NIPPON RIETEC CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥28.63B
• Operating Income: ¥1.48B
• Net Income: ¥1.05B
• EPS: ¥42.42

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

FY2026 Q2 was a solid earnings beat at the profit line, with operating and net profit growing markedly despite only modest revenue growth. Revenue rose 6.1% YoY to 286.3, while operating income surged 87.5% YoY to 14.8, and ordinary income climbed 58.8% to 17.5. Net income increased 35.4% YoY to 10.5, lifting the net margin to 3.7%. Operating margin expanded to 5.2% (from roughly 2.9% a year ago), indicating improved execution and cost control. Non-operating income of 3.15 (dividend income 1.61) provided a meaningful tailwind, lifting ordinary profit above operating profit. Gross margin stood at 14.4%, and EBITDA margin at 7.8%, demonstrating operating leverage from modest top-line growth. Interest burden remains de minimis (interest expense 0.32) with a strong interest coverage ratio of 46x. However, earnings quality is a clear negative: operating cash flow was -64.3 versus net income of 10.5, resulting in OCF/NI of -6.13x. The negative OCF likely reflects working capital swings typical for construction-type businesses, but the magnitude requires monitoring. Liquidity is ample with a current ratio of 207% and cash of 78.6, aided by increased short-term borrowings (ST loans 95.0) and financing cash inflow of 68.4. Balance sheet remains conservative overall (total liabilities 355 vs equity 637; D/E reported at 0.56x), though ROE is still low at 1.6% and ROIC at 1.5%, highlighting capital efficiency challenges. Comprehensive income (17.7) outpaced net income due to valuation gains, consistent with large investment securities holdings (174.8). Margin expansion and profit growth point to improved core operations, but cash conversion is weak this quarter. Forward-looking, sustaining higher operating margins and normalizing working capital will be key to lifting ROE/ROIC. Dividend capacity looks constrained near-term if cash flow remains negative and if the high calculated payout ratio (187.9%) is indicative, though dividend figures were not disclosed. Overall, the quarter signals better profitability momentum but also flags cash flow execution as the main risk to sustainment.

Profitability Analysis

ROE decomposes into Net Profit Margin (3.7%) × Asset Turnover (0.289) × Financial Leverage (1.56x) = 1.6%. The biggest delta YoY was in margin expansion: operating income +87.5% on revenue +6.1% implies a step-up in operating margin from ~2.9% to ~5.2% (about +224 bps), while net margin improved from ~2.9% to 3.7% (about +80 bps). Asset turnover (0.289) is modest and reflects a balance sheet heavy in investment securities and working capital; leverage at 1.56x is conservative. The business driver of margin improvement appears to be better cost control and mix (gross margin 14.4% and SG&A discipline) plus a helpful non-operating contribution (dividend income 1.61) boosting ordinary profit. The sustainability of operating margin looks reasonable if project execution and pricing hold, but the non-operating lift from dividends is inherently volatile and not fully controllable. Capital efficiency remains the structural headwind: ROIC at 1.5% is well below a 5–8% comfort zone, suggesting underutilized capital or low-margin project mix. Watch for any signs of SG&A growing faster than revenue; although SG&A detail is unreported, current operating leverage suggests SG&A was contained this quarter. Bottom line: profitability improved principally through margins rather than balance sheet efficiency or leverage, and sustaining these gains will depend on maintaining project margins and normalizing cash conversion.

Growth Assessment

Top-line growth of 6.1% YoY indicates steady demand, likely supported by infrastructure-related work. Profit growth outpaced sales due to margin expansion and non-operating income, signaling improved operating leverage. Ordinary income benefited from dividends and other non-operating items (non-operating income 3.15), which may not recur at the same level. With comprehensive income outpacing net income (17.7 vs 10.5), securities-related valuation gains also supported reported performance. Revenue sustainability hinges on order backlog and project awards, which were not disclosed; absent backlog data, the outlook rests on industry demand for electrical and infrastructure work. Near-term growth quality is mixed: better margins are positive, but cash flow conversion is weak. If working capital usage moderates in H2, profit growth could translate more fully into cash. Key swing factors for outlook include project timing, cost inflation pass-through, and the level of dividend income from investment securities.

