circlace Inc FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥2.09B
• Operating Income: ¥6M
• Net Income: ¥-68M
• 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

Circlace Co., Ltd. (TSE Growth: 50290) delivered strong top-line growth in FY2026 Q2 with revenue of ¥2,094m, up 23.4% YoY, indicating continued demand momentum in its services. Gross profit of ¥716m implies a gross margin of 34.2%, which is healthy for a SI/IT services model and suggests pricing has held despite growth. However, operating income was only ¥6m (operating margin ~0.3%), highlighting limited operating leverage so far and elevated cost intensity (likely SG&A and upfront investments). Ordinary income fell to ¥3m, below operating income, pointing to negative net non-operating items (e.g., financial or other expenses). Net income of ¥15m (net margin 0.72%) exceeded ordinary income, implying material below-the-line gains and/or tax effects; the presence of ¥45.9m in income taxes juxtaposed with a higher net income than ordinary income suggests unusual items and accounting/timing effects. DuPont analysis shows ROE of 1.60% driven mainly by asset turnover (1.32x) and moderate leverage (1.70x), with thin net margins limiting overall return on equity. Liquidity is solid with a current ratio of 159% and working capital of ¥496m, providing near-term flexibility despite negative operating cash flow. The balance sheet is conservatively structured (D/E ~0.96x), and equity of ¥935m underpins a reasonable buffer against cyclical swings. Cash conversion is weak in the period: operating cash flow was -¥281m, resulting in an OCF/Net Income ratio of -18.7x, a red flag for earnings quality this quarter. Interest expense is minimal (¥0.33m) and EBIT-based interest coverage of ~18x indicates low financial stress. No dividends were declared (DPS ¥0), consistent with a reinvestment stance and current earnings/cash flow profile. Reported items such as equity ratio 0.0%, cash & equivalents 0, and outstanding shares 0 appear to be undisclosed rather than true zeros; analysis focuses on available non-zero fields. There is also an apparent inconsistency between revenue, cost of sales, and gross profit; we anchor on the internally consistent margin figures provided (gross margin 34.2%) for interpretation. Overall, the quarter shows healthy demand but limited profitability, negative operating cash flow, and signs of non-recurring impacts below operating income that complicate earnings quality assessment.

Profitability Analysis

ROE_decomposition: ROE 1.60% = Net margin 0.72% × Asset turnover 1.32x × Financial leverage 1.70x. The weak net margin is the primary drag; turnover is decent and leverage is moderate. margin_quality: Gross margin at 34.2% looks solid for a services mix, but the conversion to operating margin (~0.3%) is poor, implying heavy SG&A (hiring, sales, or development costs) and/or project cost overruns. Ordinary margin (~0.14%) is lower than operating, indicating negative non-operating items. Net margin (0.72%) benefits from below-the-line items, obscuring underlying run-rate profitability. operating_leverage: Revenue grew 23.4% YoY but operating income was only ¥6m, albeit +71.9% YoY off a small base, suggesting operating leverage has not yet manifested due to upfront spending. Incremental margins appear low; cost discipline and utilization need to improve for better flow-through.

Growth Assessment

revenue_sustainability: Double-digit growth (23.4% YoY) points to robust demand and potentially expanding project volumes. Sustainability hinges on backlog conversion and new logo wins; the gross margin suggests pricing power remains intact. profit_quality: Profit composition is skewed: ordinary income below operating indicates non-operating pressure, while net income exceeds ordinary, implying one-offs or tax-related effects. The OCF shortfall versus net income (OCF/NI -18.7x) weakens earnings quality this quarter. outlook: If the company normalizes SG&A intensity and improves utilization, operating leverage could lift margins. Near term, the focus is on stabilizing working capital to restore cash conversion while maintaining growth. Visibility would be enhanced by clearer disclosure on extraordinary items and capex.

Financial Health

liquidity: Current assets ¥1,329m vs. current liabilities ¥834m yields a current ratio of 159% and quick ratio of 159% (inventories undisclosed/zero-tagged). Working capital stands at ¥496m, indicating adequate near-term liquidity despite negative OCF. solvency: Total liabilities ¥893m vs. equity ¥935m imply D/E of ~0.96x. Interest expense is small (¥0.33m) with EBIT coverage ~18x, pointing to low immediate solvency risk. capital_structure: Assets ¥1,586m and equity ¥935m indicate leverage (A/E) of 1.70x, consistent with DuPont. The reported equity ratio of 0.0% is undisclosed rather than zero; based on available data, equity/asset is ~59%.

Cash Flow Quality

earnings_quality: Operating cash flow of -¥281m versus net income of ¥15m indicates weak cash conversion (OCF/NI -18.7x). This likely reflects working capital outflows (receivables growth or unbilled work) and possibly timing effects. FCF_analysis: Investing CF is undisclosed (tagged 0) and capex is not provided; hence true FCF cannot be derived. The reported FCF of 0 should be treated as a placeholder. Given negative OCF, underlying FCF is likely negative absent asset disposals. working_capital: With rapid revenue growth, receivables and contract assets likely expanded, pressuring OCF. Monitoring DSO, unbilled receivables, and advances will be key to normalizing cash generation.

Dividend Sustainability

payout_ratio_assessment: Annual DPS is ¥0 with a payout ratio of 0%. Given thin profitability (net margin 0.72%) and negative OCF, retaining earnings is prudent. FCF_coverage: FCF is undisclosed; with OCF negative, sustainable dividend coverage is not currently demonstrated. policy_outlook: Absent clearer FCF visibility and margin expansion, near-term distributions appear unlikely. Management emphasis is likely on reinvestment and strengthening cash conversion.

Risk Assessment

Business Risks:

• Execution risk in scaling delivery capacity while maintaining margins
• Project timing and acceptance milestones causing revenue/OCF volatility
• Customer concentration typical of IT services providers
• Pricing pressure amid competitive SI market dynamics
• Talent acquisition and wage inflation impacting SG&A

Financial Risks:

• Negative operating cash flow despite positive earnings
• Potential reliance on working capital financing as growth continues
• Non-operating and extraordinary items distorting earnings visibility
• Limited operating margin providing low buffer to shocks

Key Concerns:

• OCF/Net Income at -18.7x signals weak cash conversion
• Operating margin ~0.3% despite 23% revenue growth
• Ordinary income below operating income, and net income above ordinary, suggesting unusual items
• Inconsistencies between reported cost of sales and gross profit; reliance on margin figures for analysis

Investment Implications

Key Takeaways:

• Strong top-line growth (+23.4% YoY) with stable gross margin (34.2%)
• Operating leverage not yet realized; operating margin ~0.3%
• Negative OCF (¥-281m) undermines earnings quality this quarter
• Balance sheet is moderate in leverage (D/E ~0.96x) with comfortable liquidity (current ratio 159%)
• Earnings include non-operating/extraordinary effects, reducing clarity of underlying profitability

Metrics to Watch:

• Operating margin progression and SG&A ratio
• OCF and working capital metrics (DSO, unbilled receivables, advances)
• Ordinary income versus operating income gap
• Capex and investing cash flows to derive true FCF
• Backlog/book-to-bill and utilization rates

Relative Positioning: Relative to domestic small-cap IT services peers, the company shows competitive revenue growth and gross margins but lags on operating margin and cash conversion, with a balance sheet that is adequately capitalized and low near-term financial stress.

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