Chapter 2

Yatsen's operating recovery is real but not yet self-funding. In 2025 revenue grew 26.7%, gross margin reached 78.2%, and non-GAAP net income turned positive — ¥8.4 million — for the first time [1]. Yet operations still consumed ¥94.7 million of cash, the one profitable quarter leaned on non-operating income, and in the first quarter of 2026 a push for 22.5% growth sent marketing back above 72% of revenue and reopened the loss.

Figures are stated in Renminbi (¥), the currency Yatsen reports in; the company's own US-dollar convenience translations are given alongside where useful.

The annual turn is genuine, and thin

The three-year income statement shows a business that has stopped deteriorating. Revenue rose 26.7% to ¥4,298.1 million (US$614.6 million) in 2025 after two flat-to-down years, gross margin widened to 78.2% from 77.1% as skincare displaced color cosmetics, and the reported net loss shrank 87% to ¥92.4 million (US$13.2 million) from ¥710.2 million [2]. Most of that headline improvement is the absence of the ¥403.1 million goodwill impairment that fell in 2024; the underlying trend is better read through the company's non-GAAP lines, which exclude impairment, share-based pay and acquisition amortization [3].

Source: Q4 & Full Year 2025 earnings release, full-year results and non-GAAP reconciliation [4] [5].

The swing to a non-GAAP profit is a real inflection — 2024 carried a non-GAAP net loss of ¥128.2 million — but it is a slender one. The ¥8.4 million result is a 0.2% net margin, and it depends on adding back ¥59.0 million of share-based compensation and ¥42.7 million of acquisition-related intangible amortization; on a fully reported basis the company still lost money [6]. At the operating line, 2025 was still a ¥185.8 million loss, or ¥84.0 million excluding the non-cash items — narrower than 2024's ¥224.3 million, but a loss all the same [7].

Source: Q4 & Full Year 2025 earnings release, full-year results [8].

The recovery is not a straight line

The quarter-by-quarter record is where the durability question actually lives. Revenue has grown year on year every quarter, but the operating line has stayed negative throughout, and profitability tracks the calendar as much as the strategy. The fourth quarter of 2025 was the standout: net revenues jumped 20.1% to ¥1,379.4 million and Yatsen posted its first quarterly net income — ¥3.0 million for the group, ¥8.1 million attributable to shareholders — against a ¥378.8 million loss a year earlier [9].

Source: Q4 2025 and Q1 2026 earnings releases, statements of operations [10] [11].

Two things qualify that milestone. The quarterly net profit sat on top of a still-negative operating margin of 0.9%; the black ink came from below the operating line — financial income and other income — not from the business breaking even on its own costs [12]. And the quarter was flattered by scale: the Double 11 shopping festival lifts fourth-quarter volume enough to spread marketing over a larger revenue base, so selling and marketing fell to 64.8% of revenue even as it rose in absolute terms [13]. A ¥14.6 million out-of-period adjustment correcting prior-period sales-return and inventory errors reduced the quarter's profit, so the underlying figure was modestly better — but it also means the reported number is not a clean run-rate [14].

Source: derived from quarterly statements of operations, Q4 2025 and Q1 2026 earnings releases [15] [16].

The first-quarter 2026 test

The most recent quarter is the first real-time test of whether growth and profitability can move together, and it went the other way. First-quarter 2026 revenue grew 22.5% to ¥1,021.0 million (US$148.0 million), led by a 58.5% rise in skincare, yet the operating loss more than doubled to ¥99.0 million and the operating margin fell to a negative 9.7% — its worst reading in the five quarters shown [17] [18]. The non-GAAP net line swung from a ¥7.1 million profit a year earlier to a ¥57.3 million loss [19].

The cause is direct. Selling and marketing rose to 72.2% of revenue from 66.4% a year earlier, which management attributed to investments in brand equity for its core brands and higher traffic-acquisition costs on the Douyin platform [20]. The pattern that emerges across the year is central to the recovery: marketing intensity falls when the seasonal revenue surge does the work, and rises when the company pays to grow. Away from the fourth-quarter peak, selling and marketing runs in the low-to-mid 70s as a share of revenue, and a gross margin near 80% is not wide enough to cover it.

Source: Q4 2025 and Q1 2026 earnings releases, operating-expense detail [21] [22].

Cash generation still lags

Reported profit and cash generation have diverged in Yatsen's favor at times and against it at others, so the cash statement is the harder test of self-funding, and it has not yet been passed. Operating cash flow was negative in the peak quarter (¥69.4 million used in the fourth quarter of 2025) and negative again in the first quarter of 2026 (¥90.0 million used, against ¥23.8 million generated a year earlier) [23] [24]. Liquid assets — cash, restricted cash and short-term investments — fell from ¥1.05 billion at the end of 2025 to ¥934.2 million three months later [25].

The clearest signal against the self-funding read arrived in May 2026: Yatsen completed the first closing of a private placement of convertible notes and warrants worth roughly US$120 million, taken up by Trustar Capital, Hillhouse and founder-CEO Jinfeng Huang [26]. A company described in the prior chapter (After the Crash) as carrying net cash and no debt has chosen to raise convertible capital while still burning cash — a step that funds the growth ambition but sits awkwardly against the idea that the business is now paying its own way.

What is modeled ahead

Management guides revenue, and only revenue. Its first-quarter 2026 forecast of ¥958.6 million to ¥1.08 billion was met, and it guided second-quarter 2026 revenue to ¥1.20–1.30 billion, a 10% to 20% year-on-year increase [27] [28]. Notably, no guidance is offered on margins, losses or the timing of profitability; the CFO's stated aim is that "top-line expansion efficiently translates into future margin improvement," without a date attached [29].

Sources: management guidance from Q1 2026 earnings release, Business Outlook [30]; forward-revenue figures are consensus estimates, as reported.

The forward view carries an important caveat: sell-side coverage of Yatsen is effectively a single analyst, so the consensus revenue path — roughly ¥5.2 billion in 2026 and ¥5.7 billion in 2027 — should be read as one modeler's assumption, not a market view, and the consensus earnings figures are too thinly covered to lean on. What the numbers do establish is a growth story without a committed profitability timeline: management will forecast the top line and describe margin improvement as an aspiration, but has not put a breakeven date on the record.

The evidence points one way for now. The mix shift to skincare and the near-80% gross margin are durable and improving; the operating recovery is real. But self-funding profitability is not yet demonstrated — the business earns money only when seasonal volume subsidizes a fixed-heavy marketing base, it still burns operating cash, and it has just raised convertible capital to keep growing. What would settle the question is a full year in which selling and marketing falls as a share of revenue while revenue still grows, and operating cash flow turns durably positive. The first quarter of 2026 was the first live test of exactly that, and it went the wrong way.