KANTO DENKA KOGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥30.84B
• Operating Income: ¥815M
• Net Income: ¥100M
• EPS: ¥1.86

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 weak FY2026 Q2 with sharp profit compression despite only a modest revenue decline. Revenue decreased 1.4% YoY to 308.41, while operating income fell 52.6% YoY to 8.15 and ordinary income dropped 59.7% to 9.72, highlighting margin pressure. Net income plunged 92.6% YoY to 1.06, with a very low net margin of 0.34% and an elevated effective tax rate of 74.2% exacerbating the earnings decline. Gross profit was 58.41 for a gross margin of 18.9%, indicating cost inflation and/or unfavorable mix relative to last year. Operating margin compressed to 2.64%, down approximately 285 bps from an estimated 5.49% a year ago based on the reported YoY declines. Ordinary margin fell to 3.15%, compressing roughly 456 bps vs. last year, as non-operating items (+1.57 net) only partially cushioned weak core profits. Net margin declined by about 424 bps YoY to 0.34%, driven by both operating weakness and a high tax burden. Cash flow quality was comparatively solid: operating cash flow of 14.99 exceeded net income by 14.1x, implying real cash generation from operations and/or a working capital release despite low earnings. Liquidity remains healthy with a current ratio of 182% and quick ratio of 157%, and cash and deposits of 143.96 comfortably above short-term loans of 40.87. Leverage is moderate with D/E at 0.81x, but interest coverage at 3.7x is only middling given the cyclical nature of chemicals. Capital intensity remains high: depreciation and amortization were 40.91 in the half, and capex was sizable at 54.03, implying negative free cash flow on a simple OCF–capex basis. ROE is extremely weak at 0.2% (DuPont: NPM 0.3%, asset turnover 0.251x, leverage 1.81x), and ROIC at 0.5% flags capital efficiency stress. Forward-looking, recovery hinges on stabilizing input costs, improving product mix (electronic materials/fluorochemicals), and normalizing the tax rate; otherwise, sustained capex with weak margins risks prolonged FCF pressure. Investors should monitor operating margin inflection, inventory discipline, and pricing in key end-markets (semiconductor and battery-related) into 2H.

Profitability Analysis

ROE decomposition (DuPont): Net profit margin 0.3% × asset turnover 0.251 × financial leverage 1.81x = ROE 0.2%. The dominant negative driver is net profit margin, which collapsed as operating income fell 52.6% on only a 1.4% revenue decline, compressing operating margin by ~285 bps YoY to 2.64%. Asset turnover at 0.251 reflects a capital-intensive balance sheet relative to half-year sales and offers limited ROE support, while leverage at 1.81x is moderate and not a major contributor. Business drivers of NPM deterioration likely include higher energy/raw material costs, less favorable product mix in electronic/fluorochemical lines, and an unusually high effective tax rate (74.2%) that depressed after-tax earnings. The elevated tax rate appears one-off or non-recurring (e.g., timing effects, limited tax shields at low profit) and should normalize; however, cost/mix headwinds may persist absent price increases or demand recovery. No evidence of SG&A discipline can be concluded due to lack of YoY detail, but the absolute SG&A of 50.26 against gross profit of 58.41 leaves a very thin operating spread. Sustainability: margin recovery is possible with input cost relief and mix improvement, but current profitability is fragile and sensitive to volume/price changes.

Growth Assessment

Top line slipped 1.4% YoY to 308.41, indicating relatively stable demand, but operating leverage turned negative with operating income down 52.6%. Non-operating income (5.11, including 1.91 of dividends) partially offset weaker operations, but ordinary income still fell 59.7%. Net income contracted 92.6% to 1.06 due to margin compression and a 74.2% effective tax rate, suggesting transient tax effects amplified the decline. EBITDA of 49.06 (15.9% margin) remains well above EBIT due to heavy depreciation (40.91), reflecting capital intensity rather than underlying strength. With capex of 54.03 in the half, the company is investing through the downturn, which could support medium-term growth if utilization and pricing recover. Near-term, revenue appears resilient but profit quality is pressured; recovery will depend on cost pass-through, product mix (electronics/battery chain), and normalization of the tax rate. Outlook: low visibility for a rapid earnings rebound; watch for 2H margin stabilization and guidance on capex returns.

