KADOKAWA CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥133.93B
• Operating Income: ¥5.55B
• Net Income: ¥3.18B
• EPS: ¥10.17

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: Soft quarter with sharp profit compression despite stable topline and strong balance sheet. Revenue declined 1.8% YoY to 1,339.33, while operating income fell 47.8% YoY to 55.50 and net income dropped 51.8% to 14.91. Gross profit was 474.64, implying a 35.4% gross margin, but SG&A of 419.13 (31.3% of sales) kept operating leverage unfavorable. Operating margin compressed to 4.1% from an estimated 7.8% a year ago (down ~366 bps). Net margin fell to 1.1% from an estimated 2.3% (down ~116 bps). Ordinary income of 67.78 benefited from net non-operating gains of 12.28 (19.42 income vs 7.14 expense), but profit before tax was 43.99 due to sizable net extraordinary losses (~23.8) implied between ordinary income and PBT. Earnings quality is weak: operating cash flow was -35.70 versus net income of 14.91, yielding an OCF/NI ratio of -2.39x. Interest burden is minimal (interest expense 0.37; coverage ~150x), and the balance sheet remains robust with cash and deposits of 1,138.76 and current ratio of 240%. Leverage is low (reported D/E 0.39x), and short/long-term loans are small (4.77 and 7.28, respectively), limiting solvency risk. ROE is muted at 0.5% on DuPont metrics (net margin 1.1%, asset turnover 0.348x, leverage 1.39x), reflecting weak profitability more than balance sheet constraints. ROIC is 2.4%, well below a 7–8% target range, highlighting capital efficiency issues. Capex was modest at 13.95, but financing cash outflows of 210.82 suggest distributions and/or debt repayments; dividend data are unreported, but a calculated payout ratio of 299.8% indicates potential misalignment with earnings/OCF. With inventories at 381.65 and receivables at 693.02, working-capital intensity appears to be a drag this quarter. Forward-looking, normalization of extraordinary items, tighter cost control, and stabilization of working capital are necessary to rebuild margins and improve cash generation. Strong liquidity provides flexibility to invest in IP and digital initiatives, but sustained ROIC uplift is needed for value creation.

Profitability Analysis

ROE decomposition: ROE 0.5% = Net Profit Margin (1.1%) × Asset Turnover (0.348x) × Financial Leverage (1.39x). The largest change vs last year is the margin component: operating income -47.8% YoY on -1.8% revenue implies significant margin compression; estimated operating margin fell ~366 bps to 4.1%, and net margin fell ~116 bps to 1.1%. Business drivers likely include fixed-cost pressure within SG&A and a less favorable sales mix; while gross margin is 35.4%, SG&A at 31.3% of sales left limited room for operating profit. Non-operating items (net +12.28) partially cushioned ordinary income, but extraordinary losses drove PBT below operating income, indicating one-off or non-recurring impacts this quarter. Sustainability: margin compression from cost base rigidity could persist without cost actions; extraordinary losses are by nature non-recurring but may recur intermittently in content-heavy businesses. Operating leverage was negative this quarter (small revenue decline led to outsized profit decline), suggesting high fixed costs; monitoring SG&A discipline is key, but we lack prior-period SG&A to quantify growth. Asset turnover at 0.348x is low for a content/IP and platform business and, together with ROIC at 2.4%, flags capital efficiency challenges.

Growth Assessment

Topline contracted 1.8% YoY to 1,339.33, indicating mild softness. Operating income fell 47.8% YoY to 55.50, and ordinary income declined 30.6% to 67.78, pointing to deterioration in core profitability offset partially by non-operating gains. Net income decreased 51.8% to 14.91, amplified by net extraordinary losses (~23.8) between ordinary income and PBT. Revenue sustainability is uncertain without segment detail; however, negative operating leverage suggests the current cost structure is not aligned to revenue levels. Profit quality is weak: OCF was -35.70 versus NI 14.91, implying cash conversion headwinds likely from working capital. EBITDA was 95.99 (7.2% margin), offering limited buffer for shocks. Near-term outlook hinges on cost control, normalization of extraordinary items, and working capital normalization; absent these, margin recovery could be gradual.

