Kuroda Group Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥59.47B
• Operating Income: ¥2.88B
• Net Income: ¥1.19B
• EPS: ¥27.40

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 soft quarter with resilient cash generation but significantly weaker earnings and returns. Revenue declined 1.5% YoY to 594.7, while operating income fell 8.1% to 28.8, indicating modest negative operating leverage. Gross profit came in at 95.7 with a gross margin of 16.1%, and operating margin was 4.8% (down from roughly 5.2% a year ago), implying about 35 bps of compression. Net income dropped sharply by 49.4% YoY to 11.6, taking the net margin down to 2.0% from roughly 3.8% last year, a contraction of about 184 bps. The steep decline in bottom-line performance versus the more modest deterioration in operating income suggests non-operating headwinds and a much higher effective tax rate (53.0%) weighed on net profit. Profit before tax was 25.4 versus operating income of 28.8, implying net non-operating losses of approximately 3.4 this period. Cash flow execution was a relative bright spot: operating cash flow was 28.6, 2.46x net income, indicating solid earnings quality and good cash conversion. Free cash flow was 22.3 (OCF + investing CF), but this did not fully cover dividends of 25.5, yielding FCF coverage of 0.83x. Leverage remains elevated with a D/E of 1.46x and debt totaling about 274.6 (short-term 73.5, long-term 201.1), though liquidity looks supported by cash and equivalents of 139.1 and sizable current assets of 548.8. ROE was 3.0% and ROIC 2.2%, both below cost of capital benchmarks and indicating weak capital efficiency. Goodwill is sizeable at 190.6 (about 20% of total assets), posing potential impairment risk if profitability stays subdued. EBITDA of 40.3 implies an EBITDA margin of 6.8%, which is modest for sustaining both growth investments and a high dividend payout. With net income under pressure and a high effective tax rate, dividend sustainability appears stretched on current-period earnings. Near term, stabilization hinges on normalizing tax rates, mitigating non-operating losses, and arresting margin compression through SG&A control and mix improvement. Looking ahead, management likely needs to prioritize ROIC improvement via disciplined capex, portfolio pruning, and operational efficiencies to lift returns toward 5–8%.

Profitability Analysis

ROE (3.0%) = Net Profit Margin (2.0%) × Asset Turnover (0.622) × Financial Leverage (2.46x). The most material deterioration YoY appears in net margin, given net income fell 49.4% versus a 1.5% revenue decline and 8.1% drop in operating income. The net margin pressure stems from a high effective tax rate (53.0%) and negative non-operating items (~3.4 gap between operating income and PBT), overshadowing otherwise modest operating margin compression (~35 bps). Asset turnover is low at 0.622, reflecting a sizeable asset base including large goodwill and intangibles, limiting ROE. Financial leverage at 2.46x is doing most of the work to support the 3.0% ROE, but leverage-driven ROE is not ideal given weak margins and low ROIC (2.2%). Operating leverage turned slightly negative as revenue fell while SG&A was not disclosed in detail but total SG&A of 77.8 (flat to slightly up vs revenue) looks sticky, pressuring operating margin. The compression in net margin looks partly cyclical/one-time (tax and non-operating), so some normalization is possible; however, without structural improvement in gross margin and SG&A efficiency, sustained ROE recovery is unlikely. Watch for any SG&A growth outpacing revenue in upcoming quarters as a warning signal.

Growth Assessment

Top-line contracted 1.5% YoY to 594.7, signaling soft demand or pricing pressure. Operating income declined 8.1% to 28.8, suggesting negative operating leverage as costs did not flex down commensurately with revenue. Net income fell 49.4% to 11.6, driven by non-operating losses and a high tax burden rather than core operations alone. EBITDA of 40.3 provides some buffer, but at a 6.8% margin, profit growth will require mix upgrades and tighter costs. Revenue sustainability remains uncertain absent segment detail; with inventories at 104.0 and receivables at 283.6, working capital appears substantial, leaving scope for conversion but also potential demand soft spots. Outlook hinges on normalizing tax rate, curbing non-operating drags, and improving gross margin through product mix/pricing. Near-term catalysts would include evidence of demand recovery, SG&A containment, and improved PBT conversion. Medium term, portfolio optimization and ROIC-focused allocation are needed to lift returns above 5–8% benchmarks.

