TOKYO ENERGY & SYSTEMS INC. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥34.28B
• Operating Income: ¥1.18B
• Net Income: ¥1.49B
• EPS: ¥44.69

Income Statement

Balance Sheet

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: Solid topline and operating recovery with margin expansion, but headline net profit is flattered by non-recurring gains and non-operating items; core profitability and capital efficiency remain modest. Revenue rose 12.3% YoY to 342.8, supported by stronger order execution in the first half. Operating income increased 46.3% YoY to 11.8, lifting the operating margin to 3.44%. Based on prior-period estimates, operating margin expanded by roughly 80 bps YoY (from about 2.64% to 3.44%). Ordinary income surged 470.7% YoY to 13.9, implying a step-up in non-operating contributions. Net income grew 136.3% YoY to 14.9, translating to a net margin of 4.34% (+~228 bps YoY vs an estimated 2.06%). The gap between ordinary income (13.9) and profit before tax (24.5) indicates approximately 10.6 in extraordinary gains, inflating bottom-line results in the quarter. Non-operating income was 4.91 (notably dividend income of 1.76 and interest income of 0.36) against non-operating expenses of 2.81 (including interest expense of 1.13), making non-operating items a material earnings driver. The effective tax rate was 39.3%, broadly in line with domestic norms, but applied to an elevated pretax base due to non-recurring items. Liquidity is very strong: current ratio 321% and cash of 95.5 comfortably exceed short-term loans of 21.7. Leverage is conservative (D/E 0.46x; equity ratio about 68.5%), and interest coverage of 10.4x supports solvency. However, capital efficiency is weak: ROE is 2.1% and ROIC is 1.1% (warning level <5%), constrained by low asset turnover (0.334) and thin core margins. The non-operating income ratio is high (33%), underscoring reliance on financial income/one-offs alongside operations. Earnings quality assessment is limited by unreported cash flow data, but the outsized PBT vs OI suggests lower-quality, non-recurring contributions this quarter. The calculated payout ratio of 122.1% hints at a potential mismatch with recurring earnings absent confirmation of special dividends or timing effects. Looking forward, sustaining profit growth will likely require continued operating margin improvement and better asset turns, as non-operating and extraordinary gains are unlikely to recur at the same scale.

Profitability Analysis

ROE decomposition (DuPont): ROE 2.1% = Net Profit Margin (4.3%) × Asset Turnover (0.334) × Financial Leverage (1.46x). The largest change driver YoY appears to be margin improvement: operating income grew 46.3% vs revenue 12.3%, indicating positive operating leverage and an estimated ~80 bps expansion in operating margin. Ordinary margin improved more significantly to ~4.06% from ~0.80% (+~326 bps), driven by higher non-operating income and lower non-operating drag YoY. Business reason: better project execution and mix lifted operating income, while dividends/interest and likely improved financial income reduced the gap between operating and ordinary profit. Additionally, extraordinary gains (~10.6) boosted PBT and net margin, but this is non-recurring by nature. Sustainability: the operating margin uplift is more sustainable than the extraordinary gain; however, at 3.44% it remains modest for engineering/construction, leaving ROE constrained unless asset turns improve. Concerning trends: capital efficiency remains low (asset turnover 0.334; ROIC 1.1%), and the ordinary/net margin is supported by non-operating and extraordinary items. While SG&A absolute level is 36.76, lack of prior-period SG&A prevents a definitive check, but the outsized growth in profit over revenue suggests some SG&A operating leverage in the period.

Growth Assessment

Revenue growth of 12.3% YoY to 342.8 indicates healthy demand and/or improved backlog conversion in H1. Operating income growth of 46.3% outpaced revenue, signaling better project margins and operating leverage. Ordinary income up 470.7% reflects material non-operating tailwinds; net income up 136.3% includes an additional boost from extraordinary gains (~10.6), which are unlikely to repeat. Net margin improved to 4.34% from an estimated ~2.06%, but the quality of this improvement is mixed given the one-off elements. Dividend and interest income (2.12 combined) were meaningful contributors relative to operating income (11.8). Given the capital-intensive and order-driven nature of the business, sustainability hinges on backlog quality, pricing power amid input cost inflation, and stable execution. Without cash flow data or backlog disclosure, we assume growth is primarily execution-driven rather than structural. Outlook: near-term profit momentum is positive if operating margin gains persist, but headline EPS may normalize as extraordinary gains fade. Focus should be on maintaining operating margin above 3% and improving asset turnover toward industry norms to lift ROIC.

