KOSE Corporation FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥240.51B
• Operating Income: ¥13.57B
• Net Income: ¥10.35B
• EPS: ¥164.50

Income Statement

Balance Sheet

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: Soft quarter operationally with clear margin compression, partially masked at the bottom line by one-time gains that kept net profit almost flat year on year. Revenue grew 0.7% YoY to 2,405.1, indicating demand stabilization but not acceleration. Operating income fell 27.8% YoY to 135.8, driving operating margin down to 5.6%. Ordinary income declined 34.5% YoY to 135.4 despite net non-operating income of roughly 18.7, implying adverse items in ordinary activities or classification nuances. Profit before tax jumped to 184.9, implying approximately 49.5 of extraordinary gains that are non-recurring in nature. Net income was 93.9, down just 0.3% YoY, with EPS at 164.5 yen, highlighting how extraordinary items cushioned the decline in operating earnings. Gross margin is high at 69.4%, but SG&A intensity remains heavy at about 61.5% of sales (1,480 on 2,405), leaving limited operating leverage at current growth. ROE is a subdued 3.2% (DuPont: NPM 3.9% × ATO 0.643 × leverage 1.29x), reflecting low margin and conservative leverage. ROIC is 3.7%, falling below the 5% warning threshold, underscoring capital efficiency challenges. Liquidity is very strong with current ratio at 356.5% and cash and deposits of 862.5, while leverage is minimal (D/E 0.29x). Interest expense is negligible (0.03) and coverage extraordinarily high (4,525x), so solvency risk is low. However, the effective tax rate of 44% is elevated, which suppressed net profit conversion. Operating margin compressed by an estimated 224 bps YoY (from about 7.9% to 5.6%), while net margin compression was mild at roughly 4 bps (from ~3.94% to 3.90%) due to extraordinary gains. Earnings quality cannot be fully assessed as operating cash flow was unreported; this limits confidence in the durability of earnings. The calculated payout ratio is high at 90.4%, which looks stretched given low ROE/ROIC and lack of visible free cash flow data. Looking ahead, restoring operating margin via SG&A discipline and improved cost absorption is critical, as reliance on non-recurring gains is not a sustainable earnings driver.

Profitability Analysis

ROE decomposition: 3.2% ROE = 3.9% net profit margin × 0.643 asset turnover × 1.29x financial leverage. The largest change YoY appears to be net profit margin at the operating level (operating margin down from ~7.9% to 5.6%), as revenue was essentially flat (+0.7%) and leverage remains conservative. The primary business driver is elevated SG&A intensity (1,480; ~61.5% of sales) amid only modest top-line growth, suggesting higher personnel costs (salaries 403.8) and brand investment outpacing revenue. This looks partially structural (wage inflation, marketing commitments) rather than purely one-time, though some spending could moderate if growth slows further. Asset turnover at 0.643 reflects a sizable asset base (inventories 467.0; receivables 492.6) relative to sales; without evidence of channel destocking, inventory normalization could help over time. Sustainability: absent a top-line acceleration, margin recovery depends on SG&A control and mix; current trends do not yet show positive operating leverage. Watch for concerning patterns: operating income (-27.8% YoY) fell much faster than revenue (+0.7% YoY), implying cost growth or gross margin pressure outpacing sales and weighing on ROIC (3.7%).

Growth Assessment

Revenue growth of +0.7% YoY indicates stabilization but lacks momentum for scale efficiencies. Operating profit declined 27.8% YoY to 135.8 despite flat revenue, pointing to negative operating leverage and cost absorption issues. Net income was almost flat (-0.3% YoY to 93.9) due to roughly 49.5 in extraordinary gains that lifted profit before tax to 184.9. Non-operating income of 20.4 (mainly interest income 7.2 and dividends 1.3) helped, but ordinary income still fell 34.5% YoY to 135.4, implying other ordinary-level headwinds. Profit quality skewed toward non-recurring support this quarter; recurring operating momentum is weak. Near-term outlook hinges on SG&A rationalization and mix upgrade to restore operating margin; otherwise, earnings will remain highly sensitive to any revenue softness. With ROIC at 3.7%, incremental growth needs to be capital-disciplined. Absent cash flow data, sustainability of current earnings and investment pace is uncertain; we need confirmation from OCF and inventory turns.

