DN HOLDINGS CO.,LTD. FY2026 Q1 Earnings Report

Financial Highlights

• Net Sales: ¥7.72B
• Operating Income: ¥-252M
• Net Income: ¥-117M
• EPS: ¥-25.23

Income Statement

Balance Sheet

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: Soft quarter with modest topline growth but persistent operating loss and slightly deeper negative margins. Revenue rose 3.6% YoY to 77.22, while operating income was a loss of -2.52, deteriorating 8.0% YoY. Gross profit was 21.89, implying a gross margin of 28.3%. SG&A was 23.10, exceeding gross profit and resulting in a negative operating margin of -3.3%. Ordinary income came in at -2.54 and net income was -2.05 (EPS -25.23 JPY), both slightly worse YoY (-5.9% and -7.4%, respectively). Operating margin compressed by roughly 13 bps YoY (from about -3.1% to -3.3%), and net margin deteriorated by about 4 bps to -2.6%. Non-operating items were broadly neutral (income 0.10 vs expenses 0.11), with interest expense of 0.08 weighing modestly. Liquidity appears adequate with a current ratio of 173%, supported by cash and deposits of 27.71 against current liabilities of 107.09. However, interest coverage is deeply negative (-32.24x), reflecting loss-making operations relative to financing costs. Leverage is moderate with D/E at 0.88x, and short-term loans of 52.50 indicate a refinancing/rollover need despite sufficient current assets. ROE was -1.4%, driven by negative margins (net margin -2.6%) and low asset turnover (0.279), partially offset by leverage (1.88x). ROIC of -1.4% is below the 5% warning threshold, signaling subpar capital efficiency. Cash flow metrics are unreported, so earnings quality cannot be cross-checked (OCF vs NI). The slight margin compression suggests cost pressure or mix headwinds despite revenue growth. Forward-looking, stabilization hinges on closing the GP–SG&A gap and restoring positive operating profit, alongside maintaining liquidity to cover short-term debt. Monitoring SG&A intensity, pricing, and any cost-control initiatives will be key near-term catalysts for profit normalization.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-2.6%) × 0.279 × 1.88 ≈ -1.4%. The primary drag is the negative net margin, as operating losses persist due to SG&A (23.10) exceeding gross profit (21.89). Asset turnover at 0.279 indicates relatively low efficiency in generating sales from the asset base, compounding the impact of negative margins. Financial leverage of 1.88x provides only limited amplification and cannot offset loss-making operations. The component that changed most YoY appears to be the margin, with operating margin compressing by ~13 bps and net margin by ~4 bps; asset turnover and leverage changes cannot be precisely assessed with available data. Business drivers: revenue growth (+3.6%) did not translate into operating leverage because gross margin (28.3%) was insufficient to cover SG&A burden (~29.9% of sales), implying either higher personnel/overheads or adverse mix/pricing. Sustainability: absent actions to reduce SG&A or improve gross margin, negative operating margins could persist; conversely, even modest improvements in gross margin or SG&A efficiency could quickly restore breakeven given the narrow gap. Watch-outs: SG&A growth versus revenue is not disclosed this quarter; given the operating loss, continued SG&A creep would be concerning. Non-operating items remain small and do not mask operational weakness.

Growth Assessment

Topline grew 3.6% YoY to 77.22, a modest pace indicative of steady demand. However, profitability deteriorated slightly, with operating income at -2.52 (-8.0% YoY), suggesting negative operating leverage. Gross margin stands at 28.3%, but with SG&A at 29.9% of sales, the cost structure still overwhelms gross profit. Non-operating impact was minimal (net -0.01), so the core issue resides in operations. With no disclosure on segment mix, order backlog, or pricing, the sustainability of revenue growth cannot be firmly assessed. The small YoY margin compression implies cost pressures or mix headwinds that offset volume growth. Outlook will depend on management’s ability to either lift gross margin (pricing, mix, procurement) or reduce SG&A intensity (headcount efficiency, overhead control). Absent these, incremental revenue may not translate into profits. Given negative ROIC (-1.4%), capital deployment into growth should be scrutinized for returns until margins normalize.

