ERI HOLDINGS CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥11.37B
• Operating Income: ¥2.08B
• Net Income: ¥1.27B
• EPS: ¥167.68

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment 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: A very strong FY2026 Q2 with double-digit top-line growth and a step-change in profitability, underpinned by robust cash generation. Revenue grew 26.7% YoY to 113.68, while operating income surged 268.6% YoY to 20.82, demonstrating powerful operating leverage. Net income rose 273.9% YoY to 12.68, lifting the net margin to 11.2% from 3.8% a year ago. Gross margin printed at 36.7%, supporting an operating margin of 18.3% (+1,203 bps YoY) and net margin of 11.2% (+737 bps YoY). Cash quality was excellent: operating cash flow of 30.62 exceeded net income by 2.41x, with FCF at 22.58. The DuPont ROE of 17.9% sits in the ‘excellent’ range, driven primarily by margin expansion; leverage is moderate and interest burden negligible (EBT/EBIT 1.003). Liquidity is conservative with a current ratio of 196% and cash of 76.51 easily covering short-term loans (2.50) and total interest-bearing debt (20.50). Balance sheet strength is solid: we estimate an equity ratio around 47% (70.80/149.54), despite XBRL not reporting it. Tax burden is a headwind (NI/EBT 0.607; effective tax rate ~39%), tempering the flow-through from EBIT to net income. Dividend capacity looks healthy: an implied payout ratio of ~37% and FCF coverage of ~4.8x support the interim and year-end DPS of ¥30 each. Interest coverage remains exceptionally strong (EBITDA/interest >130x), and debt/EBITDA of 0.93x indicates low financial risk. The step-up in operating margin reflects both scale benefits and cost discipline, though sustainability depends on maintaining volume mix and utilization. No Quality Alerts were flagged by the data provider; our analysis likewise finds no material red flags in earnings quality or solvency. Forward-looking, the challenge shifts to sustaining growth against regulatory, housing-cycle, and staffing constraints while managing a high effective tax rate. Overall, the quarter indicates a higher earnings base with solid cash support, positioning ERI for potential shareholder returns while retaining balance-sheet flexibility.

Profitability Analysis

• ROE decomposition (3-factor): ROE 17.9% = Net Profit Margin (11.2%) × Asset Turnover (0.760) × Financial Leverage (2.11x).
• Biggest driver: Net profit margin improved the most YoY (from ~3.8% to 11.2%), far outpacing any changes in turnover or leverage (limited comparative data on assets restricts precision on those components).
• Business reason: Revenue growth of 26.7% combined with operating margin expansion to 18.3% (+1,203 bps YoY) indicates strong operating leverage—gross profit growth outpaced SG&A, and interest burden was immaterial.
• Sustainability: Margin gains appear supported by scale and cost control, but may normalize if volume mix or utilization softens; high tax rate (~39%) caps net margin upside absent tax planning.
• Concerning trends: None evident in cost creep; SG&A/revenue was 18.4% this period, but YoY SG&A growth cannot be benchmarked due to unreported prior-period SG&A.

Growth Assessment

Revenue rose 26.7% YoY to 113.68, a robust acceleration likely driven by higher inspection volumes and improved pricing/mix. Operating income increased 268.6% to 20.82, reflecting significant operating leverage. Net income grew 273.9% to 12.68, even with a high effective tax rate of ~39%. Margins: gross 36.7%, operating 18.3%, net 11.2%; YoY operating margin expanded by ~1,203 bps and net margin by ~737 bps. EBITDA of 22.06 implies an EBITDA margin of 19.4%. With interest burden minimal and leverage modest, the earnings step-up appears primarily operational. Outlook: near-term sustainability hinges on maintaining volume momentum and staffing capacity utilization; regulatory or housing-cycle slowdowns could moderate growth. Absent segment disclosures, we assume broad-based improvement rather than one-time gains, supported by strong OCF.