Financial Health

Liquidity is strong: current assets 517.1 vs current liabilities 161.2 yield a current ratio of 320.7% and quick ratio of 320.7%. There is no warning on liquidity (Current Ratio well above 1.0). Cash and deposits (95.5) exceed short-term loans (21.7), limiting near-term refinancing risk. Working capital stands at 355.8, providing a sizable buffer for project execution. Solvency is conservative: total liabilities 324.1 vs equity 702.7 imply D/E of 0.46x; no warning threshold breached (D/E < 2.0). Long-term loans are 47.2; noncurrent liabilities 162.9 suggest modest long-term leverage relative to assets (TA 1,026.9). Maturity mismatch risk appears low given ample current assets vs current liabilities; however, unreported breakdowns of receivables/inventories and advances received limit precision. Equity ratio (calculated) is ~68.5%, indicating a strong capital base. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income cannot be assessed; this is a key limitation. Given the nature of EPC/project businesses, working capital swings can materially distort OCF vs NI; thus, the large YoY profit swing may not translate to cash without corroborating OCF. Free cash flow is also unreported, preventing verification of coverage for dividends and capex. Potential red flag: headline PBT materially exceeds operating income due to extraordinary gains (~10.6), which are non-cash or non-recurring in many instances (e.g., investment security disposals), potentially inflating NI relative to cash. No clear signs of working capital manipulation can be inferred without receivables/inventories or OCF detail.

Dividend Sustainability

The calculated payout ratio is 122.1%, which would be above sustainable levels if based on recurring earnings; however, dividend amounts and cash flow are unreported. Without OCF and FCF data, coverage cannot be confirmed. If the payout calculation references annualized dividends against a half-year NI or includes special distributions, the ratio could be transiently elevated. Balance sheet strength (cash 95.5; low leverage) provides interim flexibility, but long-term sustainability should align with FCF generation and recurring operating profit rather than extraordinary gains. Policy outlook is unclear from the data; caution is warranted until FCF visibility improves.

Risk Assessment

Business Risks:

• Project execution risk leading to cost overruns and margin erosion in EPC/engineering contracts
• Input cost inflation (materials, labor) compressing margins if not fully passed through
• Customer concentration in electric utilities and energy infrastructure cycles
• Timing risk of revenue recognition tied to backlog conversion and milestone billing
• Competitive bidding pressure in domestic power infrastructure markets

Financial Risks:

• Earnings reliance on non-operating items and extraordinary gains in the quarter
• Low capital efficiency (ROIC 1.1%, ROE 2.1%) limiting value creation
• Potential market value volatility of investment securities (balance of 180.7) affecting comprehensive income
• Limited visibility on cash generation due to unreported OCF/FCF
• Tax rate sensitivity around a relatively high effective rate (39.3%)

Key Concerns:

• Headline profit uplift driven partly by non-recurring extraordinary gains (~10.6)
• Non-operating contributions (dividends/interest) are meaningful vs operating profit
• Sustained improvement in core operating margin is needed from a low base (3.44%)
• Asset turnover is low (0.334), weighing on ROIC and ROE
• Data gaps (gross margin, OCF, capex, backlog) may conceal additional risks

Investment Implications

Key Takeaways:

• Core operations improved with operating income +46.3% on revenue +12.3%, expanding operating margin by ~80 bps to 3.44%
• Ordinary and net profits benefited from sizable non-operating and extraordinary gains; headline NI may not be repeatable
• Balance sheet is very strong (equity ratio ~68.5%, current ratio ~321%, interest coverage 10.4x)
• Capital efficiency remains a key weakness (ROIC 1.1%, ROE 2.1%, asset turnover 0.334)
• Dividend affordability uncertain given a calculated payout ratio of 122.1% and absent FCF data

Metrics to Watch:

• Backlog size and quality; order intake and book-to-bill
• Operating margin trajectory vs project mix and input cost trends
• OCF and FCF conversion relative to net income
• Composition of non-operating income and any further extraordinary items
• Asset turnover improvement and ROIC progression

Relative Positioning: Versus domestic engineering/utility EPC peers, the company shows improving operating momentum and superior balance sheet strength, but trails on capital efficiency with low ROIC/ROE and a higher reliance on non-operating/one-off items to bolster earnings this quarter.

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