RHYTHM CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥16.58B
• Operating Income: ¥1.02B
• Net Income: ¥336M
• EPS: ¥223.84

Income Statement

Balance Sheet

Cash Flow Statement

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

Rhythm Co., Ltd. (TSE: 7769) reported FY2026 Q2 consolidated results under JGAAP showing modest top-line growth but a sharp recovery in profitability. Revenue rose 3.8% YoY to ¥16.58bn, while operating income surged 193% YoY to ¥1.02bn, indicating strong operating leverage and/or improved cost control. Gross profit of ¥3.22bn implies a gross margin of 19.4%, and operating margin expanded to 6.1%, both consistent with improved earnings efficiency. Ordinary income of ¥1.15bn exceeded operating income by ¥0.14bn, suggesting positive net non-operating contributions (likely FX gains, investment income, or subsidies) more than offsetting ¥24m in interest expense. Net income reached ¥1.81bn (+437.5% YoY), exceeding ordinary income by ~¥0.66bn, implying material extraordinary gains and/or tax effects (e.g., valuation allowance reversals), which should be treated as non-recurring. EBITDA was ¥1.64bn (9.9% margin), and interest coverage was a comfortable 42.4x, underscoring ample debt service capacity. On the balance sheet, total assets were ¥46.51bn and equity ¥31.57bn, implying an equity-to-asset ratio around 67.9% based on available totals, although the reported equity ratio field shows 0.0% (unreported in XBRL). Liquidity appears very strong with current and quick ratios of 447% and 330%, respectively, supported by sizeable working capital of ¥22.01bn. Operating cash flow was ¥1.42bn, representing 0.78x of net income, a reasonable but not flawless conversion given likely non-recurring gains in net income. Investing cash flow is shown as 0 (unreported), preventing a precise free cash flow calculation; the provided “FCF: 0” should be viewed as data-limited rather than actual zero. Financing cash inflow of ¥2.27bn indicates net capital raising or debt inflows, but details are not disclosed. Dividends are shown as DPS 0 and payout 0% (unreported), so dividend policy assessment requires caution despite improved earnings. DuPont analysis yields ROE of 5.73%, driven by a 10.91% net margin, asset turnover of 0.357x, and modest leverage of 1.47x. Overall, Rhythm’s core profitability is improving, cash generation is positive, leverage is low, and liquidity is ample, but the outsized gap between net and ordinary income highlights non-recurring factors. Near-term outlook hinges on sustaining gross margin gains, managing inventories, and normalizing below-the-line items. Key data limitations include unreported equity ratio, cash balance, investing cash flows, and share data, necessitating prudence in trend interpretation.

Profitability Analysis

ROE decomposition: Reported ROE is 5.73%, derived from a 10.91% net profit margin, 0.357x asset turnover (¥16.58bn/¥46.51bn), and 1.47x financial leverage (assets/equity of ¥46.51bn/¥31.57bn). Margin quality: Operating margin is 6.1% (¥1.018bn/¥16.584bn) versus a gross margin of 19.4%, implying SG&A and other opex at ~13.3% of sales; EBITDA margin is 9.9%, indicating a moderate gap between EBITDA and EBIT driven by ¥622m depreciation. Ordinary income exceeds operating income by ~¥135m, indicating net positive non-operating contributions; interest expense is low at ¥24m, so non-operating gains are likely the driver. Net income exceeds ordinary income by ~¥657m with taxes of ¥230m reported; the effective tax rate field shows 0.0% (unreported), and the magnitude of the net/ordinary gap suggests extraordinary gains and/or tax effects, lowering the quality of bottom-line growth. Operating leverage: With revenue up 3.8% YoY and operating income up 193% YoY, fixed-cost leverage and/or mix improvements likely contributed materially. Sustainability will depend on maintaining gross margin and restraining SG&A. Interest coverage is strong at 42.4x (EBIT/interest), reflecting low financial burden and resilience to rate changes.

Growth Assessment

Revenue grew 3.8% YoY to ¥16.58bn, a steady pace consistent with incremental volume or mix improvements rather than a broad demand surge. Operating income growth of +193% YoY indicates a significant normalization from a weak base and/or execution on cost initiatives; this outsized rebound is unlikely to recur at the same rate. Profit quality: Ordinary income (¥1.15bn) was close to operating income, implying core profits are the primary driver of improvement, but the step-up to net income (¥1.81bn) likely includes non-recurring gains and/or tax items. EBITDA growth and margin (9.9%) support an improving underlying earnings trajectory, but the OCF/NI ratio of 0.78 points to only moderate cash conversion, consistent with one-offs inflating net income. Outlook: If gross margin can be maintained near ~19–20% and SG&A discipline continues, mid-single-digit sales growth could translate into double-digit operating profit growth. However, normalization of extraordinary items could compress net income growth relative to operating income. Watch for FX sensitivity, pricing power, and backlog/order trends in core segments (timepieces, precision components, automotive/industrial).

