STARTS CORPORATION INC. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥118.58B
• Operating Income: ¥16.02B
• Net Income: ¥11.04B
• EPS: ¥224.96

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

Verdict: Solid top-line and operating performance, but net profit declined on a higher tax burden and less favorable below-OP items, leading to mixed headline optics. Revenue rose 8.9% YoY to 1,185.8, reflecting healthy underlying demand across core businesses. Gross profit reached 387.6 with a gross margin of 32.7%, indicating resilient pricing and mix. Operating income increased 6.3% YoY to 160.2, with operating margin at 13.5%, implying modest margin compression versus last year. Ordinary income grew a stronger 11.4% YoY to 165.5 as net non-operating income (income 9.9 minus expenses 4.6) provided a tailwind. Despite this, net income fell 9.9% YoY to 108.4, with net margin at 9.1%, pressured by a 34.5% effective tax rate. Operating margin contracted by roughly 32 bps YoY (from ~13.8% to 13.5%). Net margin compressed by about 189 bps (from ~11.0% to 9.1%) on tax normalization and mix. Earnings quality is adequate but not pristine: OCF of 87.4 implies an OCF/NI of 0.81x, slightly below the >1.0x high-quality threshold. Liquidity remains strong with a current ratio of 169% and ample cash (934.1), limiting short-term funding risk. Leverage is manageable with a reported D/E of 0.81x and very strong interest coverage of 53x. ROE stands at 5.8% (DuPont: 9.1% margin × 0.353 turnover × 1.81x leverage), while ROIC is 7.3%, within management target range. Capex outflows were 51.1, and financing CF was -64.4, suggesting disciplined balance sheet management alongside shareholder returns. Dividend payout ratio is an estimated 59.8%, roughly in line with sustainability thresholds, though FCF coverage is not fully verifiable due to limited investing CF disclosure. Forward-looking, stable recurring revenues and a target-level ROIC support medium-term resilience, but earnings growth will hinge on margin discipline, tax rate normalization, and cost control. Key watch points are OCF conversion, SG&A efficiency, and the trajectory of the effective tax rate into 2H. Overall, the quarter confirms operational steadiness with caution on earnings quality and net profitability optics.

Profitability Analysis

Step 1 (DuPont ROE): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 9.1% × 0.353 × 1.81 ≈ 5.8%. Step 2 (Component changes): The largest adverse change was in net profit margin (net down 9.9% YoY vs revenue up 8.9%), while asset turnover was broadly stable and leverage modest at 1.81x. Step 3 (Business drivers): Net margin compression reflects a higher effective tax rate (34.5%) and a less favorable below-OP mix despite improved ordinary income; operating margin also eased as revenue growth outpaced operating income growth (8.9% vs 6.3%). Step 4 (Sustainability): Operating profitability appears resilient given a 13.5% OP margin, suggesting core earnings are sustainable; however, the elevated tax rate may normalize over time, offering potential net margin recovery, while non-operating items (e.g., interest/dividends/other) are less predictable. Step 5 (Concerning trends): SG&A detail is undisclosed, but the fact that operating income grew slower than revenue indicates mild operating leverage pressure; monitor if SG&A growth is running above revenue growth and whether inflationary costs (labor, outsourcing, materials) are diluting margins.

Growth Assessment

Revenue growth of 8.9% YoY to 1,185.8 indicates healthy demand and likely stable recurring revenue streams in core operations. Operating income rose 6.3% to 160.2, trailing revenue growth and implying limited operating leverage this quarter. Ordinary income outpaced OP (+11.4% YoY to 165.5) thanks to a positive net non-operating contribution, but this is less dependable than operating drivers. Net income fell 9.9% to 108.4 on a 34.5% effective tax rate and net margin compression, masking underlying operational steadiness. EBITDA was 193.9 with a 16.3% margin, supporting the view that cash earnings remain solid. With ROIC at 7.3% (near the 7–8% target band), investment efficiency is acceptable, though improvements above 8% would be desirable for value accretion. Outlook-wise, sustaining high-single-digit revenue growth will require continued project execution and resilient leasing/management fees; profit growth depends on stabilizing the tax rate and restoring operating leverage. Near-term catalysts include cost discipline to protect OP margins, and potential interest expense benefits if funding costs remain manageable. On balance, growth is sustainable if cost control improves and the tax rate normalizes, but reported EPS growth may lag revenue absent margin recovery.

