WATANABE SATO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥15.16B
• Operating Income: ¥-139M
• Net Income: ¥-252M
• 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

Sato Watanabe Co., Ltd. (TSE: 18070) reported FY2026 Q2 consolidated results under JGAAP showing a revenue decline to 15.159 billion yen (-6.0% YoY) and continued operating loss of 139 million yen (+1.9% YoY improvement). Gross profit was 852.8 million yen, translating to a thin gross margin of 5.6%, indicative of tight pricing and/or elevated input costs in the period. Despite the operating loss, ordinary income turned positive at 33 million yen, suggesting non-operating gains offset operating weakness and modest interest expense. Net income was 21 million yen (-4.7% YoY), resulting in EPS of 3.48 and a very low DuPont ROE of 0.10% driven by a 0.14% net profit margin, 0.486x asset turnover, and 1.45x financial leverage. EBITDA was 169 million yen and EBITDA margin 1.1%, reinforcing that profitability remains constrained even before depreciation and amortization (308 million yen). The firm’s interest burden is small (interest expense 6.2 million yen), but the interest coverage ratio is negative (-22.3x) on an EBIT basis due to the operating loss; on an EBITDA basis, coverage appears ample. Operating cash flow was a sizable outflow of 2.305 billion yen, far exceeding the small positive net income and pointing to sizable working capital consumption typical in project-based businesses. Investing cash flow and cash balance were not disclosed in the provided dataset (values shown as 0 indicate unreported), limiting full cash flow interpretation, but financing cash flow was an outflow of 512 million yen, suggesting debt repayment or other financing uses in a period of negative OCF. The balance sheet lists total assets of 31.217 billion yen and total equity of 21.542 billion yen, implying an equity ratio around 69% (despite the reported 0.0% figure being unreported), which indicates a conservative capital structure. Current assets of 21.050 billion yen and current liabilities of 10.739 billion yen yield a strong current ratio of 196%, though the quick ratio is likely overstated because inventories and certain contract assets/liabilities were not disclosed. Debt-to-equity stands at 0.65x, indicating moderate leverage against a solid equity base. The company did not pay a dividend (DPS 0; payout 0%), which is consistent with weak profitability and negative operating cash flow in the half. Overall, the quarter portrays pressured margins, an operating loss, and significant working capital outflows, partially mitigated by strong equity capitalization and modest financial leverage. Data gaps (inventories, cash, investing CF, share count) constrain precision, but available figures suggest near-term cash flow strain and structurally low returns, with balance sheet strength providing resilience.

Profitability Analysis

ROE decomposition (DuPont) shows: net profit margin 0.14% x asset turnover 0.486x x financial leverage 1.45x = ROE 0.10%, underscoring that ultra-thin margins are the primary drag. Gross margin at 5.6% is low for civil engineering/contracting, likely reflecting cost inflation, competitive bidding, and/or mix. Operating margin is negative (operating income -139 million yen), with implied SG&A around 992 million yen (gross profit 852.8 million yen minus operating income), suggesting limited operating leverage at current volume. EBITDA of 169 million yen indicates some cash earnings capacity, but D&A (308 million yen) and SG&A absorb this. Ordinary income at 33 million yen implies non-operating gains or subsidies offset operating loss and small interest expense. Interest burden is minimal (6.2 million yen), and while EBIT-based coverage is negative (-22.3x), EBITDA/interest would be comfortably positive, indicating financial expenses are not the profitability bottleneck. The decline in revenue (-6% YoY) likely exacerbated fixed-cost absorption and pressured margins; a return to growth and/or cost pass-through would be needed to restore operating profitability. Overall, profitability quality is weak with low margins and limited operating leverage benefit at the current scale.

Growth Assessment

Top-line contraction of 6.0% YoY to 15.159 billion yen suggests a softer order environment, execution delays, or project timing effects typical of the construction/civil engineering cycle. Given the thin gross margin and negative operating income, current profit growth is not sustainable without margin recovery or improved mix. Ordinary and net profit were positive but fragile, supported by non-operating items rather than core operations. Asset turnover at 0.486x (half-year revenue vs. period-end assets) is modest; annualized turnover would be higher, but on the reported basis it underscores the capital intensity and project WIP nature. Looking ahead, revenue sustainability hinges on order intake, backlog conversion, and timing of completions; material cost trends (asphalt, aggregates, cement, fuel) and labor availability will be key to margin normalization. Any easing in input costs, improved bidding discipline, or higher value-added project mix would support recovery in gross margin. The negative OCF indicates significant working capital build (likely receivables/contract assets), which often normalizes with project completions, but poses timing risk to reported growth. Overall outlook: cautious near term given weak H1 margins and cash outflows, with potential for second-half improvement if backlog conversion accelerates and cost pass-through improves. Data limitations (no disclosure of backlog, inventories/contract assets) temper confidence in the forward trajectory.

