profile is margin expansion rather than financial leverage, given the conservative capital structure. Revenue growth of 7.7% translated into operating-income growth of 45.2%, demonstrating strong operating leverage. Gross margin rose to 22.1% from 20.0%, a 216bp improvement. SG&A increased only 4.1% to ¥1.72bn, versus 7.7% revenue growth, lowering the SG&A-to-sales ratio to 12.1% from 12.5%. This generated a 259bp increase in operating margin to 10.0%, placing profitability in the good 8–15% benchmark range. Net margin improved to 6.6% from 4.8%, also within the good 5–10% benchmark range. The five-factor analysis shows a tax burden of 0.651 and an interest burden of 1.009, confirming that financing costs are immaterial and that the difference between pre-tax profit and net income is mainly tax-related. Interest coverage of 437.9x further underscores the absence of debt-service pressure on current earnings. JGAAP goodwill amortization was ¥0.67bn, equivalent to 4.7% of operating income; this is a recurring accounting charge that reduces reported operating profit and net income relative to an IFRS peer with equivalent acquired goodwill. R&D expense was ¥0.59bn, or 0.4% of revenue, below the 3% benchmark cited in the quality alerts. The low R&D ratio can support near-term margins, but it may limit internally developed differentiation and longer-term service competitiveness if the company operates in technology areas that require sustained product and platform investment.

Growth Assessment

First-half growth was high quality at the operating level: revenue rose ¥1.01bn while operating income rose ¥0.44bn. Gross profit increased by ¥0.51bn, accounting for the majority of the operating-income increase. This reflects a meaningful improvement in gross-profit conversion, with gross profit growing 19.4% versus 7.7% revenue growth. The full-year forecast calls for revenue of ¥28.50bn, operating income of ¥2.25bn, ordinary income of ¥2.28bn, and net income attributable to owners of ¥1.50bn. First-half revenue progress is 49.9%, essentially in line with the standard 50% Q2 progress rate. Operating-income progress is 63.3%, 13.3 percentage points above the standard rate, while ordinary-income progress is 63.0% and net-income progress is 62.4%. The implied second-half operating income is ¥0.83bn, 42% below first-half operating income, and the implied second-half operating margin is approximately 5.8%. This conservative implied second-half profile may provide room for full-year outperformance if first-half project profitability and cost discipline are maintained. Conversely, the forecast embeds a normalization of margins or a less favorable second-half project mix. The ¥1.00bn contract-asset balance, up from ¥0.52bn a year earlier, should be monitored as delivery milestones are converted into billing and cash collection. Work in process amounted to ¥0.37bn, representing 95.9% of project inventory; this indicates a project-delivery-oriented revenue model and elevates the importance of completion, acceptance, and cost-control discipline.

Financial Health

Financial health is strong. Total assets were ¥19.80bn, financed by ¥15.22bn of equity and ¥4.58bn of liabilities. The equity ratio was 76.9%, supporting a resilient capital base. The current ratio was 331.9% and the quick ratio was 331.8%, both far above conventional liquidity thresholds. Working capital was ¥10.03bn. Cash and deposits totaled ¥8.90bn, equal to 44.9% of total assets. Interest-bearing debt was limited to ¥0.63bn, comprising ¥0.62bn of short-term loans and ¥0.01bn of long-term loans. Debt-to-equity was a conservative 0.30x, debt-to-capital was 4.0%, and cash covered short-term debt by 14.35x. There is therefore no material liquidity shortfall or balance-sheet leverage concern. The refinancing-risk alert arises because 97.9% of interest-bearing debt is short term, well above the 40% warning threshold. In context, this maturity mismatch has limited practical financial impact because current assets of ¥14.36bn and cash of ¥8.90bn greatly exceed current liabilities of ¥4.33bn and short-term borrowings of ¥0.62bn. Nevertheless, management should retain ample committed liquidity and avoid allowing short-duration borrowing to become a structural funding source for acquisitions or longer-duration intangible assets. Goodwill was ¥0.89bn, or 5.9% of equity and 4.5% of assets, indicating low goodwill-related balance-sheet concentration. Intangible assets were 6.6% of total assets, also below levels associated with elevated asset-quality concentration.

Notable B/S Changes

Contract assets: +¥0.48bn (+91.2%) to ¥1.00bn — a significant increase in unbilled completed or in-progress contract value; timely billing, customer acceptance, and cash conversion should be monitored. Work in process: +¥0.19bn (+105.8%) to ¥0.37bn — unfinished project balances increased sharply; this is central to the high-WIP-ratio alert and raises project execution and margin-control sensitivity. Treasury stock: improved by ¥0.54bn (+23.1% reduction in the negative balance) to negative ¥1.80bn — indicates a notable change in capital management and increases equity relative to the prior period. Goodwill: +¥0.13bn (+17.8%) to ¥0.89bn — below the specified percentage threshold but relevant alongside one newly consolidated subsidiary; goodwill remains modest at 5.9% of equity, limiting current impairment concentration risk.

