CGS HOLDINGS INC. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥3.49B
• Operating Income: ¥309M
• Net Income: ¥81M
• EPS: ¥25.48

Income Statement

Balance Sheet

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: Solid recovery with strong margin expansion and improved profitability versus last year, though earnings quality can’t be fully validated due to missing cash flow data. Revenue grew 24.4% YoY to 34.86, while operating income surged 184.5% YoY to 3.09, and net income rose 160.2% YoY to 2.42. We estimate operating margin expanded to 8.9% from roughly 3.9% a year ago, a ~499 bps improvement, indicating material operating leverage. Net margin improved to 6.9% from about 3.3% a year ago, a ~362 bps expansion, underscoring both margin recovery and mix or cost discipline. Gross margin stands high at 53.8%, highlighting a value-added business mix; SG&A at 17.68 suggests cost control relative to revenue as operating profit scaled meaningfully. Ordinary income of 3.55 indicates non-operating contribution is notable; the non-operating income ratio of 39% suggests profit composition includes a meaningful non-core element. Cash remains robust at 29.34 against current liabilities of 13.54, driving a strong current ratio of 281.9% and quick ratio of 278.3%. Leverage is moderate with D/E at 0.81x and interest coverage effectively non-concerning given minimal interest expense. ROE is 7.2% (DuPont: 6.9% net margin × 0.574 asset turnover × 1.81x leverage), now in line with typical cost-of-equity thresholds for small caps in Japan. ROIC is reported at a high 37.9%, implying efficient capital deployment, though details and drivers are not disclosed. An elevated effective tax rate of 48.3% versus Japan’s ~30% norm suggests tax mix effects or non-deductible items, adding some uncertainty to after-tax earnings stability. Notably, reported net income exceeding profit before tax implies below-the-line effects (e.g., tax benefits or other adjustments), but the disclosures do not detail the drivers. Earnings quality cannot be verified because operating and free cash flow are unreported; this is the main analytical limitation. Near term, the balance sheet and liquidity provide a cushion for operations and dividends (payout ratio at 40.5% appears prudent). Forward-looking, sustaining the improved operating margin and reducing reliance on non-operating contributions will be key to maintaining ROE at or above current levels.

Profitability Analysis

ROE decomposition (DuPont): ROE 7.2% = Net Profit Margin 6.9% × Asset Turnover 0.574 × Financial Leverage 1.81x. The largest change YoY is most likely the net margin component: operating income grew +184.5% vs revenue +24.4%, implying sizable operating margin expansion to 8.9% from an estimated 3.9% (~+499 bps). Business rationale: strong operating leverage from higher sales on a relatively fixed SG&A base (SG&A grew well below the pace of operating income), and potentially better mix/pricing reflected in a 53.8% gross margin. Non-operating items also contributed (non-operating income 0.94; ordinary income 3.55), but the core driver appears to be operating margin normalization. Sustainability: part of the margin expansion can be durable if driven by mix/pricing and cost discipline, but some may be cyclical or timing-related (given the sizable non-operating contribution and elevated tax effects). Asset turnover at 0.574 is moderate and could improve if revenue growth continues without proportional balance sheet expansion. Financial leverage at 1.81x is modest; ROE uplift is not debt-driven, reducing risk but also limiting leverage-based returns. Watch for any sign that SG&A growth re-accelerates ahead of revenue; currently, operating leverage is favorable (OI up far faster than sales), but maintaining this will require ongoing cost control.

Growth Assessment

Top-line growth of +24.4% YoY (to 34.86) indicates healthy demand momentum. The translation to operating profit (+184.5% YoY) signals powerful operating leverage and improved execution. Non-operating income (0.94) provided an incremental boost to ordinary income (3.55), but the growth story is primarily operational this quarter given the sharp operating margin expansion. We estimate operating margin rose to 8.9% from about 3.9% YoY, and net margin to 6.9% from about 3.3%, pointing to better mix/pricing or cost efficiency. Recurrence: without segment detail, it is difficult to disaggregate recurring vs one-time effects in non-operating income; reliance on non-operating items (39% ratio) introduces some volatility risk. Outlook hinges on sustaining the better margin structure while growing revenue at a mid-teens pace or better; any slowdown could compress margins if operating leverage reverses. Given cash of 29.34 and low payables/inventory levels, the company appears positioned to support growth without immediate balance sheet strain. However, absence of R&D/CapEx disclosures limits visibility on long-term growth investments.

