NSW Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥24.85B
• Operating Income: ¥2.36B
• Net Income: ¥1.67B
• EPS: ¥111.83

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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 growth but margin compression and weak cash conversion led to a mixed FY2026 Q2 (cumulative) performance. Revenue rose 2.7% YoY to 248.54, while operating income declined 14.4% YoY to 23.60 and net income fell 12.6% to 16.66. Gross profit reached 50.39, yielding a gross margin of 20.3%. Operating margin was 9.5% (23.60/248.54), down sharply from an estimated 11.4% a year ago, implying about 191 bps of margin compression. Ordinary income was 24.31 (-12.5% YoY), with non-operating income a modest 0.72 (interest income 0.30), indicating minimal non-core support to earnings. Effective tax rate stood at 31.1%, consistent with a normalized tax burden. DuPont analysis shows ROE at 4.6% driven by a 6.7% net margin, 0.525x asset turnover, and 1.30x financial leverage—profitability, not leverage, is the main constraint on ROE. Earnings quality is a concern: OCF of 8.20 is only 0.49x net income (below the 0.8 threshold), suggesting working capital drag or timing effects. Balance sheet strength is a clear positive, with cash and deposits of 184.64, current assets of 360.40, and a very high current ratio of 454.6%, underpinned by low leverage (D/E 0.30x using total liabilities). SG&A of 26.78 implies a ratio of 10.8% of sales; with revenue up and operating profit down, either gross margin pressure or higher SG&A intensity likely drove the margin squeeze. EBITDA was 25.94 (10.4% margin), and depreciation and amortization were modest at 2.34, indicating a light asset base consistent with an IT services profile. While reported free cash flow is not disclosed, implied FCF after capex is about 6.02 (OCF 8.20 minus capex 2.18), which appears insufficient to fully cover an implied dividend outlay if the 76% payout ratio guidance holds on a half-year basis. Financing cash outflow of -6.74 suggests dividends and possibly repurchases were funded partly from cash reserves. Looking forward, sustaining ROIC at 9.1% is encouraging, but restoring operating margin and improving cash conversion will be critical to support dividends and investment. Overall, the quarter underscores resilient sales momentum but raises questions on cost control and working capital discipline, which need to normalize in H2 to meet full-year ambitions.

Profitability Analysis

ROE decomposition: 4.6% = Net Profit Margin (6.7%) × Asset Turnover (0.525x) × Financial Leverage (1.30x). The component that changed the most versus last year appears to be the profit margin, as operating income declined 14.4% despite 2.7% revenue growth, implying about 191 bps operating margin compression (from ~11.4% to ~9.5%). Business drivers likely include project mix shifts, pricing pressure or higher delivery costs (e.g., subcontracting, wage inflation), and/or elevated SG&A ratio. Asset turnover looks broadly stable given modest revenue growth and a relatively steady asset base (assets 473.18), and leverage remains low at 1.30x, so leverage did not cushion ROE. The margin compression is partly cyclical/project-mix related; sustainability depends on execution: improving utilization, pass-through of costs, and controlling SG&A could normalize margins, but absent such actions the lower margin could persist. Watch for concerning trends: operating expense growth outpacing revenue is implied; SG&A ratio is 10.8% and, combined with weaker operating profit, signals negative operating leverage. Non-operating items are small and not a driver of YoY change.

Growth Assessment

Revenue growth of 2.7% YoY to 248.54 suggests steady demand, consistent with ongoing IT services activity. Profit growth lagged because operating income fell 14.4% YoY and net income dropped 12.6%, indicating unfavorable mix or cost absorption. Gross margin at 20.3% and operating margin at 9.5% signal compression from prior-year levels (~11.4% operating margin), implying reduced pricing power or higher delivery costs. Ordinary income decline (-12.5%) aligns with operating income, as non-operating contributions are limited. The effective tax rate of 31.1% appears normalized, so earnings downside was operational rather than tax driven. EBITDA margin of 10.4% is healthy for a domestic SIer but down versus implied prior period. Near-term growth sustainability hinges on order backlog, headcount utilization, and the ability to pass wage inflation and subcontractor costs. With ROIC at 9.1% (above 8% benchmark), the investment engine is intact; however, cash conversion must improve to fund growth and dividends. Outlook: modest top-line growth likely continues, but profit recovery requires margin restoration and better working capital control in H2.