Financial Health

• Liquidity: Current ratio 196% and quick ratio 196% indicate strong short-term coverage; working capital is 51.25. Cash and deposits of 76.51 exceed short-term loans (2.50) by over 30x and total interest-bearing debt (20.50) by ~3.7x.
• Solvency: Debt/EBITDA 0.93x, Debt/Capital 22.5%, and EBITDA interest coverage >130x signal low credit risk. Estimated equity ratio ~47% (70.80/149.54). Reported D/E (total liabilities/equity) 1.11x is moderate and below the 2.0x warning threshold.
• Maturity mismatch: Low—current assets (104.60) comfortably exceed current liabilities (53.35); long-term loans (17.99) are manageable given cash and cash generation.
• Off-balance sheet: No disclosures provided; none assessed.

Cash Flow Quality

• OCF/Net income: 2.41x (>1.0 benchmark), indicating high earnings quality.
• Accruals ratio: -12.0% (negative accruals supportive of cash earnings).
• Cash conversion (OCF/EBITDA): 1.39x (excellent; suggests working-capital release and strong collections).
• Free cash flow: 22.58, sufficient to fund dividends and buybacks; financing CF outflow (-4.59) includes share repurchases (-3.55).
• Sustainability: While WC tailwinds boosted OCF, core EBITDA also improved; absent detailed AR/inventory data, we assume normalized OCF remains healthy but may moderate if WC reverts.

Dividend Sustainability

• Policy execution: Interim and year-end DPS of ¥30 each (annual ¥60) communicated; Q2 DPS recorded at ¥30.
• Payout ratio: ~37.1% based on provided calculation, below the 60% sustainability threshold.
• Coverage: FCF coverage ~4.8x; cash balance provides additional buffer.
• Capital allocation: Share repurchases (-3.55) alongside dividends appear comfortably funded by OCF; room remains for continued distributions without stressing the balance sheet.
• Outlook: With Debt/EBITDA <1x and robust OCF, current dividend level looks sustainable; key swing factors are volume/margin durability and tax rate.

Risk Assessment

Business Risks:

• Cyclicality in construction/housing starts affecting inspection demand and backlog
• Regulatory and building code changes altering demand timing and pricing
• Capacity and staffing constraints for qualified inspectors impacting service delivery and cost base
• Competitive pressure in inspection/certification services potentially pressuring pricing
• Project timing/seasonality leading to revenue and cash flow volatility

Financial Risks:

• High effective tax rate (~39%) limits net margin and ROE upside
• Intangible assets including goodwill (total goodwill 10.08; intangibles 13.69) carry impairment risk if growth slows
• Potential working-capital reversals after a strong OCF quarter (OCF > EBITDA) could reduce cash generation
• Moderate leverage on a total liabilities basis (D/E 1.11x), though net cash to debt remains strong

Key Concerns:

• Sustainability of the sharp operating margin expansion as scale benefits normalize
• Visibility on receivables/collections and capex needs is limited due to unreported line items
• Tax burden (NI/EBT 0.607) remains a structural drag on net profitability

Investment Implications

Key Takeaways:

• Earnings inflected meaningfully: operating margin 18.3% and ROE 17.9% now in the ‘excellent’ band
• Cash generation is strong (OCF/NI 2.41x; FCF 22.58) supporting dividends and buybacks
• Balance sheet conservative with substantial net cash; Debt/EBITDA 0.93x and interest coverage >130x
• Tax rate is the main headwind; interest burden is negligible
• No Quality Alerts flagged; internal metrics corroborate high earnings quality this quarter

Metrics to Watch:

• Order volume/inspection counts and utilization rates to gauge sustainability of growth
• SG&A ratio and personnel costs to confirm operating leverage persistence
• Working capital movements (receivables, unbilled) to validate cash conversion
• Effective tax rate trajectory and any tax planning initiatives
• Capex requirements vs depreciation to assess maintenance vs growth investment

Relative Positioning: Within Japan’s building inspection and certification services cohort, ERI screens as a high-margin, cash-generative operator with low leverage and above-peer ROE, albeit with a higher tax burden; execution on sustained volume and staffing efficiency will determine whether the current margin level is the new run-rate.

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