Nippon Kanryu Kogyo Co., Ltd. FY2025 Q4 Earnings Report

Financial Highlights

• Net Sales: ¥17.59B
• Operating Income: ¥697M
• Net Income: ¥627M
• EPS: ¥101.69

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

FY2025 Q4 results indicate a mixed but resilient close: revenue was essentially flat while profitability contracted, yet liquidity and balance sheet strength remain robust. Revenue increased 0.3% year over year to 175.94, but operating income fell 20.1% to 6.97 and net income declined 23.3% to 5.28. Gross profit was 39.40, translating to a gross margin of 22.4%, while operating margin landed at 3.96%. Based on prior-period inference (revenue +0.3% YoY and operating income -20.1% YoY), operating margin compressed by roughly 101 basis points from about 4.97% to 3.96%. Ordinary income declined 17.5% to 7.65, and the effective tax rate was elevated at 40.8%, exerting further pressure on bottom-line outcomes. EBITDA was 8.98 (5.1% margin), indicating limited operating leverage at current scale. ROE came in at 5.5% (DuPont: NPM 3.0% × asset turnover 1.228 × leverage 1.50x), implying moderate value creation versus an assumed cost of equity in the high single digits. Cash generation was close to earnings quality, with operating cash flow of 5.04 equating to 0.95x net income—slightly below ideal but not alarming. Free cash flow was negative at -8.23 due to heavy investing outflows (-13.27), which exceeded capital expenditures (-2.81), suggesting growth or strategic investments (including intangibles and/or M&A). The balance sheet remains a key positive: current ratio at 243% and cash and deposits of 60.71 comfortably cover 43.61 of current liabilities. Leverage is conservative with reported long-term loans at 1.05 and interest coverage at 140x, mitigating solvency risk. Retained earnings are substantial at 82.30, supporting financial flexibility and dividend capacity despite this year’s negative FCF. Calculated payout ratio is 18.4%, implying dividends remain prudently set, although not covered by FCF this year. ROIC is reported at 11.6%, well above typical 7–8% targets, indicating disciplined investment returns despite near-term margin pressure. Looking ahead, margin normalization and converting recent investments into earnings/OCF will be central to sustaining ROE above 6% and supporting dividend continuity. Overall, execution on cost control and project profitability will determine whether FY2025’s profit dip is transitory or structural.

Profitability Analysis

ROE (5.5%) = Net Profit Margin (3.0%) × Asset Turnover (1.228) × Financial Leverage (1.50x). The largest driver of YoY change is the net profit margin, as operating income declined 20.1% despite flat revenue (+0.3%), and the effective tax rate was high (40.8%). Operating margin compressed to 3.96%; inferred prior margin of ~4.97% implies ~101 bps compression, primarily from SG&A burden (32.42) and limited gross margin expansion capacity at a 22.4% gross margin. Ordinary income fell 17.5%, confirming margin pressures beyond operating level despite modest non-operating income (0.78). Asset turnover at 1.228 remains healthy for a construction/engineering-oriented business, and leverage at 1.50x is low, limiting ROE amplification. The margin pressure appears driven by cost inflation (labor/subcontracting/materials) and fixed-price project mix, not a one-time item, though normalization is possible if procurement improves and project selection tightens. Sustainability: margin recovery is plausible if bidding discipline and execution improve; leverage-based ROE uplift is unlikely given conservative balance sheet. Watch for SG&A growth outpacing revenue—revenue +0.3% vs operating income -20.1% implies deleveraging; any further SG&A creep without top-line acceleration would be a concern.

Growth Assessment

Top-line growth was minimal at +0.3%, signaling a stable but not expanding demand environment. Profitability contracted (operating income -20.1%, ordinary income -17.5%, net income -23.3%), reflecting cost pressure and an unfavorable tax burden (40.8%). Non-operating income (0.78) provided a modest buffer, with dividends (0.20) and interest income (0.07) contributing but insufficient to offset operating softness. EBITDA margin at 5.1% indicates limited operating leverage at current scale; a return to 6–7% EBITDA margin would require mix improvement or cost efficiency. Investing cash outflows (-13.27) exceed capex (-2.81), suggesting strategic/intangible investments or acquisitions aimed at future growth; near-term earnings dilution is possible before benefits accrue. ROIC at 11.6% is encouraging—if reflective of core operations, reinvestment should be value accretive; validation will come from OCF scaling in FY2026. Outlook hinges on cost containment, project selection discipline, and monetization of recent investments; with a strong balance sheet, the company can continue selective growth initiatives without leveraging up.