Financial Health

Liquidity: Current ratio 446.6% and quick ratio 329.5% indicate substantial short-term buffers; inventories are ¥7.44bn within current assets of ¥28.36bn, suggesting manageable inventory intensity. Working capital is ¥22.01bn, providing operational flexibility. Solvency: Total liabilities of ¥13.78bn vs equity of ¥31.57bn imply a low debt-to-equity ratio of 0.44x and an implied equity ratio of ~67.9% based on totals (despite the equity ratio field being unreported). Interest expense is minimal (¥24m), and coverage is very strong (42.4x). Capital structure: Leverage is conservative (financial leverage 1.47x), leaving capacity for investment if needed. Data limitations: Cash & equivalents is shown as 0 (unreported), so net cash position cannot be confirmed; similarly, details of debt composition and maturities are not disclosed.

Cash Flow Quality

Earnings quality: OCF of ¥1.419bn versus net income of ¥1.810bn yields an OCF/NI ratio of 0.78, acceptable but indicative of lower cash conversion than headline earnings—consistent with non-operating or extraordinary items boosting net income. Free cash flow: Investing CF is shown as 0 (unreported), so calculated FCF is displayed as 0 in the dataset; in substance, true FCF cannot be determined without capex and investment detail. Working capital: With inventories at ¥7.44bn and large working capital balances, cash generation may be sensitive to inventory turns and receivables collection; absent detailed breakdowns, specific drivers of OCF cannot be isolated. Depreciation of ¥622m against EBITDA suggests ongoing capital intensity, implying that underlying maintenance capex could be material even if not disclosed here.

Dividend Sustainability

The dataset shows DPS at 0.00 and payout ratio at 0.0% (unreported), so no definitive dividend information is available. Coverage: With positive OCF and improved profitability, prospective capacity to fund dividends appears adequate in principle, but the presence of non-recurring items in net income and unknown capex requirements limit visibility on sustainable FCF coverage. Policy outlook: Without explicit guidance or historical payout behavior in the dataset, we cannot infer policy direction; monitoring announcements and board resolutions will be necessary. If the company resumes or raises dividends, assessing payout against OCF (not net income) and maintenance capex will be key.

Risk Assessment

Business Risks:

• Demand cyclicality in timepieces, precision components, and industrial/auto end-markets
• Foreign exchange volatility impacting export competitiveness and translation of overseas results
• Raw material and component cost inflation pressuring gross margin
• Supply chain disruptions affecting delivery schedules and inventory levels
• Customer concentration or order volatility in OEM channels
• Technology substitution and competition in timing/precision devices

Financial Risks:

• Earnings reliance on non-operating/extraordinary items in the period, reducing net income quality
• Working capital swings (inventory and receivables) affecting OCF conversion
• Potential capex requirements not disclosed, creating uncertainty for FCF
• Interest rate changes modestly affecting low but non-zero interest expense
• FX-related valuation or hedging impacts on non-operating income

Key Concerns:

• Net income significantly above ordinary income, indicating one-off gains and limited repeatability
• Investing cash flows unreported, obscuring capex and true free cash flow
• Cash & equivalents unreported, preventing assessment of net cash and liquidity buffers beyond ratios
• Equity ratio field unreported despite strong implied equity base, complicating peer comparisons

Investment Implications

Key Takeaways:

• Core profitability improved materially, with operating margin at 6.1% and EBITDA margin at 9.9%
• Net income outperformance vs ordinary income suggests non-recurring boosts; focus on operating metrics
• Balance sheet is conservatively leveraged with implied equity ratio ~68% and D/E ~0.44x
• Liquidity is ample (current ratio ~4.5x; quick ratio ~3.3x), supporting operational resilience
• Cash conversion is decent but below net income (OCF/NI 0.78), pointing to normalization risk
• Positive financing CF (+¥2.27bn) without detail warrants scrutiny of funding sources and uses

Metrics to Watch:

• Gross margin and operating margin trajectory versus prior periods
• OCF/NI ratio and working capital turns (inventory days, receivable days)
• Non-operating and extraordinary items (gap between ordinary and net income)
• Capex and investing cash flows to assess sustainable FCF
• FX sensitivity and hedging impact on ordinary income
• Order backlog and segment mix (timepieces vs components) for revenue visibility

Relative Positioning: Within Japanese precision device and electronic component peers, Rhythm exhibits conservative leverage, strong liquidity, and recovering operating profitability; however, its bottom-line outperformance appears more reliant on non-recurring items this quarter compared with peers emphasizing steady core profit growth.

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