STG CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.04B
• Operating Income: ¥79M
• Net Income: ¥71M
• EPS: ¥30.47

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: FY2026 Q2 was a mixed quarter with modest topline growth but sharp profit compression and dependence on non-operating gains, offset by solid operating cash flow. Revenue rose 6.1% YoY to 30.44, while operating income fell 56.2% YoY to 0.79, indicating weakening core profitability. Gross profit was 7.37, yielding a gross margin of 24.2%, and EBITDA was 2.79 with a 9.2% margin, but operating margin settled at a thin 2.6%. Ordinary income was supported by non-operating gains (0.85) that exceeded operating profit, helping ordinary income reach 1.01 despite 0.63 of non-operating expenses. Net income declined 54.6% YoY to 0.70, translating to a net margin of 2.3%. We observe margin compression at the operating and net levels; precise basis-point changes cannot be quantified from the disclosed data but the direction is clearly negative given revenue growth and steep OP decline. Earnings quality this quarter is acceptable from a cash perspective: operating cash flow was 1.68, or 2.41x net income, implying cash earnings outpaced accounting profits. However, total comprehensive income swung to a loss of -1.90, likely driven by other comprehensive income items (e.g., valuation/FX effects), which signals balance-sheet valuation headwinds. Leverage is elevated with D/E at 2.42x and interest coverage at 2.21x, leaving limited cushion if rates rise or earnings remain weak. Liquidity is adequate with a current ratio of 154%, supported by cash and deposits of 16.79 against current liabilities of 30.49. Financing cash inflow was sizable at 25.02, implying incremental borrowing to support operations/investment or refinancing, which increases financial risk. ROIC is 1.0%, well below a typical cost of capital and below a 5% warning threshold, highlighting capital efficiency issues. Profit composition is skewed toward non-operating contributions (non-operating income at 121% of operating income), which reduces visibility and quality of earnings. A proxy FCF (OCF − capex) is positive but slim at ~0.19, insufficient to comfortably fund dividends if payout stays above earnings (calculated payout ratio shown at 104.1%). Forward-looking, the company needs to restore operating margins, improve ROIC, and reduce reliance on non-operating gains to sustain earnings and de-lever. Near-term focus should be on SG&A discipline, pricing/mix to defend gross margin, and working capital control to keep cash conversion strong amid high leverage.

Profitability Analysis

ROE decomposition (DuPont): ROE 2.6% = Net Profit Margin (2.3%) × Asset Turnover (0.329x) × Financial Leverage (3.42x). The leverage component is high and is the primary factor preventing ROE from being lower, given a modest net margin and slow asset turnover. The most stressed component appears to be the net margin: operating income fell 56.2% YoY despite 6.1% sales growth, compressing operating and net profitability. Business drivers likely include higher SG&A relative to gross profit and/or gross margin pressure; SG&A of 6.57 absorbed 89% of gross profit, leaving limited operating leverage. Non-operating income (0.85) masked some core weakness, but this is not a durable driver of ROE. Sustainability: leverage-driven ROE is fragile; without margin recovery or better asset turns, ROE is unlikely to improve and could decline if financing costs rise. Concerning trends: SG&A growth appears to have outpaced revenue (given OP decline), indicating negative operating leverage; exact SG&A YoY is not disclosed, but the ratio of SG&A to gross profit is elevated. Asset turnover of 0.329 suggests a capital-heavy or underutilized asset base; combined with ROIC at 1.0%, capital efficiency is a key structural issue.

Growth Assessment

Topline growth was +6.1% YoY to 30.44, but profit growth was negative across operating (-56.2%), ordinary (-50.2%), and net (-54.6%) levels. Current margins are thin: gross 24.2%, EBITDA 9.2%, operating 2.6%, net 2.3%. Profit quality is mixed: cash conversion is strong (OCF/NI 2.41x), but ordinary income relies on non-operating items that may not recur. The negative total comprehensive income (-1.90) points to valuation/FX headwinds that could continue if markets remain volatile. With interest expense at 0.36 and interest coverage at 2.21x, incremental growth driven by debt is constrained. Outlook: absent evidence of pricing power or cost relief, operating margin recovery may be gradual; focus on cost control and mix improvement is key. Revenue appears stable, but sustainability of profits hinges on improving core operations rather than non-operating contributions.

