Denkyo Group Holdings Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥24.70B
• Operating Income: ¥-146M
• Net Income: ¥-173M
• EPS: ¥-27.88

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

FY2026 Q2 was a mixed quarter with top-line softness and an operating loss, but near-breakeven ordinary income thanks to non-operating gains. Revenue declined 3.3% YoY to 247.0, reflecting a subdued demand backdrop in electronics distribution. Gross profit was 49.5, implying a 20.0% gross margin, while SG&A was 51.0, leaving operating income at -1.46 (operating margin -59 bps). Ordinary income improved to a slim positive 0.01, helped by 1.55 in non-operating income, mainly dividends of 0.97. Net income was a loss of -1.73 (net margin -70 bps), weighed by a tax charge of 1.37 despite the pre-tax loss. The operating margin sits at -59 bps versus an SG&A ratio of 2,064 bps and gross margin of 2,004 bps, indicating 60 bps of negative operating spread. Non-operating items added roughly +63 bps of margin benefit (1.55/247.02), offset by non-operating expenses and taxes. Ordinary margin was essentially flat at +0.4 bps, highlighting fragile profitability. Balance sheet strength remains a key positive: current ratio 301.5%, quick ratio 207.2%, and D/E 0.33x. Working capital is ample at 124.6, with cash of 42.9, receivables 68.8, and inventories 58.3 versus payables 46.5. ROE is -0.6% and ROIC -0.6%, both below the cost of capital, underscoring inadequate capital efficiency. Interest coverage is negative (-48.7x) due to the operating loss, although absolute interest expense is low (0.03). Cash flow data were not disclosed, limiting earnings quality assessment and dividend coverage analysis. The tax line was adverse (effective rate -391%), likely reflecting non-recurring or timing effects that should normalize if profitability recovers. Forward-looking, sustaining the dividend income stream and tightening SG&A relative to gross profit are pivotal levers to reach consistent breakeven. The company’s strong liquidity provides time to execute efficiency improvements, but restoring positive operating margin is the core challenge.

Profitability Analysis

ROE decomposition: ROE (-0.6%) = Net Profit Margin (-0.7%) × Asset Turnover (0.693x) × Financial Leverage (1.33x). The most material drag is the net profit margin, driven by a slight operating loss (operating margin -0.59%) and an adverse tax charge despite a pre-tax loss. Business drivers: revenue fell 3.3% YoY, gross margin printed 20.0%, and SG&A ratio was 20.6%, producing a small operating deficit; non-operating income (mainly dividend income of 0.97) bridged operating loss to near-zero ordinary profit, but taxes swung results back to a net loss. Financial leverage is conservative (equity/asset ~75%), so leverage contributes little to ROE—this is fundamentally a margin issue, not a balance-sheet one. Sustainability: gross margin around 20% appears reasonable for an electronics distributor, but with SG&A marginally higher than gross profit, achieving structural cost efficiency (procurement synergies, logistics optimization, and headcount/overheads) is essential; non-operating dividend income is supportive but not a substitute for operating earnings. Concerning trend flags: SG&A exceeded gross profit (50.98 vs 49.51), implying negative operating leverage at current revenue levels; revenue contracted while costs remained sticky, a sign of inadequate cost flex. We also note reliance on non-operating items to achieve breakeven ordinary income, which elevates earnings volatility if affiliate dividends fluctuate.

Growth Assessment

Revenue declined 3.3% YoY to 247.0, implying soft volume or pricing in electronics components and related segments. Operating income improved sharply YoY (+418.5%) but remained negative at -1.46, indicating progress but insufficient scale to cover fixed costs. Ordinary income of 0.01 (+136.1% YoY) shows the lift from non-operating sources, primarily dividend income (0.97). With gross margin at 20.0% and SG&A at 20.6% of sales, revenue growth without SG&A discipline will not improve profits meaningfully; structural cost actions are required. The profit mix is skewed toward non-operating dividends, raising questions about recurring operating earnings power. Outlook hinges on demand normalization in electronics, inventory cycles at customers, and FX-driven procurement conditions; absent a top-line recovery or cost resets, profitability will remain fragile. No segment data were provided, limiting assessment of growth drivers by end-market.