Financial Health

Total assets were 955.9 with equity of 388.9 (equity ratio 39.4%). Debt-to-equity is 1.46x, at the conservative/upper bound threshold; any incremental debt could push leverage above comfort. Current ratio is not disclosed; however, current assets of 548.8 versus short-term loans of 73.5 and accounts payable of 215.2 suggest no immediate liquidity stress, especially with cash and equivalents at 139.1. There is no explicit warning on Current Ratio <1.0 due to data unavailability. Maturity mismatch risk appears moderate: short-term debt (73.5) seems covered by cash and working capital, but reliance on long-term debt (201.1) remains significant. Goodwill is high at 190.6 (~20% of assets), creating potential impairment downside to equity if performance weakens. No off-balance sheet obligations were disclosed in the provided data. Overall solvency is adequate but sensitive to earnings normalization and asset quality.

Cash Flow Quality

OCF of 28.6 is 2.46x net income, indicating strong cash conversion and high earnings quality this quarter. Investing CF was -6.3 despite capex of -21.0, implying asset sales or investment inflows of roughly +14.7; this helped lift FCF (defined as OCF + investing CF) to 22.3. Working capital details by movement are not disclosed, so we cannot isolate inventory or receivables dynamics; no explicit signs of working capital manipulation are identifiable from the snapshot. Free cash flow generation was solid, but not sufficient to fully cover dividends (25.5), resulting in FCF coverage of 0.83x. Sustainability of cash generation will depend on maintaining OCF while avoiding reliance on asset sales. Absent repeated gains on disposals, FCF could normalize closer to OCF − maintenance capex, which may be tighter versus dividends.

Dividend Sustainability

The calculated payout ratio is 230.5%, well above the <60% benchmark and not supported by current-period earnings. FCF coverage of dividends is 0.83x, indicating dividends exceeded internally generated free cash this period. While the balance sheet can temporarily fund the gap, sustained overdistribution would pressure leverage and equity if earnings do not recover. With ROE at 3.0% and ROIC at 2.2%, internal returns are weak, arguing for either dividend right-sizing or profitability improvement to maintain policy credibility. DPS was not disclosed; thus, we cannot assess trajectory, but the combination of low net income and high payout implies risk of adjustment if profit does not rebound and if tax/non-operating burdens persist.

Risk Assessment

Business Risks:

• Margin compression amid soft revenue (-1.5% YoY) and sticky SG&A, pressuring operating leverage
• High effective tax rate (53.0%) reducing net margin and earnings visibility
• Potential goodwill impairment risk given goodwill of 190.6 (~20% of assets)
• Execution risk in lifting ROIC from 2.2% to >5–8% range
• Dependence on disposals/other investment inflows to support investing CF in the period

Financial Risks:

• Elevated leverage with D/E at 1.46x near the upper comfort bound
• Dividends exceeding FCF (0.83x coverage), risking funding from balance sheet or debt
• Non-operating losses (~3.4 drag from OI to PBT) adding volatility to earnings
• Potential refinancing risk if rates rise, given 274.6 of interest-bearing loans

Key Concerns:

• Net income down 49.4% YoY vs modest top-line decline
• ROE at 3.0% and ROIC at 2.2% below cost of capital benchmarks
• Lack of detail on current liabilities and interest expense limits visibility on liquidity and coverage
• High payout ratio (230.5%) appears inconsistent with current earnings power

Investment Implications

Key Takeaways:

• Earnings compression at the net level due to tax and non-operating headwinds despite only modest operating margin pressure
• Cash conversion is healthy (OCF/NI 2.46x), but dividends exceed FCF
• Leverage is elevated at 1.46x D/E; room to lever up is limited without better earnings
• Capital efficiency is weak (ROIC 2.2%, ROE 3.0%), requiring operational and portfolio actions
• Goodwill intensity heightens impairment sensitivity if profitability does not improve

Metrics to Watch:

• Effective tax rate normalization and drivers (e.g., one-offs, valuation allowances)
• PBT-to-OI bridge (non-operating income/expenses) and interest expense disclosure
• Operating margin trajectory and SG&A discipline vs revenue
• Working capital turns (AR and inventory days) and OCF sustainability
• Dividend policy signals vs FCF and leverage
• ROIC by business and capex returns

Relative Positioning: Within diversified industrial/consumer peers, the company currently screens weak on returns (ROIC/ROE) and dividend coverage, average on liquidity, and mixed on cash conversion (strong OCF/NI but reliance on non-recurring investing inflows). A credible path to normalize tax, reduce non-operating drags, and improve operating margin would be needed to close the gap to peers.

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