Financial Health

Liquidity is very strong: current assets 360.40 vs current liabilities 79.28 yield a current ratio of 454.6% and quick ratio of 454.6%. There is no warning for Current Ratio, as it is well above 1.0. Cash and deposits are 184.64, covering 233% of current liabilities. Solvency is conservative: total liabilities 109.15 vs total equity 364.02 implies a D/E of 0.30x; this is well below any warning threshold of 2.0. No interest-bearing debt was disclosed, and interest coverage could not be calculated, but leverage is clearly low. Maturity mismatch risk is minimal given the large cushion of current assets over short-term obligations. No off-balance sheet obligations were reported in the data provided.

Cash Flow Quality

OCF of 8.20 vs net income of 16.66 yields an OCF/NI ratio of 0.49x, triggering an earnings quality flag (<0.8). The gap likely reflects working capital outflows, consistent with accounts receivable at 135.82 (a high share versus half-year revenue), suggesting timing of collections. Capex was modest at 2.18, indicative of an asset-light model. Implied free cash flow is approximately 6.02 (8.20 OCF minus 2.18 capex), though FCF was not formally reported. Financing cash outflow of -6.74 suggests dividends and/or buybacks were funded partly from existing cash, not from internally generated cash this period. Sustainability hinges on normalizing receivables and improving OCF/NI toward or above 1.0 in H2. No clear signs of aggressive working capital manipulation are evident, but elevated receivables warrants monitoring of DSO and project billing milestones.

Dividend Sustainability

The calculated payout ratio is 76.0%, implying a relatively high distribution versus earnings. Based on EPS of 111.83 JPY and a 76% payout, implied DPS is approximately 85 JPY; with 14.9 million shares, the implied cash dividend would be roughly 12.7 (100M JPY). Implied FCF of ~6.02 for the period would not fully cover this level of cash distribution if paid within the same half, suggesting reliance on accumulated cash (cash and deposits 184.64) and seasonality of OCF. Given strong net cash and low leverage, near-term dividend capacity is supported, but medium-term sustainability requires improved cash conversion and margin recovery to reduce payout pressure. Policy outlook cannot be inferred from disclosures; no explicit dividend policy or DOE was reported.

Risk Assessment

Business Risks:

• Margin pressure from wage inflation and subcontracting costs impacting fixed-price projects
• Project mix shifts reducing gross margin and utilization
• Client IT spending delays or deferrals affecting bookings and revenue visibility
• Execution risk on large projects leading to acceptance delays and receivable build-up

Financial Risks:

• Weak cash conversion (OCF/NI 0.49x) increasing reliance on cash reserves
• Potential mismatch between dividend outflows and internally generated FCF in the period
• Receivables concentration risk and extended DSO

Key Concerns:

• Operating margin compressed by ~191 bps YoY
• Ordinary income decline with limited non-operating offsets
• High payout ratio (76%) against soft FCF
• Lack of disclosure on interest-bearing debt and detailed SG&A breakdown limits visibility

Investment Implications

Key Takeaways:

• Top line grew 2.7% but operating profit fell 14.4%, indicating negative operating leverage
• Operating margin declined to 9.5% (~191 bps compression YoY)
• Cash conversion is weak (OCF/NI 0.49x), dragging implied FCF to ~6.02
• Balance sheet is robust with cash 184.64 and low leverage (D/E 0.30x)
• ROIC at 9.1% remains above the 8% benchmark, supporting long-term value creation

Metrics to Watch:

• OCF/Net income ratio and DSO trends
• Order backlog and book-to-bill
• Operating margin and SG&A ratio trajectory
• Utilization rates and subcontracting ratio
• Dividend announcement versus implied FCF coverage

Relative Positioning: Within domestic IT services peers, NSW shows healthy ROIC and a very strong balance sheet, but currently trails on operating margin trajectory and cash conversion; a recovery in utilization and working capital discipline would be needed to close the gap with higher-margin, higher-cash-conversion peers.

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