Financial Health

Liquidity is strong: current ratio 281.9% and quick ratio 278.3%, well above benchmarks, with cash of 29.34 comfortably exceeding current liabilities of 13.54. No warning on current ratio (<1.0) or D/E (>2.0); D/E is 0.81x, indicating conservative leverage. Interest coverage is effectively very high (1688.5x) due to negligible interest expense; this should be interpreted cautiously as a function of minimal debt cost rather than outsized EBIT. Maturity mismatch risk appears low: current assets (38.17) cover current liabilities (13.54) by 2.8x; cash alone is over 2x current liabilities. Noncurrent liabilities of 13.62 are manageable relative to total assets of 60.71 and equity of 33.55. Off-balance sheet obligations are not disclosed; absence of lease or guarantee detail prevents a full appraisal. Overall solvency and liquidity are sound based on available data.

Cash Flow Quality

OCF and FCF are unreported, so earnings quality cannot be validated via cash conversion; OCF/NI and FCF coverage are not calculable. With net income at 2.42 and no cash flow data, we cannot confirm whether working capital supported or consumed cash. Balance sheet working capital is ample (current assets 38.17 vs current liabilities 13.54), and receivables (3.05) and inventories (0.48) look modest relative to revenue, which reduces concern about aggressive revenue recognition or inventory build this quarter. No clear signs of working capital manipulation can be identified from the disclosed levels. Near-term dividend and capex affordability cannot be assessed via FCF; the large cash balance provides a buffer, but sustainability requires ongoing positive OCF.

Dividend Sustainability

Payout ratio is calculated at 40.5%, comfortably below a 60% prudence threshold and consistent with earnings retention for growth. DPS and total dividends paid are unreported; hence, we cannot triangulate cash payouts against free cash flow. With OCF unreported, FCF coverage of dividends is not calculable; however, liquidity is strong (cash 29.34) and leverage moderate, suggesting near-term dividend capacity is adequate. Sustainability medium-term will depend on maintaining operating margin gains and translating earnings into OCF.

Risk Assessment

Business Risks:

• Profit mix reliance on non-operating income (non-operating income ratio ~39%) increases volatility of ordinary profit.
• Potential normalization of margins if revenue growth slows, given current benefits from operating leverage.
• Limited disclosure (no segment, SG&A, R&D, CapEx) reduces visibility on growth drivers and cost structure.
• Elevated effective tax rate (48.3%) adds uncertainty to after-tax profitability.

Financial Risks:

• Cash flow opacity: OCF and FCF unreported, preventing validation of earnings quality and dividend coverage.
• Potential below-the-line adjustments affecting net income (NI > PBT) create uncertainty without detailed notes.
• Interest coverage inflated by minimal interest expense; any increase in borrowing costs could reduce coverage.

Key Concerns:

• Earnings quality cannot be confirmed due to missing cash flow data.
• Ordinary profit supported by sizable non-operating income contribution.
• Tax rate volatility could materially swing net income.

Investment Implications

Key Takeaways:

• Strong top-line growth (+24.4% YoY) translated into outsized operating profit growth (+184.5% YoY).
• Operating margin expanded an estimated ~499 bps YoY to 8.9%; net margin improved ~362 bps to 6.9%.
• ROE at 7.2% is supported mainly by margin recovery, not leverage (1.81x).
• Balance sheet is liquid and conservatively levered (current ratio 282%, D/E 0.81x).
• Non-operating contribution is meaningful (ordinary income 3.55 vs operating income 3.09), adding profit volatility risk.
• Earnings quality and dividend coverage cannot be assessed due to missing OCF/FCF data.

Metrics to Watch:

• Operating cash flow and free cash flow conversion versus net income (target OCF/NI > 1.0).
• Sustainability of operating margin around ~9% and SG&A trajectory vs revenue.
• Non-operating income composition and recurrence; aim to reduce dependency.
• Effective tax rate normalization toward ~30%.
• Asset turnover trend and any working capital swings affecting cash conversion.

Relative Positioning: Within small-cap JGAAP peers, the company shows stronger-than-average liquidity and a pronounced margin recovery, resulting in a respectable 7.2% ROE without heavy leverage. However, relative visibility is lower due to limited disclosures and reliance on non-operating items, making cash flow confirmation and profit mix normalization key for maintaining this positioning.

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