KANDA TSUSHINKI CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.03B
• Operating Income: ¥171M
• Net Income: ¥227M
• EPS: ¥99.66

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

Verdict: A soft FY2026 Q2 with sharp operating margin compression and low ROE, partly cushioned by strong operating cash flow and ample liquidity. Revenue declined 6.2% YoY to 30.31, while operating income fell 49.3% YoY to 1.71 and ordinary income decreased 43.8% YoY to 2.15. Net income declined 19.5% YoY to 2.27 (EPS 99.66 JPY), helped by non-operating income of 0.45 including 0.22 of dividend income. Gross profit was 8.77, implying a 28.9% gross margin; SG&A was 7.05, yielding operating income of 1.71. Operating margin compressed to 5.6% from roughly 10.4% a year ago, a contraction of about 478 bps. Ordinary income margin stood at 7.1% and net margin at 7.5%, with non-operating items contributing about 20% of ordinary profit. ROE is low at 3.7%, driven by modest net margin (7.5%), low asset turnover (0.326x), and conservative leverage (1.50x). Cash generation was a bright spot: operating cash flow reached 5.44, 2.39x net income, indicating high earnings quality in the quarter. Liquidity remains strong with cash of 33.31, current assets of 52.36, and a current ratio of 280%, while interest coverage is very high at 98x. Balance sheet conservatism is evident with total liabilities of 30.90 and owners' equity of 61.95 (A/E ~1.50x). However, capital efficiency is weak; ROIC is 3.7%, below the 5% warning threshold. The quarter’s weak operating leverage (SG&A ratio elevated at ~23.3%) and reliance on non-operating income for profit support are notable headwinds. Forward-looking, improving project execution, cost control, and mix are needed to restore operating margins and raise ROIC above the 5–8% comfort range. The strong cash position provides resilience to navigate softer demand and invest selectively. Dividend sustainability appears adequate given cash/OCF, but the calculated payout ratio of 80.9% looks elevated against profit pressure and sub-5% ROIC. Data gaps (e.g., working capital details, segment disclosure) limit deeper diagnostics but do not change the cautious quality-over-quantity takeaway.

Profitability Analysis

DuPont (ROE = NPM × Asset Turnover × Leverage): 3.7% = 7.5% × 0.326 × 1.50x. The largest change driver versus last year is net profit margin via operating margin compression: operating income fell ~49% on a 6% revenue decline, indicating negative operating leverage and likely pricing/mix or cost pressure. Business drivers likely include weaker volumes, project timing, and fixed-cost under-absorption that lifted the SG&A-to-sales ratio to ~23.3%, versus a higher operating margin (~10.4%) in the prior-year period. Asset turnover is also weak (0.326x), reflecting a balance sheet heavy in cash (33.31) and investment securities (18.87) relative to H1 revenue scale, which depresses efficiency. Leverage remains conservative (Assets/Equity ~1.50x), providing limited ROE boost. Sustainability: the margin compression appears cyclical/project-timing related rather than purely structural; partial recovery is plausible if orders normalize and cost containment improves. However, absent efficiency improvements or portfolio pruning, asset turnover will likely remain a headwind. Watch for SG&A growth outpacing revenue; in this quarter, the sharp profit drop despite modest sales decline flags cost inflexibility and adverse mix.

Growth Assessment

Top-line contracted 6.2% YoY to 30.31, indicating softer demand and/or delayed project recognition. Operating profit declined 49.3% to 1.71 and ordinary profit 43.8% to 2.15, underscoring negative operating leverage. Net income decreased 19.5% to 2.27, cushioned by non-operating income (0.45) and a normalized tax rate (~34%). Profit quality tilts more to recurring operations than one-off gains; dividend income (0.22) supported ordinary profit but does not mask the operating shortfall. Revenue sustainability hinges on order intake and execution timing; absent segment/backlog data, near-term trend looks flat-to-soft. Margin outlook: gross margin at 28.9% is decent, but operating margin at 5.6% needs recovery toward high single-digits to rebuild ROE. Efficiency improvement (asset turnover 0.326x) and cost control are key levers. With a strong cash buffer, the company can pursue selective investments or cost restructuring to support medium-term growth. Near-term guidance not provided; bias is cautious until margin stabilization is evidenced.

