Advance Create Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.41B
• Operating Income: ¥18M
• Net Income: ¥-1.18B
• EPS: ¥-0.46

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

FY2026 Q2 marked a sharp operational turnaround for Advance Create, with operating income returning to a small profit of 0.18bn yen from a loss a year ago, though bottom line remained slightly negative due to heavy non-operating and extraordinary items. Revenue rose 9.2% YoY to 3.406bn yen, while operating income improved by 0.629bn yen versus the prior period’s -0.611bn yen. Gross margin stood at 162.4% (55.33/34.06), compressing by roughly 3,360 bps from last year’s level, reflecting mix and accounting effects in the agency/reinsurance structure. Operating margin expanded by about 2,013 bps to 0.5% (from -19.6%), driven by substantial SG&A discipline relative to gross profit. Ordinary margin improved by roughly 2,173 bps to -0.5%, as higher interest expense and FX losses offset gains in operating performance. Net margin improved roughly 3,680 bps to -0.9%, supported by smaller net losses and modest tax expense. Non-operating income of 0.59bn yen (notably investment securities gains of 0.93bn yen and interest income of 0.39bn yen) was outweighed by non-operating expenses of 3.41bn yen (including FX losses of 0.35bn yen and interest expense of 0.24bn yen). Extraordinary loss of 5.90bn yen, including 2.24bn yen impairment and store closure-related losses, pushed profit before tax to -11.59bn yen. Cash flow quality was weak: operating cash flow of -3.904bn yen diverged materially from net income of -0.031bn yen, as receivables growth and other working capital outflows consumed cash. Leverage remains extreme with D/E at 21.84x, and short-term borrowings comprise 96.9% of debt, elevating refinancing risk despite cash/short-term debt coverage of 1.15x. Segment performance was polarized: Media Agency and ASP segments delivered solid positive operating income, while Insurance Agent (64.4% of sales) posted a large operating loss. Relative to full-year guidance (sales 79.5bn, OP 6.5bn), progress is mixed—sales at 42.8% are modestly behind a typical 50% Q2 run-rate, while operating and net income are significantly behind. To meet guidance, H2 will need substantial operating leverage and reduced extraordinary drag. The equity base remains thin (equity 0.447bn yen, book value per share ~12.1 yen), amplifying sensitivity to performance and funding conditions. Overall, execution improved at the operating line, but earnings quality, leverage, and refinancing risk remain the key constraints on the near-term outlook.

Profitability Analysis

ROE decomposition (DuPont 3-factor): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-0.9%) × 0.384 × 19.83x ≈ -6.9%. The dominant driver of change YoY is Net Profit Margin, which improved from roughly -37.7% to -0.9% as operating results normalized and the scale of one-time losses shrank. Asset turnover at 0.384 remains low for a service/intermediation model with sizeable receivables and cash balances, offering limited leverage to ROE absent margin gains. Financial leverage at 19.83x is extremely high; while it mathematically boosts ROE in profitable periods, it magnifies downside when margins are thin or negative. Business drivers: SG&A discipline and stabilization in core agency operations lifted EBIT from a deep loss to breakeven-plus, while non-operating and extraordinary items still depressed below-OP lines. Sustainability: operating margin gains look partially sustainable if cost control holds and mix continues to favor profitable sub-segments (Media Agency, ASP), but extraordinary losses and FX/interest burdens are not structural supports and could recur if not addressed. Concerning trends include: SG&A (58.19) near the level of gross profit (55.33), leaving a razor-thin operating margin; rent expense at 8.36 (24.6% of revenue) and high commission fees weigh on operating leverage.

Growth Assessment

Top-line grew 9.2% YoY to 34.06, with growth concentrated outside the Insurance Agent segment where sales declined. Positive growth in ASP (+2.5%) combined with resilience in Reinsurance (-9.4%) and outperformance in Media Agency (-33.9% revenue but strong margin) indicates mix-driven profit support despite headline revenue volatility. Operating income improved to 0.18 from -6.11, demonstrating early benefits from cost control and portfolio focus. However, the path to scaled profitability requires continued mix shift toward higher-margin media/ASP and stabilization of Insurance Agent unit economics. Outlook: meeting full-year operating income guidance (6.5) requires significant H2 acceleration from a 2.8% progress rate at Q2; this implies back-half weighted execution, tighter expense discipline, and reduced extraordinary drag.

