SANKYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥100.41B
• Operating Income: ¥39.04B
• Net Income: ¥28.77B
• EPS: ¥135.62

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 strong FY2026 Q2 with double-digit top-line growth and resilient profitability, albeit with modest margin compression and weaker cash conversion. Revenue rose 10.7% YoY to 1,004.09, driven by a robust slate and continued strength in the pachinko/pachislot cycle. Operating income increased 7.6% YoY to 390.38, and net income rose 9.7% YoY to 287.73, reflecting disciplined SG&A and limited non-operating volatility. Gross profit reached 595.37, translating to a healthy 59.3% gross margin. The operating margin was 38.9% (390.38/1,004.09), while the net margin was 28.7%, underscoring a high-margin earnings model for a manufacturer/ IP-driven operator. Using the reported growth rates, we estimate prior-period operating margin at ~40.0% versus 38.9% now, implying ~109 bps YoY compression; net margin eased by ~26 bps to 28.7%. Ordinary income of 399.49 (+8.7% YoY) benefited only modestly from non-operating items (9.16), with dividend income 3.37 and interest income 2.65; earnings quality is primarily operating-driven. DuPont ROE is 11.2%, decomposed as 28.7% net margin × 0.336 asset turnover × 1.17x leverage, indicating returns are driven mainly by margins rather than leverage. ROIC is a standout at 21.5%, well above typical cost of capital and the 7–8% management benchmark seen in Japan. Liquidity remains a fortress with current ratio 739.5% and cash/deposits of 1,252.06 against current liabilities of 328.09. However, cash flow conversion flagged: operating CF was 178.87 versus net income 287.73 (OCF/NI 0.62x), indicating working capital absorption and an earnings quality watch-point. Capital returns were aggressive with financing CF of -584.05, including share repurchases of -452.45; the calculated payout ratio is high at 90.4%, pointing to a shareholder-return-heavy stance. Balance sheet conservatism (equity 2,560.32; total assets 2,986.83) offsets some sustainability concerns around high payout and buybacks. Forward-looking, the key swing factors are title pipeline execution, replacement cycle momentum, and normalization of working capital to restore OCF/NI >1.0. Overall, the quarter was strategically sound with strong profitability and disciplined costs, but investors should monitor cash conversion and the capacity to fund elevated shareholder returns from organic FCF rather than cash reserves.

Profitability Analysis

ROE (11.2%) = Net Profit Margin (28.7%) × Asset Turnover (0.336) × Financial Leverage (1.17x). Profitability is predominantly margin-led, with minimal leverage contribution and a modest asset turnover reflecting a cash-rich balance sheet. Based on revenue (+10.7%) growing faster than operating income (+7.6%), operating margin likely compressed by ~109 bps YoY to 38.9%; net margin eased by ~26 bps to 28.7%. The most notable component change is the net/operating margin (down modestly), likely due to product mix and higher SG&A intensity relative to revenue growth. Business driver: a strong launch slate typically lifts revenue, but mix (title-specific bill of materials, promotional intensity, and distribution terms) can weigh slightly on incremental margin; non-operating items were small and stable. Sustainability: high structural margins look intact given gross margin at 59.3% and SG&A ratio at 20.4%, but quarterly margins will remain sensitive to hit-title cadence and campaign timing. Operating leverage appears positive over the medium term, but this quarter’s leverage was softer (SG&A growth likely at or above revenue, inferred from margin compression). Watch for any trend of SG&A growth outpacing revenue; if persistent, it would pressure ROE given a low-leverage capital structure.

Growth Assessment

Top-line growth was solid at +10.7% YoY to 1,004.09, consistent with a favorable replacement cycle and healthy title throughput. Operating income grew +7.6% to 390.38 and net income +9.7% to 287.73, indicating earnings growth broadly in line with sales, albeit with slight margin dilution. Gross profit of 595.37 supports the high-quality revenue mix, with a gross margin of 59.3% that remains a key competitive differentiator. Non-operating contribution (9.16) was modest (0.9% of revenue), keeping the quality of profit anchored in operations. EBITDA of 402.63 implies a 40.1% EBITDA margin, highlighting robust cash earnings potential, though near-term cash conversion lagged. Outlook hinges on continued new model adoption and content pipeline; if title momentum persists, revenue growth looks sustainable, but earnings trajectory will depend on maintaining gross margin and managing promotional spend. Near-term, we expect normalized working capital to be a support to cash conversion if sell-through remains solid; conversely, slower collections or higher channel inventory would be a headwind.

