Def consulting,inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥373M
• Operating Income: ¥-253M
• Net Income: ¥-295M
• Earnings per Unit (EPU): ¥-8.07

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution 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: Weak quarter with significant operating losses despite solid top-line growth. Revenue rose 29.0% YoY to 3.73, but profitability deteriorated, with operating income at -2.53 and net income at -2.95. Gross profit was only 0.25, implying a gross margin of 6.6%, which is very thin for a consulting/services model and insufficient to cover SG&A of 2.10. Operating margin was -67.8% and ordinary margin -79.4%, underscoring substantial negative operating leverage at current scale. Non-operating expenses of 0.44 weighed on ordinary income, while profit before tax improved to -1.85 versus ordinary loss of -2.96, suggesting unreported special gains of roughly 1.1. Cash generation was weak: operating cash flow (OCF) was -2.15 versus net loss of -2.95, with OCF/NI at 0.73x (below the 0.8 threshold), indicating earnings quality concerns. Financing inflow of 33.18 was very large relative to the balance sheet, implying significant equity or similar capital raising to fund losses and operations. Liquidity appears ample in the short term (current ratio 307.3%, cash 1.83 vs current liabilities 1.02), and leverage is very low (D/E 0.04x; calculated equity ratio approximately 96%). However, retained earnings are negative at -7.39, indicating accumulated deficits and reliance on paid-in capital (capital surplus 9.43) to support equity. Asset turnover is low at 0.107, and with minimal financial leverage (1.04x), ROE is driven down by an extremely negative net margin (-79.1%), resulting in calculated ROE of -8.8%. ROIC is -8.0%, below the 5% warning line, highlighting subpar capital efficiency. Capex of 0.42 is modest, but with negative OCF, internally funded growth remains constrained without continued external financing. Dividend capacity is not assessable due to unreported dividend data, but current losses imply limited near-term distributable capacity. Forward-looking, the company must expand gross margin and right-size SG&A to approach break-even; otherwise, continued dilution or cash burn risks persist.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-79.1%) × (0.107) × (1.04x) ≈ -8.8%. The component most impacting ROE is the net profit margin, which is deeply negative due to low gross margin (6.6%) and SG&A (2.10) vastly exceeding gross profit (0.25). Business drivers: likely under-utilization of delivery capacity, pricing pressure, or a revenue mix with high subcontracting costs elevating cost of sales, combined with a fixed SG&A base that the current revenue level cannot absorb. Asset turnover at 0.107 indicates underutilized assets and/or elevated cash following financing, further depressing efficiency metrics. Financial leverage is minimal (1.04x), so leverage is not amplifying returns in either direction. Sustainability: The current margin profile is not sustainable; improvement requires structural gross margin expansion (pricing, mix, delivery efficiency) and SG&A discipline. Warning flags: SG&A growth relative to revenue cannot be assessed precisely without YoY SG&A data, but the absolute gap (SG&A 2.10 vs gross profit 0.25) is a critical negative operating leverage indicator.

Growth Assessment

Revenue grew 29.0% YoY to 3.73, demonstrating demand momentum. However, the quality of growth is poor given the 6.6% gross margin and negative operating margin of -67.8%. The cost structure suggests that incremental revenue is not translating into contribution margin, implying either aggressive pricing, high subcontractor usage, or project cost overruns. Ordinary income (-2.96) deteriorates further after non-operating items, though PBT (-1.85) indicates an unreported special gain improving pre-tax results by roughly 1.1. Without evidence of recurring non-operating gains, core earnings power remains weak. Outlook hinges on improving utilization and project margins; absent this, top-line growth alone is unlikely to restore profitability. Near-term growth should prioritize higher-margin service lines and tighter cost control to raise contribution margins.