Financial Health

Liquidity: Current ratio 169.3% and quick ratio 169.3% are comfortably above benchmarks; no warning (both >1.0/1.5). Working capital is 635.9, supported by cash and deposits of 934.1, offering strong short-term flexibility. Solvency: Total liabilities 1,499.7 vs equity 1,859.1; reported D/E is 0.81x (conservative vs 1.5x benchmark). Interest coverage is very strong at 53.0x, indicating low refinancing stress. Debt mix: Short-term loans are 61.9 and long-term loans 444.0; the predominance of long-term debt reduces near-term rollover risk. Maturity mismatch: Current assets (1,554.0) significantly exceed current liabilities (918.2), limiting liquidity risk; short-term loans are small relative to cash on hand. Off-balance sheet: No off-balance sheet obligations disclosed in the provided data. No explicit financial covenants are reported. Overall financial health is robust with ample liquidity and moderate leverage.

Cash Flow Quality

OCF was 87.4 versus net income of 108.4, yielding OCF/NI of 0.81x, slightly below the >1.0x high-quality threshold and warranting monitoring. The shortfall suggests working capital absorption or timing effects; with accounts receivable reported at 177.4 and inventories undisclosed, the precise driver is unclear. Indicative FCF, approximated as OCF (87.4) minus capex (51.1), is about 36.3; however, full investing CF details are unreported, so true FCF cannot be confirmed. Financing CF of -64.4 reflects debt service and/or shareholder returns; dividends and buybacks were not itemized. Interest coverage of 53x supports the view that cash interest is not a constraint. No obvious signs of aggressive working capital management are visible from the limited disclosure, but the OCF/NI ratio below 0.8–1.0 is a mild quality flag. Sustainability: If OCF normalizes toward NI in 2H and capex stays disciplined, cash generation should cover maintenance capex and ordinary dividends comfortably; any ramp in growth capex would tighten coverage.

Dividend Sustainability

Payout ratio is estimated at 59.8%, right at the upper bound of the sustainable range (<60%). With indicative FCF of ~36.3 (OCF minus capex), coverage of dividends cannot be precisely assessed due to lack of dividend cash outflow data, but the combination of strong liquidity (cash 934.1) and moderate leverage suggests capacity to maintain current distributions. Policy outlook likely targets stable to progressive dividends, contingent on OCF conversion improving toward NI and stable capex. Key sensitivities include net margin recovery (tax rate), working capital swings, and potential growth investments. Absent a significant step-up in capex or a deterioration in OCF, dividend sustainability appears acceptable.

Risk Assessment

Business Risks:

• Margin pressure from cost inflation (labor, materials, outsourcing) leading to weaker operating leverage
• Demand cyclicality in real estate-related segments affecting revenue visibility
• Execution risk on development/renovation pipelines impacting revenue timing and gross margins
• Potential slowdown in brokerage/transaction volumes in a weaker property market

Financial Risks:

• OCF/NI at 0.81x indicates modest earnings-to-cash conversion risk
• Tax rate volatility (34.5% this quarter) can materially swing net income
• Refinancing and interest rate risk on 506.0 of loans (short + long), despite strong coverage
• Concentration risk if large projects or clients dominate cash collections (data not disclosed)

Key Concerns:

• Net margin compression (-189 bps YoY) despite solid ordinary income performance
• Limited SG&A disclosure restricts visibility into cost drivers and controllability
• Investing CF details unreported, constraining true FCF assessment

Investment Implications

Key Takeaways:

• Top-line growth strong (+8.9% YoY) with resilient gross margin (32.7%)
• Operating margin modestly compressed (~-32 bps YoY), signaling limited operating leverage
• Ordinary income outperformance (+11.4% YoY) aided by non-operating gains
• Net income -9.9% YoY on a higher effective tax rate (34.5%) and net margin compression
• OCF/NI at 0.81x is a mild earnings quality flag; monitor 2H cash conversion
• Balance sheet conservative: current ratio 169%, D/E 0.81x, interest coverage 53x
• ROE 5.8% and ROIC 7.3% indicate acceptable but improvable capital efficiency
• Dividend payout ~60% appears maintainable, contingent on OCF normalization

Metrics to Watch:

• Operating margin trajectory and SG&A growth vs revenue
• Effective tax rate normalization in 2H
• OCF/NI ratio and working capital movements (receivables, contract assets)
• Capex intensity vs pipeline and returns (ROIC >8% target)
• Net non-operating items (interest, dividends, other) stability
• Leverage and funding costs amid interest rate dynamics

Relative Positioning: Within Japan real estate/services peers, Starts demonstrates solid revenue growth, healthy liquidity, and moderate leverage with very strong interest coverage. Profitability is steady at the operating level but trails best-in-class peers on ROE and margin momentum due to tax effects and limited operating leverage this quarter.

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
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