WATANABE SATO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥15.16B
• Operating Income: ¥-139M
• Net Income: ¥21M
• EPS: ¥3.48

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: Soft topline and structurally weak margins led to an operating loss, with bottom-line profitability rescued by non-operating income; liquidity remains strong and cash generation was robust in FY2026 Q2. Revenue declined 6.0% YoY to 151.6, indicating a slower order environment or delays in project execution. Gross profit was 10.5, implying a thin gross margin of 6.9%, which was insufficient to cover SG&A of 11.9, driving operating income to -1.39. Operating income improved slightly YoY (+1.9%), but the business still posted a negative operating margin of about -0.9%. Ordinary income was positive at 0.33 (down 2.1% YoY), supported by non-operating income of 1.93, notably dividend income of 1.28. Net income came in at 0.21 (-4.7% YoY), with a net margin of roughly 0.14%, highlighting narrow profitability. EBITDA was only 1.28 (0.8% margin), reflecting limited cash earnings from operations before D&A. The current ratio is very healthy at 259%, and the D/E ratio is conservative at 0.45x, indicating ample balance sheet flexibility. However, interest coverage (EBIT/interest) is negative (-17.7x) due to a negative EBIT, signaling weak core earning power relative to financing costs. Operating cash flow was strong at 19.7, vastly exceeding net income; this likely reflects working-capital release and/or non-cash charges, rather than a structural uplift in profitability. Based on OCF and disclosed capex, FCF is estimated at roughly 17.8, comfortably covering routine investment needs. ROE is a very low 0.1%, driven by razor-thin net margin and modest asset turnover (0.486x), only partially offset by moderate leverage (1.45x). Reported ROIC at -0.5% underscores sub-par capital efficiency, below a typical 5% warning threshold. Margin trend analysis in basis points is constrained by limited YoY detail and the negative operating base; directionally, profitability remains under pressure given SG&A exceeding gross profit. Forward-looking, restoring gross margin and aligning SG&A with scale are essential; reliance on non-operating gains (dividends) to achieve profit is not a durable strategy.

Profitability Analysis

DuPont: ROE (0.1%) = Net Profit Margin (0.14%) × Asset Turnover (0.486x) × Financial Leverage (1.45x). The net profit margin is the primary bottleneck, with operating activities loss-making and bottom line sustained by non-operating income. Asset turnover is modest for a construction/engineering-type business, suggesting either elevated asset base or slower revenue velocity. Financial leverage is moderate and not a major contributor to ROE. Business drivers: weak gross margin (6.9%) and SG&A exceeding gross profit (11.93 > 10.53) produced an operating loss; non-operating income (dividends 1.28) lifted ordinary income into positive territory. Sustainability: dependence on dividend income introduces volatility and is not a controllable core driver; unless gross margins improve and SG&A is recalibrated, ROE will stay depressed. Concerning trends: revenue -6% YoY alongside ordinary income -2.1% and net income -4.7% indicates operating deleverage; SG&A growth vs revenue cannot be assessed due to lack of YoY SG&A disclosure, but the current SG&A overhang relative to gross profit is a red flag. Operating margin (-0.9%) and EBITDA margin (~0.8%) both indicate limited operating resiliency to cost inflation or project mix shifts.

Growth Assessment

Topline contracted 6.0% YoY to 151.6, implying weaker order intake or execution delays. Profit growth quality is poor: operating loss persisted, with bottom-line profitability driven by non-operating sources (dividends), not core operations. Ordinary income declined 2.1% YoY and net income fell 4.7% YoY, consistent with operating deleverage. With gross margin at 6.9% and EBITDA margin at 0.8%, the margin structure provides limited buffer against cost overruns. Near-term outlook hinges on improving project margin mix, cost pass-through, and SG&A control; any normalization of non-operating dividend income could pressure ordinary profit. Absent evidence of backlog growth or pricing improvement (not disclosed), revenue recovery visibility is limited. If OCF strength reflects one-off working capital release, growth investment capacity could normalize lower in subsequent periods.