Financial Health

Liquidity is strong: current ratio 240.1% and quick ratio 202.7% (no warning flags; both > benchmarks). Cash and deposits are 1,138.76 versus current liabilities of 1,019.71, providing ample coverage. Solvency appears conservative: reported D/E 0.39x and minimal loans (short-term 4.77; long-term 7.28). Interest coverage is very strong at ~150x, indicating negligible interest burden. No warning for Current Ratio (<1.0) or D/E (>2.0) applies. Maturity mismatch risk is low given high liquid assets relative to short-term obligations. Off-balance sheet obligations are not reported in the provided data; none can be assessed.

Cash Flow Quality

OCF/Net Income is -2.39x (<0.8), signaling weak earnings quality this quarter. Negative OCF despite positive NI suggests working capital outflows and/or cash costs not reflected in accrual earnings; with receivables at 693.02 and inventories at 381.65, a build in operating assets is a plausible driver, though deltas are not disclosed. Capex was 13.95, modest relative to revenue. Using a proxy FCF (OCF - Capex), free cash flow would be approximately -49.65, indicating no coverage for dividends or buybacks this quarter; however, full investing cash flows are unreported, so this is an approximation. Financing cash outflow of 210.82 implies distributions and/or debt repayments; dividend specifics are unreported. No clear signs of deliberate working-capital manipulation can be inferred from a single period; the magnitude of OCF weakness warrants monitoring across subsequent quarters.

Dividend Sustainability

Dividend data are unreported, but the calculated payout ratio of 299.8% indicates that, on current earnings, any dividend would be poorly covered by NI and not covered by OCF (negative). Proxy FCF is negative (~-49.65), suggesting limited capacity to fund distributions from internal cash flow this quarter. The strong net cash/liquidity position could support dividends temporarily, but sustainability requires improved cash generation and margin recovery. Policy outlook cannot be inferred from the data provided; monitor management guidance and capital allocation disclosures.

Risk Assessment

Business Risks:

• Hit-driven content/IP performance risk affecting revenue visibility and margins
• Cost inflation (talent/creator fees, production costs) compressing operating margin
• Project and release schedule slippage causing revenue timing mismatches and extraordinary items
• Advertising and platform monetization cyclicality impacting non-operating and other income

Financial Risks:

• Weak cash conversion (OCF/NI -2.39x) risking funding of operations and distributions
• Extraordinary loss volatility depressing PBT vs ordinary income
• Low ROIC (2.4%) relative to cost of capital, implying value dilution risk if not improved
• Potential reliance on non-operating gains to support ordinary income

Key Concerns:

• Margin compression: operating margin down ~366 bps YoY to 4.1%
• Negative proxy FCF (~-49.65) and financing outflows (210.82)
• Capital efficiency: low asset turnover (0.348x) and ROE 0.5%
• Visibility: multiple items unreported (investing CF, dividends, equity-method income) constrain analysis

Investment Implications

Key Takeaways:

• Core profitability under pressure with significant negative operating leverage
• Earnings quality weak as cash flow lags accrual profits
• Balance sheet strength provides cushion but does not offset structural ROIC shortfall
• Ordinary income buoyed by non-operating gains, but extraordinary losses weighed on PBT
• Cost discipline and working-capital normalization are near-term priorities

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio
• OCF/Net Income and working capital (AR, inventory, AP) movements
• Extraordinary gains/losses and their recurrence
• ROIC vs 7–8% target benchmark
• Financing cash flows (dividends, buybacks) vs internal cash generation

Relative Positioning: Within Japan-listed content/IP and platform peers, KADOKAWA shows stronger liquidity and lower leverage than average, but materially weaker near-term earnings quality and capital efficiency, with ROIC at 2.4% and compressed operating margins.

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
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