Financial Health

Liquidity is robust: current assets 52.36 vs current liabilities 18.68 imply a current ratio of 280.3% and quick ratio of 280.3%. No warning on current ratio (<1.0) or leverage (D/E 0.50x reported); interest coverage is very strong at 98.22x. Maturity mismatch risk is low: short-term loans of 2.00 are fully covered by cash of 33.31, and working capital stands at 33.68. Total liabilities are 30.90 against equity of 61.95, keeping financial leverage modest (A/E ~1.50x). Noncurrent liabilities of 12.22 are manageable given liquidity. Off-balance sheet obligations are not disclosed; no specific guarantees/commitments reported in the provided data. Overall solvency is strong, providing resilience despite margin pressure.

Cash Flow Quality

Earnings quality is high this quarter: OCF/Net Income is 2.39x (5.44 vs 2.27), suggesting cash conversion strength, likely aided by working capital release; detailed drivers are unreported. Implied free cash flow is strong at about 5.16 (OCF 5.44 minus capex 0.28), comfortably exceeding financing cash outflows of -1.91 (likely dividends and minor debt service/share repurchases). No signs of aggressive working capital manipulation are evident from the limited data, but the lack of receivables/inventories detail constrains verification. Capex appears modest at 0.28, consistent with an asset-light profile. Cash and deposits of 33.31 provide substantial dry powder for investment or shareholder returns without stressing liquidity.

Dividend Sustainability

The calculated payout ratio is 80.9%, which is elevated versus a conservative benchmark (<60%). While DPS and total dividends paid are unreported, financing CF of -1.91 and a token share repurchase (-0.01) imply ongoing shareholder returns. On cash metrics, implied FCF of ~5.16 would cover likely dividends with headroom; however, coverage is sensitive to profit/cash normalization if working capital tailwinds fade. Given ROIC at 3.7% (<5% warning), prioritizing investment in margin/efficiency over incremental payout would enhance long-term sustainability. Policy outlook: absent explicit guidance, expect stable-to-cautious dividends, supported by cash but capped by low capital efficiency and profit volatility.

Risk Assessment

Business Risks:

• Demand softness and project timing risk leading to revenue volatility (-6.2% YoY).
• Operating margin pressure (5.6%) from fixed-cost inflexibility and adverse mix.
• Dependence on non-operating income (20% of ordinary income) including dividend income (0.22).
• Execution risk on large projects that can swing quarterly profitability.
• Supply chain and component cost fluctuations impacting gross margin.

Financial Risks:

• Low ROIC at 3.7% indicates suboptimal capital efficiency.
• Potential equity price/valuation risk in investment securities (18.87) affecting comprehensive income.
• Earnings sensitivity to working capital swings despite current OCF strength.
• Dividend sustainability risk if payout (~80.9%) persists amid lower profits.

Key Concerns:

• Sharp operating margin contraction (~-478 bps YoY).
• Asset turnover at 0.326x dampening ROE despite strong balance sheet.
• Reliance on cash reserves to bridge earnings softness rather than structural profit improvement.

Investment Implications

Key Takeaways:

• Quarter marked by significant operating margin compression; profit heavily protected by non-operating income and tax rate normalization.
• ROE at 3.7% and ROIC at 3.7% highlight capital efficiency issues; improvement requires margin recovery and better asset utilization.
• Liquidity is very strong (cash 33.31; current ratio 280%), providing cushion and optionality.
• Cash flow quality robust (OCF/NI 2.39x) with implied FCF ~5.16, supporting near-term dividends/repayments.
• Non-operating income (dividends 0.22) meaningful at ~20% of ordinary profit; sustainability depends on investee distributions.

Metrics to Watch:

• Order intake and backlog conversion to gauge near-term revenue trajectory.
• Operating margin trend and SG&A-to-sales ratio for cost discipline.
• Working capital movements (receivables, inventories, payables) underpinning OCF.
• ROIC progression toward >5–8% and asset turnover improvement.
• Non-operating income stability (dividend income, other financial income) and equity securities valuation impacts.

Relative Positioning: Within electrical/communications equipment/system integrators, the company exhibits superior liquidity and low leverage but lags peers on ROIC/ROE due to weak operating leverage and low asset turnover; near-term positioning is defensive, underpinned by cash rather than earnings momentum.

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