Financial Health

Liquidity is very strong: current ratio 356.5% and quick ratio 280.4%; no warning triggers (current ratio >> 1.0). Cash and deposits of 862.5 comfortably cover current liabilities of 613.5. Leverage is conservative with D/E at 0.29x and negligible short-term loans (7.8); long-term loans and interest-bearing debt were unreported, but balance sheet equity of 2,903.3 covers 77.6% of total assets, indicating high solvency. Interest burden is minimal (interest expense 0.03) with coverage at 4,525x. Maturity mismatch risk appears low given the cash position and small short-term borrowings relative to current assets. No off-balance sheet obligations were disclosed in the provided data; absence of disclosure limits full assessment.

Cash Flow Quality

Operating cash flow was unreported; therefore OCF/Net Income cannot be assessed and earnings quality cannot be validated through cash conversion. Free cash flow and capex are also unreported, preventing assessment of sustainability of investment and shareholder returns. Working capital signs are mixed but not conclusive: receivables (492.6) and inventories (467.0) are sizable relative to sales, yet without prior-period comparisons we cannot assess build-ups or potential channel stuffing. Given heavy SG&A and low ROIC, we would seek confirmation that OCF covers dividends and any growth capex; data limitations preclude conclusions.

Dividend Sustainability

Calculated payout ratio is 90.4%, well above the <60% benchmark for comfort and high relative to the 3.2% ROE and 3.7% ROIC. With OCF and FCF unreported, we cannot verify coverage; near-term cash reserves are ample, but sustaining a ~90% payout alongside reinvestment needs could be challenging if operating earnings remain weak. Policy outlook depends on margin recovery; absent an improvement in operating margin and ROIC, payout normalization (or reliance on cash on hand) may be necessary to balance growth investments and shareholder returns.

Risk Assessment

Business Risks:

• Margin compression from elevated SG&A versus modest revenue growth
• Demand volatility in core cosmetics channels leading to negative operating leverage
• Product mix and brand investment payback uncertainty affecting gross-to-operating margin conversion
• Execution risk in inventory and receivables management impacting working capital
• Potential reliance on non-recurring/extraordinary gains to support bottom line

Financial Risks:

• High effective tax rate (44%) dampening net income conversion
• Dividend payout ratio of ~90% stressing coverage if OCF is weak (OCF unreported)
• Low ROIC (3.7%) versus cost of capital, risking value dilution if not improved
• Data gaps on cash flows and interest-bearing debt could hide funding or coverage pressures

Key Concerns:

• Operating margin down ~224 bps YoY with revenue nearly flat
• Ordinary income fell 34.5% YoY; operating decline masked at net level by ~49.5 in extraordinary gains
• Sustained SG&A intensity (~61.5% of sales) limiting operating leverage
• Earnings quality cannot be verified due to missing OCF and FCF data

Investment Implications

Key Takeaways:

• Core operating performance weakened despite flat revenue; cost structure is the key issue
• Non-recurring gains inflated PBT and supported net income; not a durable driver
• Balance sheet and liquidity are strong, providing resilience and flexibility
• Capital efficiency is low (ROE 3.2%, ROIC 3.7%), highlighting need for margin and asset efficiency improvements
• Dividend payout appears high relative to earnings power, raising sustainability questions

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio
• Gross-to-operating margin conversion (evidence of marketing and personnel cost discipline)
• Operating cash flow, free cash flow, and inventory turnover
• Effective tax rate normalization and any further extraordinary items
• ROIC trajectory versus a 7–8% target range

Relative Positioning: Within Japan cosmetics peers, the company stands out for exceptionally strong liquidity and low leverage but lags on capital efficiency and current operating momentum, with higher apparent SG&A intensity and reliance on non-recurring items this quarter.

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