Financial Health

Liquidity is solid: current ratio 182.2% and quick ratio 157.3% comfortably exceed benchmarks; no warning on current ratio. Cash and deposits (143.96) plus receivables (152.17) cover current liabilities (302.64), reducing short-term refinancing risk. Leverage is moderate with D/E at 0.81x and total loans of 263.21 (short 40.87, long 222.34), and Debt/EBITDA approximates 5.37x, acceptable but elevated for a period of depressed earnings. Interest coverage (EBIT/interest) at 3.70x is below the >5x strong benchmark, implying sensitivity if earnings weaken further. Maturity mismatch risk is limited near-term as cash exceeds short-term loans; however, long-term debt reliance remains meaningful and will require stable cash generation to service. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF of 14.99 vs net income of 1.06 yields an OCF/NI ratio of 14.14x, indicating strong cash conversion and suggesting earnings were depressed by non-cash charges (notably 40.91 of depreciation) and/or working capital release. Simple free cash flow (analytical) is negative at approximately -39.04 (OCF 14.99 minus capex 54.03), implying internal cash generation did not fully fund investment in the half. Financing cash flow was -19.89, consistent with debt repayments and/or shareholder returns (share repurchases of -1.12 reported). No clear signs of working capital manipulation emerge from the limited data, but continued monitoring of inventories (75.43) and receivables (152.17) is warranted given the thin operating margin. Given capital intensity and negative FCF, sustaining both capex and shareholder returns will likely depend on a 2H rebound in operating cash flow or incremental financing.

Dividend Sustainability

Dividend data are largely unreported, but the calculated payout ratio of 922.9% versus depressed earnings signals potential unsustainability if referencing recent payouts. With estimated FCF negative (-39.04) in the half, dividend coverage from organic cash is weak this period. Balance sheet capacity (D/E 0.81x, cash 143.96) could support interim distributions, but doing so while maintaining capex would raise leverage risk if profits do not recover. Policy outlook will likely hinge on 2H recovery and full-year cash generation; a conservative stance (linking dividends to sustainable FCF) would be prudent until margins normalize.

Risk Assessment

Business Risks:

• Input cost inflation (energy and key chemical feedstocks) compressing margins
• Demand and pricing volatility in electronic materials/fluorochemicals and battery-related products
• Customer inventory adjustments in semiconductor/EV supply chains affecting volumes
• High capital intensity requiring sustained utilization to earn returns above the cost of capital

Financial Risks:

• Interest coverage at 3.7x during a weak profit phase, increasing sensitivity to further EBIT declines
• Negative free cash flow in the half due to high capex, raising funding needs if profitability lags
• Potential tax rate volatility (74.2% this period) creating EPS unpredictability
• Debt/EBITDA around 5.4x on depressed EBITDA, limiting flexibility if downturn extends

Key Concerns:

• ROIC at 0.5% indicates sub-par capital efficiency versus typical 7–8% targets
• Margin compression of ~285 bps at the operating level despite only -1.4% revenue change
• Reliance on non-operating income (dividends 1.91) to partially support ordinary profit
• Dividend sustainability at current earnings run-rate appears weak absent recovery

Investment Implications

Key Takeaways:

• Core profitability weakened significantly; operating margin fell to 2.6% (-~285 bps YoY)
• Net income down 92.6% with a 74% tax rate; tax normalization could aid 2H EPS
• OCF strong relative to NI, but capex-heavy profile produced negative FCF in H1
• Balance sheet liquidity is solid, but interest coverage is only middling
• ROIC of 0.5% underscores urgency for margin and utilization improvement

Metrics to Watch:

• Operating margin trajectory and gross margin recovery
• Working capital (AR and inventories) and OCF sustainability
• Capex execution, payback, and impact on ROIC
• Debt/EBITDA and interest coverage
• Pricing and demand in semiconductor/battery-linked products
• Effective tax rate normalization

Relative Positioning: Among Japanese specialty chemical peers, the company currently sits in the lower tier on profitability (OI margin ~2.6%, ROE ~0.2%, ROIC ~0.5%) but maintains healthier-than-average liquidity. Recovery potential hinges on end-market stabilization (electronics/EV) and cost pass-through; until then, capital efficiency lags 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