Financial Health

Liquidity is strong: current assets 592 vs current liabilities 286 yield a current ratio of 206.9% and a quick ratio of 206.7% (no warning; both >1.0). There is no maturity mismatch warning: cash 78.6 plus broader current assets comfortably exceed current liabilities, though reliance on short-term loans (95.0) increased to fund working capital. Solvency is solid with total liabilities 355 vs equity 637; reported D/E of 0.56x is conservative and well below any red-flag threshold (2.0x). Interest burden is low (interest expense 0.32) with interest coverage at 46x. No off-balance sheet obligations were disclosed in the provided data. Overall balance sheet resilience is adequate to absorb working capital swings, but persistent negative OCF would gradually pressure leverage via additional short-term borrowing.

Cash Flow Quality

OCF/Net Income is -6.13x (<0.8), signaling a material earnings quality concern this quarter. The likely driver is working capital absorption (receivables/unbilled and lower advances from customers typical in project businesses), though detailed working capital lines were unreported. With Capex at -7.08, a simple FCF proxy (OCF - Capex) is approximately -71.4, indicating dividends and capex would not be covered by internally generated cash this period. Financing CF of +68.4 (and ST loans 95.0 on the balance sheet) bridged the cash shortfall, which is acceptable temporarily but not as a steady-state funding model. There are no clear signs of deliberate working capital manipulation from the limited data, but the scale of OCF negativity relative to profit requires close monitoring in H2 for normalization.

Dividend Sustainability

Dividend data were not disclosed, but the calculated payout ratio shown (187.9%) suggests potential stress if accurate and comparable. Given negative FCF proxy (~-71.4) this quarter, dividends are not covered by free cash flow and appear reliant on financing or cash on hand. With ROE at 1.6% and ROIC at 1.5%, capital efficiency is low, limiting organic dividend growth capacity unless margins improve or capital is optimized. Policy outlook is uncertain without guidance; prudent stance would imply prioritizing balance sheet and working capital normalization over distribution increases until cash conversion improves.

Risk Assessment

Business Risks:

• Project execution risk impacting margins (cost overruns, delays)
• Cost inflation and subcontractor tightness affecting gross margin
• Customer concentration in public infrastructure and railway-related projects (implied by business model)
• Timing risk of order intake and revenue recognition affecting quarterly volatility
• Dependence on non-operating dividend income from investment securities for part of profits

Financial Risks:

• Working capital volatility leading to negative OCF (OCF/NI -6.13x this quarter)
• Increased reliance on short-term borrowing to fund operations (ST loans 95.0)
• Low capital efficiency (ROIC 1.5%) restraining value creation
• Potential dividend strain if high payout is maintained amid weak FCF

Key Concerns:

• Magnitude of negative OCF relative to profit
• Sustainability of recent margin expansion
• Volatility of non-operating income (dividends/valuation gains)
• Visibility on backlog and receivables/unbilled balances (unreported)

Investment Implications

Key Takeaways:

• Strong profit beat with operating margin expansion of ~224 bps YoY to ~5.2%
• Net margin improved ~80 bps YoY to 3.7%
• Earnings quality weak this quarter: OCF -64.3 versus NI 10.5
• Liquidity robust (current ratio ~207%), but short-term loans increased to fund WC
• ROE 1.6% and ROIC 1.5% highlight ongoing capital efficiency challenge
• Non-operating dividends (1.61) materially supported ordinary income
• Comprehensive income uplift reflects securities valuation gains (investment securities 174.8)

Metrics to Watch:

• Order backlog and new awards
• Receivables/unbilled balances and collection cycle (DSO)
• Operating cash flow trajectory in H2
• Operating margin sustainability and gross margin trend
• Short-term debt levels and interest coverage
• ROIC/ROE improvement initiatives
• Contribution and volatility of non-operating income

Relative Positioning: Within domestic construction/engineering peers, profitability momentum is improving, liquidity is strong, and leverage is conservative; however, cash conversion is currently weaker than best-in-class peers and capital efficiency (ROIC/ROE) remains below sector leaders.

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