Financial Health

Liquidity: Very strong—current ratio 259% (current assets 166.2 vs current liabilities 64.2) and quick ratio 259% indicate abundant near-term coverage. Solvency: D/E 0.45x suggests a conservative capital structure; total liabilities 96.8 vs equity 215.4. Interest-bearing debt detail is incomplete, but short-term loans total 8.0; long-term loans not disclosed. Interest coverage is negative (-17.7x) due to negative EBIT, a clear earnings-capacity concern despite low leverage. Maturity mismatch risk appears low given current assets greatly exceed current liabilities. Off-balance sheet obligations are not disclosed; no specific commitments reported in the data provided. Asset composition includes investment securities of 43.8, introducing market valuation sensitivity but also providing liquidity if needed.

Cash Flow Quality

OCF/Net Income is extremely high at ~93.8x (19.7 OCF vs 0.21 NI), indicating cash generation far exceeds accounting earnings. This positive divergence likely reflects working capital inflows and non-cash expenses (D&A 2.67), but may not be repeatable at this magnitude. Estimated FCF is solid at ~17.8 (OCF 19.7 minus capex 1.88), implying ample internal funding for maintenance capex and potential dividends. Sustainability: if OCF strength stems from temporary reductions in receivables or advances, subsequent periods could see a reversal; monitoring OCF conversion as revenue mix normalizes is key. No clear signs of aggressive working capital manipulation can be asserted from the limited disclosure, but the scale of OCF vs NI warrants caution and further breakdown (AR, AP, inventories) when available.

Dividend Sustainability

Dividend data is largely unreported; however, a calculated payout ratio of 2,434.8% suggests dividends materially exceed current earnings, likely distorted by very low NI and/or reflecting policy-based dividends not aligned with near-term profit. With estimated FCF of ~17.8 and a strong balance sheet, the company appears capable of funding dividends from cash flow in the short term, but payouts that are far above earnings are not structurally sustainable without a recovery in core profitability. Policy outlook cannot be inferred from the data set; future sustainability depends on restoring operating profit and maintaining positive OCF.

Risk Assessment

Business Risks:

• Low gross margins (6.9%) and operating loss indicate thin project profitability and execution risk.
• Revenue decline (-6.0% YoY) suggests weaker order intake or project delays.
• Reliance on non-operating income (dividends 1.28) to achieve ordinary profit introduces volatility.
• Cost inflation (materials/labor) and limited pass-through could compress margins further.
• Project mix and potential fixed-price contract exposure increase risk of cost overruns.

Financial Risks:

• Negative interest coverage (-17.7x) highlights weak core earnings versus financing costs.
• ROIC at -0.5% and ROE at 0.1% indicate sub-par capital efficiency.
• Market value risk on investment securities (43.8) could impact equity via valuation changes.
• Potential working-capital reversal risk given OCF materially exceeds NI.

Key Concerns:

• SG&A exceeds gross profit, structurally pressuring operating margin.
• Sustainability of extraordinary OCF vs modest earnings is uncertain.
• Payout ratio far above 100% (calculated 2,434.8%) implies potential dividend strain if OCF normalizes.
• Data gaps (no AR/AP/inventory detail) limit assessment of working capital health and backlog quality.

Investment Implications

Key Takeaways:

• Core operations remain loss-making; profitability relies on non-operating income.
• Liquidity is ample and leverage conservative, providing time to execute margin recovery.
• Cash generation was strong this quarter, but durability is unclear without WC detail.
• Capital efficiency (ROE/ROIC) is notably weak and must improve to justify capital deployment.
• Revenue softness and thin margins point to continued near-term earnings risk.

Metrics to Watch:

• Order intake/backlog and book-to-bill (not disclosed here).
• Gross margin trend and project cost variance.
• SG&A to sales ratio and actions to align fixed costs.
• Operating margin and EBITDA margin normalization.
• OCF conversion vs NI, with AR/AP/inventory movements.
• Dividend policy updates relative to FCF and earnings trajectory.
• Valuation changes in investment securities and related income volatility.

Relative Positioning: Within domestic construction/engineering peers, the company shows weaker operating profitability and capital efficiency but stronger liquidity and conservative leverage. Near-term resilience depends more on balance sheet strength than on earnings quality.

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