Financial Health

Liquidity is strong: current ratio 307.3% and quick ratio 307.3%, with cash and deposits of 1.83 exceeding current liabilities of 1.02. No warning for current ratio (<1.0) or high leverage is necessary; D/E is 0.04x, indicating a conservative balance sheet. Working capital is 2.11, and accounts receivable of 1.07 appear manageable. Maturity mismatch risk is low given cash coverage of short-term liabilities. Total equity is 33.57 against total liabilities of 1.21; a calculated equity ratio is approximately 96% (though XBRL did not report it). However, retained earnings are negative (-7.39), indicating accumulated losses and dependence on capital surplus. Off-balance sheet obligations are unreported; no assessment possible.

Cash Flow Quality

OCF was -2.15 versus net income of -2.95, yielding OCF/NI of 0.73x, which is below the 0.8 benchmark and flags weak earnings quality. The divergence suggests that losses are not fully reflected in cash outflows yet, potentially due to working capital movements (details unreported). Financing CF was a large inflow (33.18), implying reliance on external capital to fund operations. Capex was 0.42; with negative OCF, an indicative FCF proxy (OCF - Capex) is approximately -2.57, suggesting that internally generated cash is insufficient to support investments without financing. No evident signs of working capital manipulation can be confirmed due to limited disclosure, but the cash burn relative to revenue is high. Sustainability depends on either rapid margin improvement or continued access to financing.

Dividend Sustainability

Dividend data are unreported. Given negative EPS (-8.07 JPY) and negative OCF, distributable capacity appears limited in the near term. Without positive FCF and profits, sustainable dividends are unlikely unless funded by past reserves or additional financing, which is generally unsound. Policy stance is unknown; if a dividend exists, the payout ratio would likely be elevated and at risk during prolonged losses.

Risk Assessment

Business Risks:

• Low gross margin (6.6%) and negative operating margin (-67.8%) indicate structural profitability challenges.
• Project execution risk: potential cost overruns or low pricing in consulting delivery compressing margins.
• Scale risk: SG&A (2.10) materially exceeds gross profit (0.25), creating negative operating leverage.
• Client demand cyclicality and potential delays/cancellations impacting revenue recognition and utilization.

Financial Risks:

• Earnings quality risk: OCF/NI at 0.73x (<0.8) suggests weaker cash conversion.
• Capital dependency risk: large financing inflow (33.18) used to fund operations, raising dilution risk.
• Accumulated deficits (retained earnings -7.39) increase the likelihood of future capital raises if losses persist.
• Potential volatility from unreported extraordinary items influencing PBT.

Key Concerns:

• ROIC at -8.0% signals inefficient capital deployment.
• Very low asset turnover (0.107) indicates underutilized assets and possible excess cash post-financing.
• Absence of detailed SG&A and non-operating breakdowns reduces visibility on cost drivers and one-offs.
• Sustainability of liquidity if external financing conditions tighten.

Investment Implications

Key Takeaways:

• Top-line growth (+29% YoY) did not translate into profits due to a 6.6% gross margin and heavy SG&A.
• Core profitability is weak: operating margin -67.8%, net margin -79.1%.
• Cash conversion is below par (OCF/NI 0.73x), with an indicative negative FCF.
• Balance sheet is under-levered (D/E 0.04x) and liquid (current ratio 307%), but equity relies on paid-in capital as retained earnings are negative.
• Large financing inflow (33.18) supports liquidity but implies dilution/financing dependence.
• ROE (-8.8%) and ROIC (-8.0%) are driven by negative margins, not leverage.

Metrics to Watch:

• Gross margin trajectory and subcontracting ratio (if disclosed).
• SG&A-to-revenue ratio and hiring cost trends.
• OCF/Net income and working capital movements (AR days).
• Order backlog/bookings and utilization rates.
• Cash runway versus burn rate; timing and size of any further financings.
• Evidence of recurring vs one-off items affecting PBT (extraordinary gains).

Relative Positioning: Versus domestic small-cap IT/consulting peers, profitability and capital efficiency are significantly weaker (negative operating margin, ROIC -8%), while liquidity is stronger due to recent financing; execution on margin improvement is needed to converge toward peer norms.

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