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

Financial Highlights

• Net Sales: ¥24.70B
• Operating Income: ¥-146M
• Net Income: ¥-143M
• 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

Denkyō Group Holdings (81440) reported FY2026 Q2 consolidated results under JGAAP showing a modest top-line decline and materially improved, albeit still negative, operating profitability. Revenue was ¥24.7bn, down 3.3% YoY, with gross profit of ¥4.71bn and a gross margin of 19.1%, indicating relatively stable product-level economics amid softer demand. Operating income was a ¥146m loss, an improvement of 418.5% YoY, signaling significant cost discipline or mix improvements even as sales contracted. Ordinary income essentially broke even at ¥1m, suggesting non-operating factors (e.g., financial income/costs) partly offset operating losses. Net income was a ¥173m loss (EPS: -¥27.88), a 14.3% YoY improvement, but still pressured by tax expense despite pre-tax weakness. The computed tax burden appears atypical: with net loss but income taxes of ¥135m, effective tax dynamics likely reflect valuation allowance movements, non-deductible items, or subsidiary-level taxes. Liquidity is strong with a current ratio of 286% and quick ratio of 211%; working capital stands at ¥12.70bn. The balance sheet is conservative: total liabilities are ¥9.31bn versus total equity of ¥26.88bn, implying a debt-to-equity of 0.35x and an equity ratio (computed) of roughly 75%, despite the reported equity ratio field being unpopulated. Asset turnover is 0.693x (TTM not available; using period data), and financial leverage is modest at 1.33x, resulting in a calculated ROE of -0.64%. Interest expense is only ¥10m, and while interest coverage using EBIT is negative (-14.6x) due to operating loss, debt service risk appears low given the modest liability load. Inventory of ¥5.10bn equates to roughly 45 days of COGS (half-year basis), not signaling acute overstocking. Cash flow statements were not disclosed (reported as zero), limiting direct assessment of operating and free cash flow quality. Dividend per share is reported as zero for the period, consistent with a cautious stance given negative earnings and undisclosed cash flows. Overall, the company exhibits improving profitability trends, robust liquidity, and low leverage, but near-term earnings remain slightly loss-making, and the absence of cash flow disclosures constrains conviction on earnings quality and dividend capacity. The forward focus should be on sustaining gross margin, translating cost control into positive operating margin, and confirming cash conversion once cash flow data become available. We acknowledge data limitations where certain items show as zero due to non-disclosure rather than true zeros.

Profitability Analysis

ROE decomposition (DuPont): net profit margin -0.70% (net income -¥173m on ¥24.70bn revenue), asset turnover 0.693x (revenue/total assets), and financial leverage 1.33x (assets/equity) yield a calculated ROE of -0.64%. Operating margin is -0.59% (operating income -¥146m on revenue ¥24.70bn), an improvement YoY from a larger loss, indicating operating leverage beginning to work positively as costs adjust. Gross margin of 19.1% suggests product/service economics remain intact despite revenue decline; the main drag is operating expense load. Implied SG&A and other operating costs approximate ¥4.86bn (gross profit ¥4.71bn minus operating income -¥0.15bn), indicating overhead still slightly exceeds gross profit. Ordinary income near breakeven implies financial and non-operating items offset part of the operating deficit. Interest expense is only ¥10m, so financing cost is not a material headwind; profitability is primarily an operating issue. The mismatch between negative pre-tax profit and ¥135m tax expense depresses bottom-line margin, pointing to non-recurring or structural tax factors rather than core operations. With modest leverage, positive operating leverage should be meaningful when revenue stabilizes or grows; small improvements in gross profit or SG&A efficiency could swing to positive operating income.

Growth Assessment

Revenue declined 3.3% YoY to ¥24.70bn, reflecting softer demand or mix headwinds; no segment disclosures are available to attribute the decline. The firm improved operating loss by 418.5% YoY, implying a credible cost response and/or mix optimization despite top-line pressure. Gross margin at 19.1% looks stable; absent a notable deterioration, margin resilience supports earnings normalization when volumes recover. Ordinary income at ¥1m indicates near-breakeven at the total profit level, a constructive sequential trend. Net loss narrowed to ¥173m, with tax expense the main divergence factor; excluding unusual tax effects, underlying profit likely trended closer to breakeven. Outlook hinges on demand recovery in key end-markets and continued cost discipline; with low financial leverage, the company can prioritize margin repair over volume at any cost. Without cash flow disclosure, we cannot validate the sustainability of cost actions via cash conversion; working capital behavior will be key in 2H. Near-term growth quality will depend on inventory normalization and maintaining pricing. The medium-term path to growth appears to be margin-led rather than volume-led, given operating leverage and low interest burden.