Financial Health

Liquidity is adequate but tight: current ratio 1.15x and quick ratio 1.15x are above 1.0 but below the 1.5x comfort threshold. Leverage is a critical concern: D/E is 21.84x and Debt/Capital 91.5%, well into high-yield territory. Short-term debt is 46.39 vs cash 53.39 (cash/short-term debt 1.15x), offering near-term coverage, but the short-term debt ratio is 96.9%, creating material refinancing risk. Interest-bearing debt totals 47.89, including long-term loans of 1.50 and bonds payable of 2.50 (with current portion 1.00), underscoring maturity concentration. Working capital is positive at 12.15, but receivables growth (26.67) and high deposits/other liabilities can pressure liquidity. Notable balance sheet shifts: cash +43.6bn% YoY reflects equity financing (proceeds ~69.02) and debt inflows; retained earnings improved to -12.68 from -88.26 on narrowed losses and capital actions; short-term loans +70.7% heighten rollover dependence; investment securities -43.5% and intangible assets -31.4% reflect portfolio trimming and lower software balances; accounts receivable +33.1% ties more cash to working capital.

Notable B/S Changes

Cash & Deposits: +43.45bn (+436.9%) - Bolstered by equity issuance (proceeds ~69.0) and incremental borrowing; enhances near-term liquidity but implies dilution and higher financial risk. Retained Earnings: +75.6bn (+85.6%) - Narrowed losses and capital actions improve deficit; equity base remains thin. Short-term Loans: +19.21bn (+70.7%) - Heavier reliance on short-term funding increases rollover risk. Investment Securities: -0.13bn (-43.5%) - De-risking or monetization of holdings; reduces market price exposure. PPE: -0.01bn (-42.8%) - Smaller asset base post rationalization; minimal impact on operations given asset-light model. Accounts Receivable: +6.63bn (+33.1%) - Working capital expansion supporting sales; weighs on OCF and elevates credit risk. Intangible Assets: -0.37bn (-31.4%) - Lower software and intangible balances; reflects impairment/amortization and reduced new investment.

Cash Flow Quality

Operating CF was -39.04 versus net income -0.31, indicating a substantial cash earnings gap driven by working capital outflows (notably receivables increase of 6.64 and other liabilities movements). OCF/EBITDA was -46.4x, highlighting weak cash conversion from operating activities. Free cash flow was -40.40 after minimal capex (-0.04) and moderate intangible purchases (-2.61 in CF details), implying external financing is required to fund operations and obligations. No clear signs of working capital manipulation are evident from disclosures, but the magnitude of receivables growth and reliance on short-term funding warrant close monitoring. Given interest expense and lease obligations, sustaining negative OCF would strain liquidity absent continued access to capital markets.

Dividend Sustainability

Q2 DPS was 0 yen. With negative EPS and negative free cash flow (-40.40), a dividend payout would not be covered by internally generated cash. The priority near term is restoring consistent operating cash generation and rebuilding earnings capacity toward the full-year guidance before considering distributions.

Risk Assessment

Business risks include Segment concentration: Insurance Agent accounts for 64.4% of revenue while generating a large operating loss (-6.87), exposing group earnings to execution risk in the largest business line., Execution risk in restructuring: impairment (2.24) and store closure losses indicate ongoing footprint and asset optimization with uncertain payoff timing., Revenue mix volatility across Media and Reinsurance segments may cause margin swings despite positive contributions..

Financial risks include High leverage: D/E 21.84x and Debt/Capital 91.5% elevate solvency risk and amplify earnings volatility., Refinancing risk: short-term debt ratio 96.9% with cash/short-term debt 1.15x requires continuous market access., Weak cash conversion: OCF -39.04 and OCF/EBITDA -46.4x increase reliance on external funding., Interest coverage pressure: interest coverage 0.75x indicates limited capacity to absorb rate or earnings shocks., Negative retained earnings and thin equity (0.447) reduce loss-absorption capacity..

Key concerns include Ability to deliver a substantial H2 profit inflection to meet operating income guidance (6.5) from a 2.8% H1 progress rate., Managing receivables growth (26.67) to improve OCF without sacrificing top-line momentum., Containing extraordinary and non-operating losses (5.90 extraordinary, 3.41 non-operating expenses) that erode below-OP lines..

Investment Implications

Key takeaways include Operating income swing to positive (0.18) is encouraging but not yet sufficient given financing and extraordinary drags., Leverage and refinancing risk are the principal constraints; deleveraging or terming out debt would significantly improve resilience., Profit pool currently resides in Media Agency (OI 1.90) and ASP (OI 1.24); scaling these while fixing Insurance Agent unit economics is key., Cash conversion must normalize via tighter working capital management to reduce dependence on external funding., H2 delivery versus guidance is the critical catalyst; variance will likely drive share price direction..

Metrics to watch include H2 operating margin trajectory vs. full-year OI target (6.5), OCF trend and receivables days (DSO 286), Debt mix and tenor (short-term debt ratio, cash/short-term debt coverage), Interest coverage vs. rising rate environment, Extraordinary/non-operating items frequency and size (impairment, FX, securities gains/losses).

Regarding relative positioning, Within Japanese insurance intermediation/media-reinsurance hybrids, Advance Create exhibits stronger operational recovery at the EBIT line than last year but substantially weaker balance sheet resilience and cash conversion versus peers with lower leverage and steadier underwriting/fee cash flows.