Financial Health

Liquidity is strong: current ratio 243.1% and quick ratio 240.2%, with cash and deposits (60.71) exceeding current liabilities (43.61). No warning on current ratio (<1.0) or D/E (>2.0); reported D/E at 0.50x is conservative, and long-term loans are only 1.05. Interest coverage is exceptionally high at 140x, reflecting minimal interest burden and healthy operating earnings relative to debt service. Working capital stands at 62.41, indicating substantial short-term cushion; AR (12.05) and cash provide ample coverage versus AP (7.82). Maturity mismatch risk appears low given the large cash balance versus current liabilities and limited long-term borrowings. Off-balance sheet obligations are not disclosed in the provided data; none can be assessed from the XBRL fields available.

Cash Flow Quality

OCF/Net Income is 0.95x, just below the 1.0x benchmark—borderline but acceptable, with no immediate red flag on earnings quality. Free cash flow is negative (-8.23) due to sizable investing outflows (-13.27) that outstrip capex (-2.81), implying non-maintenance investments (intangibles/M&A/advance payments) drove the shortfall. Despite negative FCF, liquidity is ample (cash 60.71), enabling the company to fund investments and dividends without incremental borrowing. No explicit signs of working capital manipulation are evident: AR of 12.05 versus revenue suggests reasonable collection exposure, and AP (7.82) does not indicate aggressive creditor stretching given the cash position. Sustainability: returning to positive FCF will require either normalization of investing cash flows or improved OCF via margin recovery and steady collections.

Dividend Sustainability

The calculated payout ratio is 18.4%, indicating conservative distributions relative to earnings. However, FCF coverage is negative (-8.49x) this year because investing outflows were heavy; dividends were thus not covered by free cash flow in FY2025. Balance sheet capacity (cash 60.71 and robust working capital) provides flexibility to maintain dividends temporarily despite FCF shortfall. With ROE at 5.5% and ROIC at 11.6%, distributions remain sustainable if OCF recovers and investing cash flows normalize; policy details and DPS figures were not disclosed. Near-term outlook: stable-to-cautious dividend stance appears feasible, but continuation hinges on restoring positive FCF.

Risk Assessment

Business Risks:

• Project execution and fixed-price contract risk leading to margin erosion
• Input cost inflation (labor, materials, subcontracting) compressing gross and operating margins
• Order intake/backlog visibility not disclosed, creating uncertainty on revenue trajectory
• Potential impairment risk given goodwill (6.43) and intangibles (10.05)
• High effective tax rate (40.8%) reducing net profitability

Financial Risks:

• Negative free cash flow driven by large investing outflows (-13.27)
• Dividend not covered by FCF this year (FCF coverage -8.49x)
• Concentration of liquidity in cash and deposits; reinvestment returns must remain above cost of capital
• Limited disclosure on interest-bearing debt composition; short-term borrowing balances unreported

Key Concerns:

• Operating margin compression of ~101 bps YoY with flat revenue
• OCF slightly below net income (0.95x), requiring vigilance on working capital
• Sustainability of ROE >5% depends on reversing margin pressure rather than leveraging up
• Visibility on the nature of large investing outflows (beyond capex) is limited

Investment Implications

Key Takeaways:

• Revenue stable but profits declined; operating income -20.1% and net income -23.3%
• Operating margin at 3.96% likely compressed by ~101 bps YoY
• OCF broadly tracks earnings (0.95x), indicating fair earnings quality
• FCF negative due to strategic investments; strong cash position cushions impact
• ROIC at 11.6% is solid, supporting the case for disciplined reinvestment
• Balance sheet health is a differentiator: high liquidity and low leverage

Metrics to Watch:

• Order backlog and new orders (book-to-bill) for revenue visibility
• Gross and operating margin trends, especially SG&A efficiency vs revenue growth
• OCF/NI ratio and working capital turns (AR/AP days)
• Nature and returns of investing cash flows (capex vs intangibles/M&A) and subsequent OCF uplift
• Effective tax rate normalization
• Progress toward positive FCF and dividend coverage

Relative Positioning: Within domestic construction/engineering peers, the company shows stronger-than-average liquidity and conservative leverage, with profitability currently under pressure but ROIC above typical sector targets; near-term performance hinges on restoring margins while converting recent investments into cash flow.

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