Financial Health

Liquidity is adequate: current ratio 173.4% and quick ratio 173.4%, both above healthy thresholds. No warning on current ratio (<1.0) or D/E (>2.0); D/E is 0.88x, a moderate leverage position. Short-term loans are 52.50 versus cash of 27.71 and current assets of 185.70, indicating manageable but notable refinancing/maturity mismatch risk; continued access to credit lines is important. Long-term loans are modest at 4.52, keeping noncurrent liabilities contained (22.46). Total equity is 146.96, supporting balance sheet resilience. Net debt approximates 29.31 (interest-bearing debt 57.02 minus cash 27.71), implying capacity but less room for extended losses. No off-balance sheet obligations are reported in the data provided. Interest coverage is weak (negative), underscoring the need to restore operating profit to comfortably service debt.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income cannot be assessed and earnings quality cannot be validated against cash conversion. Free cash flow is also unreported, preventing analysis of self-funding capacity for investments or distributions. With operating losses and interest expense present, internal cash generation is likely strained absent working capital releases. No clear signs of working capital manipulation can be deduced due to lack of CF and detailed WC disclosures. Until OCF data is available, caution is warranted in assuming accrual earnings quality and sustainability.

Dividend Sustainability

Dividend data for the quarter (and annual DPS) are unreported. The calculated payout ratio (-328.6%) is not meaningful given negative net income this period. Without OCF/FCF disclosure, we cannot confirm coverage from free cash flow. Given the operating loss and negative interest coverage, maintaining or increasing dividends (if any were planned) would likely depend on balance sheet capacity rather than earnings, which is a higher-risk posture. Policy outlook cannot be inferred from the provided data; clarity on full-year guidance and cash flow will be critical.

Risk Assessment

Business Risks:

• Persistent operating losses due to SG&A exceeding gross profit, limiting operating leverage.
• Potential cost inflation (personnel/overheads) pressuring margins given a services-heavy cost base.
• Pricing/mix risk that could cap gross margin near 28% and impede break-even.
• Execution risk in implementing cost controls to narrow the GP–SG&A gap.

Financial Risks:

• Negative interest coverage (-32.24x) indicating weak debt service capacity from operations.
• Refinancing/maturity risk with short-term loans of 52.50 against cash of 27.71.
• ROIC -1.4% below the 5% warning threshold, highlighting capital efficiency challenges.
• Sensitivity to interest rate increases given reliance on short-term borrowing.

Key Concerns:

• Slight margin compression despite revenue growth suggests negative operating leverage.
• Limited visibility on cash flow; OCF and FCF unreported restrict assessment of earnings quality.
• Any slowdown in revenue growth could widen losses without swift SG&A adjustments.

Investment Implications

Key Takeaways:

• Revenue up 3.6% YoY but operating loss widened slightly; operating margin -3.3%.
• Gross margin 28.3% remains below SG&A ratio (29.9%), keeping core EBIT negative.
• Leverage moderate (D/E 0.88x) and liquidity adequate (current ratio 173%), but coverage weak.
• ROE -1.4% and ROIC -1.4% reflect low capital efficiency; improvement hinges on margin repair.
• Non-operating items are minor; turnaround must come from operations, not below-the-line gains.

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio each quarter.
• Gross margin trajectory (pricing/mix/procurement initiatives).
• Operating cash flow and free cash flow to validate earnings quality.
• Interest coverage and net debt trend, especially rollover of short-term loans.
• Revenue growth vs. headcount/overhead growth to gauge operating leverage.

Relative Positioning: Within small/mid-cap services peers, DN Holdings shows steadier topline but weaker profitability due to a cost structure that currently exceeds gross profit, resulting in inferior ROIC/ROE and debt service metrics despite acceptable liquidity and leverage.

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