Financial Health

Liquidity is robust with current ratio 301.5% and quick ratio 207.2%; no warning thresholds breached (Current Ratio >> 1.0). Solvency is conservative: D/E 0.33x and long-term loans of 11.09 against total equity of 268.77. Interest-bearing debt in total was not disclosed, but interest expense is minimal (0.03), suggesting modest leverage. Maturity mismatch risk appears low: current assets of 186.37 comfortably cover current liabilities of 61.82, and cash plus receivables alone (111.68) exceed accounts payable (46.47). No off-balance sheet obligations were disclosed in the dataset. Equity accounts are solid (retained earnings 199.19), providing a cushion to absorb short-term losses.

Cash Flow Quality

Operating cash flow, investing cash flow, and financing cash flow were not disclosed; therefore, OCF/Net Income and FCF cannot be assessed. Earnings quality flags cannot be quantified; we cannot confirm whether the small operating loss masked positive OCF via working capital release, or vice versa. Given AR (68.79) and inventories (58.27) are sizable versus revenue run-rate, working capital management is a potential swing factor, but without period-on-period changes we cannot identify manipulation or timing effects. Dividend income (0.97) is cash-like but subject to investee payout policies and may not align with the company’s operating cash cycle.

Dividend Sustainability

Dividend payments were not disclosed; calculated payout ratio is shown as -154.1% due to net loss, but DPS itself is unreported. Without OCF and FCF, coverage cannot be determined. Balance sheet liquidity suggests near-term capacity to maintain dividends if modest, but sustainability over the medium term depends on restoring positive operating cash flow and narrowing the SG&A gap. Policy outlook cannot be inferred from the provided data; if dividends are maintained, they would currently rely on balance sheet resources and non-operating cash inflows rather than operating earnings.

Risk Assessment

Business Risks:

• Continued revenue softness in electronics distribution leading to sub-scale operations
• SG&A rigidity relative to gross profit, sustaining negative operating leverage
• Dependence on non-operating dividend income to achieve near-breakeven ordinary profit
• Adverse tax expense despite losses, introducing earnings volatility

Financial Risks:

• Negative interest coverage (-48.7x) driven by operating loss, though absolute interest cost is low
• ROIC at -0.6% well below cost of capital, implying value dilution if prolonged
• Potential working capital swings (AR and inventories) could pressure cash if demand weakens

Key Concerns:

• Operating margin at -59 bps with SG&A exceeding gross profit
• Tax normalization uncertainty after a loss-making quarter
• Limited disclosure of cash flows impedes assessment of earnings quality and dividend coverage

Investment Implications

Key Takeaways:

• Top line contracted 3.3% YoY; profitability remains fragile with an operating margin of -0.59%
• Ordinary income roughly breakeven, supported by 1.55 of non-operating income (dividends 0.97)
• Balance sheet is strong (current ratio 3.0x, D/E 0.33x), providing execution runway
• Capital efficiency is weak (ROE -0.6%, ROIC -0.6%), requiring margin improvement to meet WACC
• Interest burden is small, but coverage is negative due to operating loss

Metrics to Watch:

• Gross margin versus SG&A ratio (target: SG&A < gross profit to restore positive OPM)
• Operating margin progression (bps) and ordinary margin excluding dividends
• Non-operating income stability (dividend income from investment securities)
• Effective tax rate normalization as profitability recovers
• Working capital turns: AR days and inventory days; operating cash flow trend
• Revenue trajectory by end-market and FX sensitivity (USD/JPY) on procurement

Relative Positioning: Versus domestic electronics trading peers, Denkyo Group exhibits weaker profitability (negative OPM, sub-zero ROIC) but stronger liquidity and moderate leverage; closing the SG&A gap to gross profit is the key differentiator needed to approach peer-level returns.

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