circlace Inc FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥2.09B
• Operating Income: ¥6M
• Net Income: ¥-13M
• EPS: ¥3.45

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: Top-line growth was strong, but profitability and cash flow quality were weak, resulting in a mixed FY2026 Q2 print with rising revenue but minimal operating profit and significant cash burn. Revenue rose to 20.94 (億円), up 23.4% YoY, while operating income increased 71.9% YoY to 0.06 (億円) from a very low base. Gross profit reached 9.29 (億円) for a gross margin of 44.3%, but SG&A of 9.22 (億円) consumed nearly all gross profit, leaving an operating margin of just 0.3%. Ordinary income was 0.03 (億円), and net income was 0.15 (億円), up 39.2% YoY, with EPS of 3.45円. Based on growth rates, operating margin expanded by roughly 8 bps YoY (from ~0.21% to ~0.29%). Net margin expanded by approximately 8 bps YoY (from ~0.64% to ~0.72%), aided by below-the-line items despite high tax expense. Cash generation was notably poor: operating cash flow was -2.90 (億円), resulting in an OCF/Net Income ratio of -19.34x, signaling very weak earnings quality for the quarter. Capital expenditures of -2.07 (億円) intensified cash outflows, and financing CF was slightly negative at -0.12 (億円). Liquidity is adequate with a current ratio of 142% and working capital of 2.72 (億円), but cash and deposits of 3.22 (億円) cover only about half of current liabilities (6.42 (億円)), elevating liquidity management importance. Leverage appears conservative with a D/E ratio of 0.70x and negligible interest expense, yielding an interest coverage ratio of 222x. ROE is low at 1.6% and ROIC is 0.5%, well below the 5% warning threshold, underscoring sub-scale returns. An unusually high effective tax rate (262.8%) relative to pre-tax profit contrasts with positive net income and negative total comprehensive income (-0.13 (億円)), implying sizeable other comprehensive losses and potential tax timing/deferred effects. Forward-looking, sustaining >20% revenue growth while converting it into operating leverage is the key challenge; near-term focus should be on improving cash conversion, tightening working capital, and controlling SG&A intensity to lift ROIC.

Profitability Analysis

ROE decomposition (DuPont): ROE 1.6% = Net Profit Margin (0.7%) × Asset Turnover (1.320) × Financial Leverage (1.70x). The biggest drag is the very low net margin, driven by SG&A nearly equaling gross profit. Asset turnover at 1.32x is reasonable for an IT/services model but not enough to offset the razor-thin operating margin. Financial leverage at 1.70x provides only modest lift and is not excessive. Business drivers: revenue grew 23.4% YoY, but SG&A at 9.22 (億円) absorbed most of the 9.29 (億円) gross profit, limiting operating leverage. Non-operating items were small (income 0.01, expenses 0.04), while the tax charge was disproportionately high versus PBT, muting bottom-line conversion. Sustainability: current margin structure is not sustainable for attractive ROE; improvement hinges on scaling utilization, pricing, and cost discipline. Concerning trends: SG&A intensity remains very high (SG&A/gross profit ~99%), implying little margin for error; any deceleration in growth could quickly compress profit. EBITDA margin is 1.3%, underscoring limited operating cushion.

Growth Assessment

Revenue growth of 23.4% YoY indicates healthy demand or successful expansion in core offerings. Operating income rose 71.9% YoY but from a very small base, so absolute profit contribution remains minimal. Approximate operating margin expansion (~8 bps YoY) and net margin expansion (~8 bps YoY) are positive but marginal in impact. Profit quality is mixed: net income growth outpaced operating profit growth due to below-the-line effects while tax charges were unusually high; this mix is not a robust foundation for sustained earnings growth. Outlook: near-term growth durability will depend on retention, project execution, and hiring productivity; converting growth to operating leverage is the key to improving ROIC from 0.5%. Without SG&A efficiency gains and better cash conversion, growth may not translate to shareholder value.

Financial Health

Liquidity: Current ratio at 142% and quick ratio at 142% (no inventories reported) are above minimum thresholds, though below the 150% comfort benchmark. Cash and deposits of 3.22 (億円) cover ~50% of current liabilities (6.42 (億円)), making receivables collection (4.29 (億円)) critical to near-term liquidity. Solvency: D/E of 0.70x suggests conservative leverage; interest expense is de minimis with strong coverage (222x). Maturity mismatch: With current assets (9.15 (億円)) exceeding current liabilities (6.42 (億円)), near-term refinancing risk appears manageable, but sustained negative OCF could pressure cash. Off-balance sheet obligations: none reported in the provided data.

Cash Flow Quality

OCF of -2.90 (億円) against net income of 0.15 (億円) yields an OCF/NI ratio of -19.34x, a clear earnings quality red flag. The negative operating cash flow likely reflects working capital outflows (e.g., receivables growth or unbilled work) and limited operating margin. Capex of -2.07 (億円) on top of negative OCF implies materially negative implied FCF for the period, constraining internal funding capacity. With financing CF slightly negative (-0.12 (億円)), cash burn relies on existing cash balances; absent improvement, cash could trend lower. Signs of working capital strain may include rising receivables relative to sales, but detailed movements are unreported; monitoring DSO and billing milestones is critical. No indications of aggressive capitalized costs from the data, but continued negative OCF would warrant scrutiny.

Dividend Sustainability

Dividend data are unreported for the period; payout ratios and FCF coverage cannot be calculated. Given negative OCF and capex, internally funded dividends would be difficult to sustain without a turnaround in cash generation. Policy outlook likely prioritizes reinvestment and liquidity over distributions until operating margins and cash conversion improve.

Risk Assessment

Business Risks:

• Margin risk from high SG&A intensity keeping operating margin near breakeven
• Execution risk in scaling delivery capacity and utilization to achieve operating leverage
• Pricing and competitive pressure in IT/services limiting gross margin expansion
• Project timing and acceptance risk affecting revenue recognition and cash collection

Financial Risks:

• Sustained negative operating cash flow creating liquidity pressure despite adequate current ratio
• Low ROIC (0.5%) indicating sub-scale returns, heightening capital efficiency risk
• Receivables concentration/collection risk given cash covers only ~50% of current liabilities
• Tax volatility risk evidenced by a very high effective tax rate versus PBT

Key Concerns:

• OCF/NI at -19.34x signals poor earnings quality
• EBITDA margin of 1.3% provides minimal buffer against cost shocks
• Total comprehensive income negative (-0.13 (億円)), implying OCI losses impacting equity
• Dependence on continued high growth to offset thin margins; any slowdown could tip into losses

Investment Implications

Key Takeaways:

• Strong top-line growth (+23.4% YoY) but profitability remains very thin (OP margin ~0.3%)
• ROE of 1.6% and ROIC of 0.5% highlight insufficient returns at current scale
• Earnings quality is weak with OCF deeply negative relative to net income
• Liquidity is adequate but reliant on receivables conversion; cash alone covers ~50% of current liabilities
• Slight YoY margin expansion is not yet meaningful; SG&A intensity must fall to unlock operating leverage

Metrics to Watch:

• Operating cash flow and DSO/receivables turnover
• SG&A-to-revenue and SG&A-to-gross profit ratios
• EBITDA margin and operating margin progression by quarter
• Capex versus growth needs and any shift in investment intensity
• Effective tax rate normalization and drivers of OCI volatility

Relative Positioning: Within domestic small-cap IT/services peers, revenue growth is solid, but margins, ROIC, and cash conversion lag, placing the company below average on profitability and capital efficiency despite manageable leverage.

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