Financial Health

Liquidity appears solid on reported balances: current assets 21.050 billion yen vs. current liabilities 10.739 billion yen (current ratio 196%). The quick ratio is also shown as 196%, but inventories and certain construction-related balances are unreported, so true quick liquidity may be lower. Total assets 31.217 billion yen and total equity 21.542 billion yen imply an equity ratio around 69%, indicating a conservative balance sheet (the reported 0.0% equity ratio is unreported, not actual). Debt-to-equity of 0.65x suggests moderate leverage and ample equity cushion. Working capital is sizable at 10.310 billion yen, consistent with a project-based model but also tying up cash. Despite balance sheet strength, liquidity is pressured by negative operating cash flow in the period, increasing reliance on cash reserves or credit lines. Interest expense is very low (6.2 million yen), supporting solvency, and the company’s capitalization should comfortably absorb near-term earnings volatility. Overall, solvency is strong; liquidity is adequate on paper but subject to working capital swings.

Cash Flow Quality

Earnings quality is weak in H1: OCF of -2.305 billion yen contrasts sharply with positive net income of 21 million yen (OCF/NI = -109.75x), indicating substantial working capital consumption and/or billing timing. Typical drivers likely include increases in receivables, contract assets, and advances to subcontractors, none of which were disclosed in detail. With investing cash flow unreported and OCF negative, free cash flow cannot be precisely calculated, but is likely negative absent sizable investing inflows. Financing cash flow was -512 million yen (likely debt repayment or lease payments), which tightened cash in a period of operating outflows. Depreciation of 308 million yen vs. EBITDA of 169 million yen implies limited cash earnings capacity before working capital, reinforcing sensitivity to collection and billing cycles. Given the project nature, some normalization of OCF may occur in H2 as milestones are certified and cash is collected, but near-term cash conversion risk is elevated. Overall, cash flow quality in the half is poor due to timing effects and thin margins, despite balance sheet capacity to absorb it.

Dividend Sustainability

The company paid no dividends in the period (DPS 0; payout ratio 0%), which is consistent with maintaining liquidity given negative operating cash flow and weak profitability. With investing cash flow unreported and OCF negative, free cash flow coverage of any prospective dividend cannot be assessed, but would likely be inadequate in the near term. Capital structure is strong, which could support distributions in steadier periods, but current cash generation does not support a payout. Any future dividend policy will depend on sustained operating profitability, improved OCF conversion, and visibility into backlog and margin recovery. Near-term stance appears conservative and focused on balance sheet preservation.

Risk Assessment

Business Risks:

• Project execution and timing risk affecting revenue recognition and cash collections
• Material and fuel cost inflation compressing margins in fixed-price or competitive-bid contracts
• Labor availability and subcontractor cost escalation
• Weather/seasonality impacting construction schedules and utilization
• Customer/government budget timing and tender intensity affecting order intake
• Low structural margins elevating sensitivity to small cost variances

Financial Risks:

• Significant working capital outflows leading to liquidity pressure despite reported current ratio strength
• Earnings volatility with negative operating leverage at lower volumes
• Potential need for short-term borrowings to bridge OCF gaps
• Accounting timing under JGAAP for construction contracts (contract assets/liabilities) affecting reported profits and cash
• Concentration of cash in receivables/uncertified work increasing collection risk

Key Concerns:

• Negative operating cash flow of 2.305 billion yen versus minimal net profit
• Sustained low gross margin (5.6%) and operating loss
• Reliance on non-operating items to achieve positive ordinary income
• Data gaps (cash, investing CF, inventories/contract balances) limiting visibility into liquidity runway

Investment Implications

Key Takeaways:

• Revenue down 6% YoY with operating loss, highlighting weak core profitability
• Gross margin at 5.6% and EBITDA margin at 1.1% indicate limited pricing power and cost pressure
• Ordinary and net income are positive but not backed by operating earnings strength
• Operating cash flow sharply negative, pointing to sizable working capital build
• Balance sheet is strong with implied equity ratio around 69% and moderate leverage (D/E 0.65x)
• Liquidity appears adequate on reported metrics, but cash conversion risk is high
• No dividend, consistent with preserving cash amid weak cash generation

Metrics to Watch:

• Order backlog and new orders (book-to-bill)
• Gross margin by project/segment and cost pass-through trends
• Receivables, contract assets/liabilities, and collection days
• SG&A control and fixed-cost absorption at varying volumes
• Material and fuel cost indices relevant to paving/civil works
• Operating cash flow and working capital movements in H2
• Net debt and available liquidity (cash balance and undrawn facilities)
• Capex and D&A trajectory affecting future maintenance needs

Relative Positioning: Compared to domestic small/mid-cap civil engineering peers, the company shows weaker near-term margins and cash conversion but stronger capitalization (implied high equity ratio, moderate leverage). Execution on backlog conversion and cost management will determine convergence toward peer profitability.

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
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