Financial Health

Liquidity is exceptionally strong: current ratio 739.5% and quick ratio 738.6%, with cash/deposits of 1,252.06 far exceeding current liabilities of 328.09. Solvency is conservative: total equity 2,560.32 vs total liabilities 426.50, implying an equity ratio of ~85.7% and a low debt-to-equity ratio of 0.17x. No interest-bearing debt was reported in detail, and interest coverage is not calculable, but the net cash position and minimal financial expenses imply negligible refinancing risk. Maturity mismatch risk is low given the scale of liquid assets relative to short-term obligations. Off-balance sheet obligations were not disclosed in the provided data. There are no warnings on Current Ratio (<1.0) or D/E (>2.0). Large buybacks (-452.45) were funded from cash while keeping substantial liquidity buffers.

Cash Flow Quality

OCF was 178.87 versus net income of 287.73, yielding OCF/NI of 0.62x (below the 0.8x threshold), a caution flag on earnings quality for the quarter. The shortfall likely reflects working capital absorption (e.g., higher receivables consistent with revenue growth and potentially timing-related payables decreases), rather than depressed operating profitability. Free cash flow was not disclosed; capex was unreported, but depreciation/amortization was modest at 12.25, suggesting a capital-light profile and potential for positive FCF over the cycle. Financing cash outflows were heavy (-584.05), primarily share repurchases (-452.45), which exceeded quarterly OCF and likely drew on existing cash reserves. Sustainability: if OCF normalizes toward NI as collections catch up, shareholder returns remain serviceable; if working capital continues to absorb cash, reliance on the cash balance will rise. No clear signs of working capital manipulation are evident from the limited data, but the OCF/NI ratio warrants monitoring.

Dividend Sustainability

The calculated payout ratio stands at 90.4%, above the <60% benchmark for comfort and indicative of an aggressive distribution stance. Total dividends paid were unreported, but financing CF shows significant capital returns alongside buybacks (-452.45). Given the net cash balance (cash/deposits 1,252.06) and strong margins, near-term dividend capacity is supported even with weaker OCF this quarter. However, sustainability at a 90%+ payout depends on maintaining current earnings levels and improving cash conversion; any downturn in the title cycle or margin slippage could pressure coverage absent drawdowns of cash. Policy-wise, the combination of large buybacks and high payout suggests continued emphasis on shareholder returns, but prudence would call for alignment with recurring FCF rather than accounting earnings.

Risk Assessment

Business Risks:

• Hit-title dependency and content pipeline risk impacting quarterly volumes and mix.
• Regulatory and certification risk in Japan’s pachinko/pachislot market affecting product features and replacement cycles.
• Demand cyclicality tied to replacement and hall investment appetite.
• Supply chain and component availability risk (e.g., semiconductors) influencing delivery schedules and costs.

Financial Risks:

• OCF/NI at 0.62x indicates weak cash conversion this quarter; persistent working capital absorption could pressure returns funding.
• High payout ratio (90.4%) and sizable buybacks (-452.45) increase reliance on balance sheet cash if FCF lags.
• Concentration of liquid assets creates reinvestment risk at low yields, modestly dampening ROA.

Key Concerns:

• Modest margin compression (~109 bps at operating level) despite strong revenue growth.
• Visibility on capex, dividends paid, and debt profile is limited due to unreported items.
• Potential volatility in quarterly results given industry dynamics and title timing.

Investment Implications

Key Takeaways:

• Solid quarter: revenue +10.7% YoY, OP +7.6%, NI +9.7%, with high operating (38.9%) and net (28.7%) margins.
• ROE of 11.2% is largely margin-driven; leverage contribution is minimal (1.17x), with equity ratio ~86%.
• Cash conversion is the swing factor (OCF/NI 0.62x); normalization could unlock higher FCF to cover elevated shareholder returns.
• Aggressive capital returns (buybacks -452.45) funded from substantial cash (1,252.06), leaving ample liquidity.
• ROIC at 21.5% signals strong economic value creation if sustained.

Metrics to Watch:

• OCF/Net income and receivables/payables trends to confirm working capital normalization.
• Operating margin trajectory and SG&A-to-sales ratio for signs of sustained compression or stabilization.
• Title pipeline cadence, market share in pachinko/pachislot, and sell-through indicators.
• Cash balance versus cumulative dividends and buybacks to assess return sustainability.
• Gross margin resilience amid component cost and promotional dynamics.

Relative Positioning: Within Japanese amusement machine peers, SANKYO’s profitability (EBITDA margin ~40%, operating margin ~39%) and fortress balance sheet position it at the high end of quality, with more conservative leverage than many peers and higher capacity for shareholder returns, though results remain sensitive to title cycles and regulatory changes.

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