SUGITA ACE CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥35.00B
• Operating Income: ¥10M
• Net Income: ¥-95M
• EPS: ¥-3.09

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

Sugita Ace (7635) reported FY2026 Q2 consolidated results showing marginal topline growth and very thin profitability, with cash flows more resilient than earnings. Revenue grew 0.9% YoY to ¥34.996bn, while gross profit was ¥4.929bn, implying a gross margin of 14.1%, consistent with a low-margin wholesale model. Operating income was only ¥10m (operating margin ~0.03%), albeit up 32.5% YoY off a small base, indicating slight operational improvement but still negligible earnings capacity. Ordinary income of ¥72m exceeded operating income, implying sizable non-operating gains (e.g., dividends/forex), which are unlikely to be structurally repeatable as core profit drivers. Net income was a ¥16m loss (EPS -¥3.09), narrowing YoY but underscoring ongoing pressure at the bottom line. DuPont shows a negative ROE of -0.14% driven by a slim negative net margin (-0.05%), moderate asset turnover (1.01x), and relatively high financial leverage (3.03x). Cash flow from operations (OCF) was positive at ¥194m despite the net loss, suggesting supportive working capital movements and/or non-cash charges; the OCF/Net Income ratio is -12.1, which is less meaningful due to the small negative denominator but directionally implies cash earnings exceed accounting earnings. Financing cash flow was an outflow of ¥718m, likely debt service/repayment, consistent with efforts to manage leverage; dividends were not paid. Liquidity is adequate with a current ratio of 130% and quick ratio of 109%, supported by sizable current assets (¥29.1bn), though interest coverage on an operating basis is weak at ~0.8x. The balance sheet shows total assets of ¥34.6bn and equity of ¥11.4bn; while the reported equity ratio is shown as 0% (unreported), simple calculation implies an equity ratio around 33%, indicating moderate capital adequacy. EBITDA was ¥151m (0.4% margin), offering better coverage of interest on an EBITDA basis (~11.6x), but low absolute profit leaves little buffer for shocks. Inventory stands at ¥4.84bn (about 16.6% of current assets), highlighting the importance of inventory turnover to sustain cash generation. The company currently has no dividend (DPS ¥0, payout 0%), which appears consistent with preserving liquidity given weak earnings and leverage. Overall, results point to a stable but subdued demand environment, tight margins, and reliance on non-operating income, with modest cash flow support and ongoing balance-sheet management. Data gaps (e.g., cash balance, investing cash flows, shares outstanding) limit precision, but the available figures are sufficient to characterize profitability as thin, leverage as elevated, and liquidity as adequate.

Profitability Analysis

ROE decomposition: Net margin -0.05% × Asset turnover 1.011 × Financial leverage 3.03 = ROE -0.14%, consistent with the reported figure. The negative net margin stems from minimal operating profit (¥10m) and tax/extraordinary effects leading to a small net loss (¥16m). Operating margin is ~0.03% and ordinary margin ~0.21%, showing that non-operating items (about ¥62m net) are masking weakness in core operations. Gross margin of 14.1% is typical for a hardware/building-materials wholesaler; however, the spread to operating margin is extremely thin, indicating high SG&A burden and limited pricing power. EBITDA of ¥151m (0.4% margin) provides a narrow buffer; D&A of ¥141m suggests a relatively asset-light model but still meaningful fixed cost absorption. Operating leverage appears unfavorable: slight revenue growth (+0.9% YoY) translated into only ¥10m operating profit, implying cost inflation and/or mix dampening incremental margins. Interest coverage is weak on an operating basis (OI/interest ~0.8x), meaning core profits do not fully cover interest; on an EBITDA basis, coverage is healthier (~11.6x), but this relies on adding back non-cash D&A and does not solve structural margin issues. Overall margin quality is low, with earnings sensitivity to small changes in gross profit or SG&A, and a notable reliance on non-operating gains to reach positive ordinary income.

Growth Assessment

Revenue growth of +0.9% YoY indicates a flat-to-slightly growing demand environment, consistent with stable but subdued construction/DIY end-markets. The quality of profit growth is weak: operating income rose 32.5% YoY but only to ¥10m, implying limited scalability and potentially rising fixed costs or discounting pressure. The ordinary income uplift to ¥72m versus OI ¥10m suggests growth is driven by non-operating items rather than core operational improvements. With net income still slightly negative, the pathway to sustainable profit growth likely requires either mix improvements, SG&A efficiency, or better pricing discipline. Asset turnover at ~1.01x is in line with a wholesale model and not a driver of growth; future efficiency gains would need better working capital turns, particularly inventory. Given elevated leverage and low operating margins, management may prioritize balance-sheet strengthening over aggressive expansion. Near-term outlook: modest revenue growth with volatile quarterly earnings due to thin margins and dependence on non-operating income; upside would stem from gross margin improvement and expense control. Data limitations (no segment/region details, no backlog) prevent deeper assessment of sustainability across business lines.