Financial Health

Liquidity: Current ratio is 154.1% (healthy per >1.5 threshold), and quick ratio is also 154.1% given unreported inventories; cash and deposits of 16.79 cover ~55% of current liabilities (30.49). Solvency: D/E is high at 2.42x (warning >2.0) and Debt/EBITDA is 15.9x (very high), indicating elevated leverage risk. Interest coverage is 2.21x, only slightly above the 2x warning level, leaving limited buffer. Maturity profile: short-term loans of 13.60 are sizable but are covered by current assets (46.99) and cash (16.79); however, reliance on refinancing remains a risk given noncurrent loans of 30.79. No explicit off-balance sheet obligations are disclosed in the provided data. Equity stands at 27.08 against total assets of 92.65, implying financial leverage (assets/equity) of 3.42x. Overall, liquidity is adequate, but solvency risk is elevated due to leverage and modest interest coverage.

Cash Flow Quality

OCF/Net Income is 2.41x (>1.0), indicating good cash realization of earnings. Operating CF of 1.68 exceeds net income of 0.70, suggesting positive working capital contribution or non-cash charges (e.g., D&A of 2.00) supporting cash flow. Capex is 1.49; a proxy FCF (OCF − capex) is modestly positive at ~0.19, leaving limited room for discretionary outlays or dividends without additional financing. Financing CF is a large inflow at 25.02, implying increased borrowings or similar actions, which improves liquidity but raises leverage. No clear signs of working capital manipulation can be concluded due to limited disclosures (inventories and detailed WC items are unreported). Overall cash flow quality is acceptable this quarter but not robust enough to de-risk the high leverage profile.

Dividend Sustainability

The calculated payout ratio is 104.1%, implying dividends exceed earnings on the disclosed basis; DPS and total dividends are unreported, so this figure may reflect policy guidance or interim assumptions. With proxy FCF at ~0.19, dividend coverage from organic cash generation appears thin, especially considering capex needs. Given high leverage and interest coverage of 2.21x, prioritizing de-leveraging over distributions would improve resilience; however, actual dividend policy is not disclosed in the data. Sustainability is questionable if profits do not recover and if reliance on financing continues. Monitoring actual DPS announcements and cash dividend outflows is essential once disclosed.

Risk Assessment

Business Risks:

• Margin pressure: operating margin at 2.6% with SG&A absorbing 89% of gross profit
• Dependence on non-operating income (0.85 equals 121% of OP), reducing earnings visibility
• Low ROIC at 1.0%, indicating poor capital efficiency and potential value dilution
• Negative total comprehensive income (-1.90) signaling market/FX valuation headwinds

Financial Risks:

• High leverage: D/E 2.42x and Debt/EBITDA 15.9x
• Weak interest coverage at 2.21x, sensitive to rate increases or earnings declines
• Large financing inflows (25.02) implying ongoing refinancing risk
• Potential maturity mismatch if short-term borrowings (13.60) require rollovers amid tight credit

Key Concerns:

• Profit compression despite revenue growth (+6.1% YoY) suggests negative operating leverage
• Reliance on non-operating items to sustain ordinary income is not sustainable
• Thin proxy FCF (~0.19) limits capacity to fund dividends, capex, and deleveraging simultaneously
• Data gaps (inventories, detailed SG&A, investing CF) restrict full assessment of cost structure and WC dynamics

Investment Implications

Key Takeaways:

• Topline growth did not translate into profits; operating income down 56.2% YoY
• Non-operating gains are propping up ordinary income; core earnings remain weak
• Leverage is elevated with limited interest cover, increasing downside risk
• Cash conversion is acceptable this quarter, but free cash generation is minimal after capex
• ROIC of 1.0% underscores the need for asset rationalization or higher-margin growth

Metrics to Watch:

• Operating margin and SG&A-to-gross-profit ratio
• Interest coverage and effective borrowing rates
• Working capital turns (AR days, inventory if disclosed) and OCF sustainability
• ROIC progression and capex discipline
• Composition of non-operating income and OCI volatility

Relative Positioning: Within small-cap industrials/services peers, STG exhibits weaker core profitability and capital efficiency, offset by adequate liquidity but higher-than-average leverage and dependence on non-operating contributions, positioning it defensively relative to peers with stronger ROIC and cleaner earnings mix.

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