Nippon Paper Industries Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥589.22B
• Operating Income: ¥9.01B
• Net Income: ¥2.10B
• EPS: ¥6.54

Income Statement

Balance Sheet

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: Q2 FY2026 shows a modest operational recovery with sharply higher profits off a low base, but earnings remain thin and leverage/coverage metrics are tight. Revenue grew 0.8% YoY to 5,892.2, while operating income surged 338% YoY to 90.1, lifting the operating margin to 1.53%. Gross profit reached 960.7 with a gross margin of 16.3%, reflecting better pricing/mix and/or input cost relief versus last year. SG&A was 870.7 (14.8% of sales), leaving a narrow operating spread of 90.1. Ordinary income jumped 377.5% to 85.5, but the net non-operating result was a small loss due to interest expense of 51.6 outweighing non-operating income of 85.3. Profit before tax was 63.1 and net income 7.5, up 120% YoY, yet net margin is still only 0.13%. Operating margin expanded by roughly 118 bps YoY (from ~0.35% to 1.53%); ordinary margin rose about 114 bps; net margin expanded by ~7 bps. Earnings quality is mixed: total comprehensive income was negative (-104.1), implying sizable OCI losses (likely securities valuation and/or FX translation), and operating cash flow was unreported, preventing validation of cash earnings. Financial risk remains elevated: debt-to-equity is 2.38x and interest coverage is a weak 1.75x, leaving little cushion against rate or spread increases. Liquidity is adequate (current ratio 149%, quick ratio 121%), supported by cash of 1,624.8 and receivables of 1,954.1 versus short-term loans of 1,619.0. The effective tax rate was high at 66.7%, dampening bottom-line conversion. ROE is just 0.1% and ROIC 0.4%, far below cost of capital, underscoring ongoing capital efficiency challenges. Dividend sustainability is questionable with a calculated payout ratio of 154%, given thin earnings and unreported OCF/FCF. Forward-looking, improved pricing and cost normalization seem to be helping, but leverage, low coverage, and negative OCI highlight fragility if macro or input costs worsen. Near-term priorities likely include further price/volume mix management, cost-down, asset discipline, and balance sheet repair to lift ROIC above 5%.

Profitability Analysis

ROE decomposition (DuPont): ROE ≈ Net Profit Margin (0.13%) × Asset Turnover (0.350) × Financial Leverage (3.38x) ≈ 0.1%. Biggest mover: Net profit margin improved the most in direction, but remains extremely low; leverage is high and relatively stable; asset turnover is subdued given large asset base versus H1 revenue. Business drivers: Operating margin rebound reflects pricing initiatives and some input cost relief (energy, pulp) versus prior-year trough, partially offset by high SG&A burden and interest expense. Non-operating drag from interest costs kept ordinary income below operating income despite decent non-operating income. Sustainability: Margin improvements could be partially sustainable if pricing sticks and energy costs remain benign; however, the very low net margin and high effective tax rate mean small shocks can erase profit. Concerning trends: SG&A at 14.8% of sales leaves little buffer; if SG&A grew faster than sales (not disclosed), operating leverage could reverse. High interest expense reduces capacity to invest and constrains margin expansion translating to ROE.

Growth Assessment

Top-line growth was modest at +0.8% YoY, suggesting price carry-over and/or slight volume stabilization in paper/packaging offset soft demand in printing/writing. Operating income +338% YoY indicates strong incremental margins from pricing and cost normalization off a weak prior-year base. Ordinary income +377.5% and net income +120.3% confirm improvement, but absolute levels remain low due to interest burden and high taxes. Margin expansion: operating +~118 bps YoY to 1.53%; ordinary +~114 bps to 1.45%; net +~7 bps to 0.13%. Non-operating income (85.3) helped, but interest expense (51.6) is a sizable headwind. Total comprehensive income was -104.1, likely reflecting valuation losses on investment securities (1,748.2) and/or FX translation, which clouds the durability of equity growth. Outlook hinges on sustaining price discipline, energy/pulp cost trends, and demand in containerboard, specialty paper, and cellulose-related businesses; further portfolio actions or asset efficiency gains are needed to structurally lift ROIC.