Financial Health

Liquidity is adequate: current ratio 130.1% and quick ratio 108.5%, supported by current assets of ¥29.1bn versus current liabilities of ¥22.4bn; working capital is ¥6.74bn. Inventories are ¥4.84bn (about 16.6% of current assets), implying manageable inventory intensity but requiring disciplined turnover to prevent cash drag. Solvency: liabilities total ¥26.84bn against equity of ¥11.43bn; implied equity ratio is roughly 33.0% (despite a reported 0% field), and financial leverage (assets/equity) is 3.03x. The debt-to-equity ratio is 2.35x, indicating an above-moderate leverage profile for a low-margin distributor. Interest expense is ¥13m; operating interest coverage at ~0.8x is weak and a key constraint, though EBITDA coverage is stronger. Financing cash flow outflow of ¥718m suggests debt repayment and/or lease service, which, while deleveraging, also tightens liquidity if not matched by sustained OCF. Overall, the balance sheet is acceptable from a liquidity standpoint but would benefit from further deleveraging to reduce refinancing and interest-rate sensitivity.

Cash Flow Quality

Earnings quality appears mixed to cautious: OCF of ¥194m versus a net loss of ¥16m indicates that cash generation outpaced accounting earnings this period, likely via working capital release and non-cash charges (D&A ¥141m). The OCF/Net Income ratio (-12.1x) is inflated by the small negative denominator and is not a stable indicator; directionally it implies better cash conversion than earnings suggest. Free cash flow cannot be reliably assessed because investing cash flow and capex are unreported (shown as 0); thus, the reported FCF figure of 0 should be treated as not available. Working capital management appears supportive in the period given positive OCF despite minimal operating profit; inventory at ¥4.84bn highlights the need to maintain turnover to avoid future OCF reversals. Non-operating items contributed to ordinary income, but their cash nature is unclear; reliance on such items increases cash flow volatility. Sustainability of OCF will depend on maintaining gross margins and preventing rebuilds of receivables or inventory.

Dividend Sustainability

The company paid no dividend (DPS ¥0; payout ratio 0%) for the period. Given a small net loss and weak operating profitability, retaining earnings and cash is consistent with balance-sheet preservation. FCF coverage cannot be evaluated because capex/investing cash flows are unreported; therefore, the stated FCF coverage of 0x should be considered not available. With interest coverage below 1x on an operating basis and leverage at 2.35x debt-to-equity, reinstatement or increase of dividends would likely hinge on a sustained improvement in operating margins and OCF. The near-term dividend policy outlook appears conservative until profitability normalizes and leverage is reduced.

Risk Assessment

Business Risks:

• Thin structural margins (operating margin ~0.03%) increase sensitivity to cost inflation and pricing pressure.
• Dependence on non-operating income to lift ordinary income, which may not be repeatable.
• Exposure to construction/DIY cycles and housing-related demand in Japan.
• Inventory management risk; potential OCF volatility if inventory or receivables rebuild.
• Supplier and customer concentration risk typical of wholesale channels (information not disclosed but common in sector).
• Competitive pricing pressure from larger distributors and e-commerce channels.

Financial Risks:

• Elevated leverage (debt-to-equity 2.35x; leverage 3.03x) constraining financial flexibility.
• Weak operating interest coverage (~0.8x) raises refinancing and rate sensitivity risk.
• Potential cash flow strain if working capital tailwinds reverse.
• Tax and extraordinary items causing volatility between ordinary income and net income.
• Limited buffer from EBITDA (0.4% margin) to absorb shocks.

Key Concerns:

• Sustainability of positive OCF with minimal operating profit.
• Ability to improve core operating margin above 1% through pricing and SG&A control.
• Deleveraging trajectory amid financing outflows and no dividend.
• Reliance on non-operating gains to support earnings.
• Data gaps (cash balance, investing cash flows) that obscure true liquidity headroom.

Investment Implications

Key Takeaways:

• Topline stable (+0.9% YoY) but profitability remains extremely thin with OI of ¥10m.
• Ordinary income exceeds operating income, pointing to non-operating reliance.
• OCF positive at ¥194m despite a small net loss; cash generation supported by working capital.
• Leverage is elevated (D/E 2.35x), and operating interest coverage is below 1x.
• Liquidity adequate (current ratio 130%, quick ratio 109%) with ¥6.74bn working capital.
• EBITDA margin 0.4% leaves limited cushion against shocks; margin expansion is critical.

Metrics to Watch:

• Gross margin and SG&A ratio progression; target sustained operating margin above 1%.
• Interest coverage (OI/interest) improving toward >2x.
• Inventory turnover days and receivables collection (working capital intensity).
• Mix of operating vs non-operating income in ordinary profit.
• OCF sustainability and capex once investing cash flows are disclosed.
• Leverage trajectory (debt-to-equity) and equity ratio approximation (~33%).

Relative Positioning: Within Japanese building-materials/hardware distributors, Sugita Ace shows comparable asset turnover but thinner operating margins and higher leverage than conservative peers, implying greater earnings and balance-sheet sensitivity in a low-margin, competitive market.

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
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