Cash Flow Quality

Profitability and balance-sheet liquidity provide support for earnings quality, but no operating, investing, or financing cash-flow figures are reported for the period. Accordingly, OCF-to-net-income conversion, free cash flow, accruals quality, and dividend cash coverage cannot be quantified. The increase in contract assets to ¥1.00bn from ¥0.52bn is a working-capital item to monitor because it depends on project billing and customer acceptance for conversion into receivables and cash. Trade receivables were ¥3.92bn, equivalent to 27.6% of first-half revenue, while cash and deposits remained stable at ¥8.90bn. Work in process was ¥0.37bn and constituted 95.9% of project inventory, triggering the high-WIP-ratio alert. The root cause is that a large share of inventory is tied to unfinished projects rather than finished deliverables. This can be typical in systems integration and contract-development activities, but it increases exposure to project delays, scope changes, cost overruns, and acceptance timing. Its impact on the investment thesis is principally potential volatility in gross margin and operating cash conversion rather than an immediate liquidity concern, given the company’s substantial cash reserves. The increase in contract assets further reinforces the need to track conversion of in-process work into invoiced receivables and cash.

Dividend Sustainability

The declared Q2 dividend is ¥10.00 per share. Based on first-half EPS of ¥16.53, the calculated first-half dividend payout ratio is 69.2%. The full-year forecast dividend is ¥18.00 per share against forecast EPS of ¥26.44, implying a forecast dividend-only payout ratio of approximately 68.1%. This is above the cited 60% sustainability benchmark but remains below the 100% warning threshold. Retained earnings totaled ¥119.74bn, providing substantial accounting capacity for shareholder distributions. The conservative debt position and large cash balance further support financial flexibility. However, free-cash-flow coverage cannot be verified without cash-flow data. Dividend sustainability will therefore depend on the conversion of project earnings, contract assets, and receivables into operating cash flow, as well as continued maintenance of current operating margins. The reduction in treasury stock balance year on year may reflect capital-management activity, but a total return ratio cannot be calculated from the reported information.

Risk Assessment

Business risks include Project execution and acceptance risk: work in process of ¥0.37bn represents 95.9% of project inventory, exposing margins and revenue timing to development delays, customer acceptance, scope changes, and cost overruns., Technology-investment risk: R&D expense is only 0.4% of revenue, below the 3% alert threshold. While IT services can rely on customer-funded development and personnel expertise, persistently modest internal R&D could weaken technological differentiation, proprietary offerings, and competitiveness., IT-services talent risk: sustained margin expansion depends on retaining skilled engineers, managing labor-cost inflation, and maintaining utilization; wage pressure could reverse the favorable SG&A and gross-margin trend., Contract-asset conversion risk: contract assets increased to ¥1.00bn from ¥0.52bn, making delivery milestones, billing timing, and collection execution important for working-capital discipline..

Financial risks include Refinancing-risk alert: 97.9% of debt is short term. The immediate impact is mitigated by cash equal to 14.35x short-term debt and a 331.9% current ratio, but the funding profile should remain aligned with asset duration., Margin normalization risk: first-half operating-margin progress is well ahead of the full-year plan, while the forecast implies a second-half operating margin of about 5.8%, indicating that current margins may not be assumed to persist unchanged., Acquired-intangible amortization risk: JGAAP goodwill amortization of ¥0.67bn is a recurring drag on operating profit; acquired businesses must generate sufficient operating contribution to offset this charge over time..

Key concerns include Highest priority: project execution, work-in-process management, and contract-asset conversion, because these affect both revenue recognition and cash conversion., Medium priority: maintenance of gross-margin gains and labor utilization, as operating-income growth materially exceeded sales growth in the first half., Medium priority: the low R&D intensity, which may not impair near-term earnings but could affect the durability of growth and pricing over a longer horizon., Lower immediate priority: short-term debt concentration, because the company’s net cash position and liquidity buffer are substantial..

Investment Implications

Key takeaways include Revenue growth of 7.7% converted into operating-income growth of 45.2%, driven by a 216bp gross-margin improvement and SG&A growth below sales growth., The annualized 12.3% ROE is supported by a 6.6% net margin and 1.438x asset turnover, not by aggressive financial leverage., First-half operating-income progress of 63.3% versus the full-year forecast provides a material buffer relative to the normal 50% Q2 pace., The balance sheet is strongly net-cash-like, with ¥8.90bn of cash against ¥0.63bn of interest-bearing debt., The main analytical focus is whether elevated work in process and contract assets convert smoothly into accepted projects, billings, and cash..

Metrics to watch include Gross margin and operating margin, to assess the durability of the first-half improvement., Second-half operating-income delivery versus the implied ¥0.83bn forecast requirement., Contract assets and trade receivables, particularly their conversion into cash., Work-in-process balance, project profitability, and evidence of project delays or cost overruns., R&D intensity and investment in proprietary technology, service offerings, and engineering capabilities., Short-term debt composition and any change in liquidity coverage., Goodwill amortization and operating performance of acquired businesses..

Regarding relative positioning, CIJ’s reported profitability is in the good benchmark range, with a 10.0% operating margin, 6.6% net margin, and annualized 12.3% ROE. Its liquidity and leverage profile are materially stronger than that of a debt-funded IT consolidator, while goodwill exposure is modest at 5.9% of equity. Relative differentiation will depend on sustaining project margins and demonstrating adequate technology investment despite currently low R&D intensity.