Financial Health

Liquidity: Current ratio 148.9% and quick ratio 120.8% indicate adequate short-term liquidity. Cash (1,624.8) and receivables (1,954.1) comfortably cover short-term loans (1,619.0) and accounts payable (1,378.9), reducing near-term refinancing stress. Solvency: Debt-to-equity 2.38x is high (warning), and interest coverage at 1.75x is below the 2x caution threshold, indicating tight capacity to service debt from operations. Maturity profile: Short-term loans 1,619.0 vs noncurrent loans 6,352.6 suggest meaningful refinancing needs over time; however, current assets (6,384.4) exceed current liabilities (4,287.6), mitigating immediate maturity mismatch risk. Off-balance sheet: Not disclosed; given industry norms, consider potential lease obligations and environmental remediation commitments, but unreported here. Equity base: Total equity 4,982.4 with retained earnings only 111.5 highlights limited accumulated buffer.

Cash Flow Quality

OCF unreported, so OCF/Net Income cannot be assessed; this is a key limitation. With net income at 7.5 and interest expense at 51.6, cash interest likely consumed a large share of operating cash unless working capital released cash. Negative total comprehensive income (-104.1) signals mark-to-market or FX losses affecting equity, though not cash OCF. Free cash flow and capex are unreported; therefore, ability to fund dividends and deleverage from internal cash is unclear. Working capital: Receivables (1,954.1) and inventories (1,206.4) are large relative to payables (1,378.9); no clear evidence of working capital stretching is visible, but absent period-on-period WC changes, manipulation cannot be ruled out. Given thin margins and low coverage, cash generation likely remains fragile absent further margin gains.

Dividend Sustainability

DPS unreported; calculated payout ratio at 154.2% indicates dividends (if paid) exceed current period earnings capacity. With OCF and FCF unreported, coverage cannot be validated; however, low interest coverage (1.75x) and ROE (0.1%) suggest limited headroom. Unless H2 earnings/OCF improve materially or payouts are adjusted, sustainability is questionable. Policy outlook likely prioritizes balance sheet stabilization and ROIC improvement over aggressive distributions.

Risk Assessment

Business Risks:

• Input cost volatility (energy, coal/LNG, pulp, chemicals) impacting gross margins
• Structural demand decline in printing and writing paper; reliance on price hikes
• Execution risk in shifting mix to packaging, specialty materials, and biomass
• High effective tax rate (66.7%) depressing net margins
• Affiliate/securities valuation swings impacting OCI and equity

Financial Risks:

• High leverage (D/E 2.38x) and low interest coverage (1.75x)
• Refinancing risk amid higher interest rates with sizable long-term loans (6,352.6)
• Potential impairment risk on noncurrent assets given low ROIC (0.4%)
• Dividend coverage risk with payout ratio at 154% and unreported FCF
• Currency risk on imported inputs and foreign subsidiaries affecting both P/L and OCI

Key Concerns:

• Negative total comprehensive income (-104.1) despite positive net income
• Thin operating margin (1.53%) leaves little buffer against shocks
• Retained earnings low (111.5), restricting financial flexibility
• Unreported operating and free cash flow obscures earnings quality assessment

Investment Implications

Key Takeaways:

• Operational recovery is evident but from a depressed base; margins remain thin
• Leverage and interest coverage are the primary financial constraints
• Negative OCI eroded equity, muting the benefit of positive net income
• ROE (0.1%) and ROIC (0.4%) well below acceptable thresholds signal value creation challenges
• Liquidity adequate near term, but medium-term deleveraging is necessary to reduce risk

Metrics to Watch:

• Operating cash flow and free cash flow in H2
• Price-cost spread: pulp and energy indices vs realized paper/packaging prices
• Interest coverage trend and debt reduction trajectory
• OCI components (securities valuation and FX translation) and equity sensitivity
• SG&A discipline relative to revenue growth
• ROIC improvement and asset turnover changes

Relative Positioning: Versus domestic peers, profitability and capital efficiency appear weaker (very low ROE/ROIC) with higher leverage and tighter coverage, implying greater sensitivity to input costs, demand softness, and interest rates. Sustained price gains, cost-down, and portfolio optimization are needed to close the gap.

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