Financial Health

Liquidity is strong: current assets ¥19.53bn vs current liabilities ¥6.83bn yield a current ratio of 285.9% and quick ratio of 211.3%; working capital totals ¥12.70bn. Solvency is robust: total liabilities ¥9.31bn against total equity ¥26.88bn imply a debt-to-equity of 0.35x. While the reported equity ratio field is blank, the computed equity ratio is approximately 75.4% (equity/total assets). Interest expense is only ¥10m, suggesting limited debt service exposure; negative EBIT drives a formal interest coverage of -14.6x but practical refinancing risk appears low. Asset base totals ¥35.63bn with inventory of ¥5.10bn; inventory days are roughly 45 on a half-year COGS basis, not signaling acute stress. Overall, the balance sheet is conservative with ample liquidity to absorb short-term volatility and fund working capital.

Cash Flow Quality

Operating, investing, and financing cash flows are not disclosed for the period (reported as zero in XBRL placeholders), preventing direct assessment of OCF, FCF, and cash conversion. Accordingly, OCF/net income and FCF figures shown as zero should not be interpreted as true performance. Earnings quality must be inferred indirectly: ordinary income near breakeven and stable gross margins suggest core profitability is close to positive, but the negative operating income indicates incomplete flow-through. Working capital appears manageable with inventories around 45 days of COGS; receivables and payables data are not provided. Without OCF, we cannot validate whether the improvement in operating loss is mirrored by cash generation; 2H disclosure will be critical to assess accruals vs cash. Capex cannot be assessed given the absence of investing CF and depreciation disclosure (D&A field is undisclosed).

Dividend Sustainability

Annual DPS is reported as ¥0.00 for the period; with negative earnings and undisclosed cash flows, a conservative dividend stance is consistent with preserving balance sheet strength. Payout ratio metrics are not meaningful given negative EPS and non-disclosed cash flows. On balance sheet metrics alone, the company has capacity (low leverage, strong liquidity), but near-term distributable capacity hinges on turning operating profit positive and demonstrating positive OCF. FCF coverage cannot be assessed without OCF and capex data. Policy outlook likely prioritizes internal reinvestment and margin restoration over distributions until earnings visibility improves.

Risk Assessment

Business Risks:

• Demand softness evidenced by a 3.3% YoY revenue decline could persist, pressuring scale benefits.
• Operating leverage cuts both ways; small volume or price declines can re-widen operating losses.
• Potential pricing pressure or unfavorable mix could compress the 19.1% gross margin.
• Supply chain or procurement cost volatility may affect COGS and inventory normalization.
• Limited disclosure (e.g., segments, cash flows) reduces transparency into drivers and sustainability.

Financial Risks:

• Negative operating income yields a formal negative interest coverage (-14.6x), though absolute interest is low.
• Tax expense of ¥135m despite a pre-tax loss introduces bottom-line volatility.
• Cash flow uncertainty due to non-disclosed OCF/FCF and D&A; capex needs are unknown.
• Potential working capital draw if sales recover abruptly could temporarily weigh on cash.

Key Concerns:

• Sustaining gross margin while restoring positive operating margin.
• Clarifying the drivers of tax expense amid losses and its outlook.
• Visibility on cash generation and capex to assess true free cash flow.

Investment Implications

Key Takeaways:

• Top line declined 3.3% YoY to ¥24.70bn, but operating loss narrowed sharply (-¥146m).
• Gross margin held at 19.1%, supporting a path to operating breakeven with modest cost progress.
• Ordinary income was essentially breakeven (¥1m), offsetting part of the operating deficit.
• Balance sheet remains conservative with computed equity ratio ~75% and D/E 0.35x.
• Liquidity is ample (current ratio 286%, quick ratio 211%), reducing near-term funding risk.
• Tax expense (¥135m) against a loss distorted net margin and is a key item to monitor.
• Cash flow and D&A are undisclosed; confirmation of OCF positivity is necessary for conviction.

Metrics to Watch:

• Operating margin progression (targeting sustained positive OI).
• Gross margin stability versus input cost and pricing dynamics.
• Working capital turns: inventory days, receivable and payable days (when disclosed).
• OCF and FCF once reported; capex intensity and D&A run-rate.
• Effective tax rate normalization and sources of tax expense.
• Revenue trajectory and mix by segment/geography (when disclosed).

Relative Positioning: Within Japanese electronics/industrial distribution peers, the company exhibits stronger balance sheet conservatism (low leverage, high liquidity) but lags on current profitability (slight operating loss). If margins normalize, the low financial leverage provides room for faster earnings recovery relative to more leveraged peers; however, limited cash flow disclosure currently constrains comparability.

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