The purpose of this change in capital allocation strategy is to reduce the burden of financing for M&A. There is no change to the core of our growth strategy, which remains the transformational growth through M&A. And ample fund is essential to continuously execute M&A.
On the other hand, while actively investing in inorganic (M&A), we have also been aggressively pursuing organic growth (existing businesses). Specifically, we were investing more in our existing businesses than the cash flow they were generating from operations, which resulted in a negative free cash flow.
As a result, external funding was also allocated to organic (existing businesses) investments, and inorganic (M&A) investments were, in effect, “entirely” financed with external funds.
Furthermore, because our free cash flow was negative, while we were making loan repayments, our total borrowings were increasing by more than the amount repaid, meaning we were not making any substantial progress in repaying our debt.
For that reason, continuing our M&A activities places a heavy strain on our ability to raise capital.
Therefore, in a major shift of our internal policy, we have decided to focus and prioritize our organic (existing businesses) growth investments. This is a strategic change aimed at making our free cash flow positive, so that for the first time since our founding, we will allocate our own cash flow to inorganic (M&A) investments.
This will ease the burden of creditors and shareholders, who are the providers of external funding.
Specifically, for creditors, this marks the first time that substantive debt repayment will begin. While our company’s debt capacity is still estimated at approximately 30.0 billion yen (please refer to page 8 of “FY2026/1 2Q Earnings Presentation” disclosed on September 12, 2025), the start of debt repayment will further increase our debt capacity.
Additionally, from a shareholder’s perspective, the need for additional follow-on offerings is reduced by the use of our own cash flow for M&A – which is effectively the first time – and by the increase in the aforementioned debt capacity. Since we have always been disciplined with our M&A strategy, our Cash EPS has continued to rise even after follow-on offerings. However, while this approach is effective in the long term, it created a burden on the capital market, as it led to short-term pressure from investors who wanted to “wait and see” until the next follow-on offering.
Our annual cash-in amount, equivalent to EBITDA, is currently approximately 27.0 billion yen (equivalent to the company’s planned EBITDA for the fiscal year ending on January 31, 2027). We will leverage this significant annual cash inflow to its full potential to pursue continuous M&A, all while reducing the strain on the capital markets. This will be accomplished by funding M&A with our own cash flow, initiating debt repayment to increase our debt capacity, and conducting disciplined, stock-based M&A.