Denka Company Limited FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥196.70B
• Operating Income: ¥9.74B
• Net Income: ¥1.85B
• EPS: ¥45.28

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 mixed but slightly positive quarter with operating resilience offset by weak bottom-line efficiency and heavy investment outflows. Revenue declined 1.2% YoY to 1,966.99, but operating income rose 3.8% YoY to 97.40 as cost controls supported margin improvement. Gross profit was 446.95, implying a gross margin of 22.7%, while the SG&A ratio was 17.8% (349.55/1,966.99), leaving room for operating leverage. Operating margin expanded to 4.95% from roughly 4.72% a year ago, a ~23 bps improvement despite topline softness. Ordinary income increased 21.8% YoY to 67.91, but was pressured by net non-operating expenses (income 20.76 vs expenses 50.25) and interest costs of 11.36. Profit before tax was 61.05 and net income was 39.02 (+15.7% YoY), but the effective tax rate was elevated at 69.7%, compressing bottom-line conversion. Comprehensive income was negative (-13.36), likely driven by unfavorable OCI (e.g., valuation or FX-related items), indicating equity volatility not visible in net income. Cash generation was strong: operating cash flow of 115.30 was 2.95x net income, signaling high earnings quality. However, capital expenditures of 310.10 exceeded OCF, implying negative proxy FCF for the period and external funding reliance for growth capex and any shareholder returns. The balance sheet remains adequate but not pristine on liquidity: current ratio at 134.9% and quick ratio at 91.6% indicate dependence on inventory monetization. Leverage is moderate with D/E of 1.05x and interest coverage at 8.57x, but ROE is low at 1.3% due to thin margins and modest asset turnover. ROIC is 1.1%, well below a 5–8% cost of capital benchmark, highlighting capital efficiency challenges. Inventory (805.00) and receivables (900.07) are sizable relative to H1 activity, and working capital discipline will be important to sustain OCF. Non-operating swings and tax rate elevation remain key earnings headwinds near term. Looking ahead, sustaining margin gains, normalizing the tax rate, and executing on capex to lift ROIC will determine whether the modest operating improvement can translate into stronger equity returns.

Profitability Analysis

ROE decomposition: ROE (1.3%) = Net Profit Margin (2.0%) × Asset Turnover (0.309) × Financial Leverage (2.05x). The weakest components are the net margin and asset turnover; leverage is moderate and not the primary lever. The biggest change this quarter versus revenue trends appears in margin: operating income grew 3.8% while sales fell 1.2%, implying better cost pass-through and/or mix, and a ~23 bps operating margin expansion to 4.95%. Business drivers likely include procurement cost stabilization, pricing/mix in specialty lines, and SG&A discipline (SG&A ratio 17.8%). Non-operating items (net -29.49) and a high effective tax rate (69.7%) materially diluted the translation from operating to net income, capping ROE. Sustainability: operating margin gains look incrementally sustainable if input cost volatility remains contained and pricing holds, but the high tax rate and non-operating expense intensity are less sustainable drags and could normalize, offering upside to net margin. Watchpoints: SG&A growth vs revenue (ratio at 17.8%); any reacceleration in SG&A ahead of revenue would erode operating leverage. Depreciation of 144.39 implies rising capital intensity; absent commensurate EBIT growth, ROIC pressure persists.

Growth Assessment

Top line contracted 1.2% YoY despite operating profit growth, indicating mix and cost actions rather than demand-led expansion. Operating income increased 3.8% YoY to 97.40, and ordinary income rose 21.8% YoY to 67.91, though the latter is still dampened by elevated non-operating expenses. EBITDA reached 241.79 (12.3% margin), providing capacity to invest, but heavy capex (310.10) points to ongoing strategic growth or maintenance projects with lagged P&L benefits. Revenue sustainability near term hinges on price/mix retention and stability in key input and energy costs; the slight revenue dip suggests subdued demand in some categories. Profit quality is stronger than earnings suggest due to OCF/NI of 2.95x, indicating good cash conversion and likely working capital contribution. Outlook: If the effective tax rate normalizes and non-operating headwinds ease, net income growth could exceed operating growth; conversely, any resurgence in energy/feedstock costs or FX volatility could compress gross margins.

Financial Health

Liquidity: Current ratio 134.9% (adequate, but below a 150% comfort threshold), quick ratio 91.6% (below 1.0, signaling reliance on inventory turnover). No explicit warning triggers (Current Ratio <1.0 not breached). Working capital stands at 648.83. Maturity and funding: Short-term loans are 597.13 versus cash of 289.43; with receivables at 900.07, near-term liquidity is manageable but sensitive to collection cycles. Solvency: D/E is 1.05x (within a conservative <1.5x benchmark) and interest coverage is 8.57x (strong). Long-term loans total 1,035.48, indicating a balanced debt stack, but continued negative proxy FCF would gradually increase leverage if sustained. Off-balance sheet obligations: Not disclosed in the provided data.

Cash Flow Quality

Earnings quality is high with OCF/Net Income at 2.95x, indicating robust cash conversion and limited accrual risk this period. Proxy FCF (OCF – Capex) is approximately -194.8, reflecting heavy investment outflows relative to operating inflows. This implies that dividends and debt service rely on balance sheet capacity or incremental financing during the investment phase. Working capital: Receivables (900.07) and inventories (805.00) are sizable; estimated days sales outstanding ~83 days and inventory days ~96 (using H1 figures), acceptable for chemicals but a key lever for sustaining OCF. No overt signs of working capital manipulation in the limited data, though the quick ratio below 1.0 emphasizes the need for disciplined collections and inventory management.

Dividend Sustainability

Payout ratio (calculated) is 226.9%, implying dividends in excess of current period earnings; however, actual dividends paid were unreported, and this ratio may reflect interim policy vs H1 earnings. On a cash basis, proxy FCF is negative given capex of 310.10 exceeding OCF of 115.30, so dividends would be funded by cash on hand or debt in the period. Sustainability thus depends on the cadence of capex and anticipated OCF recovery in subsequent periods; if capex moderates or new assets ramp, coverage should improve. Policy outlook: With ROIC at 1.1% and leverage moderate, management may balance shareholder returns with investment needs; any commitment to stable or progressive DPS would require confidence in second-half cash generation.

Risk Assessment

Business Risks:

• Commodity and energy price volatility affecting feedstock and utility costs, pressuring gross margins
• Demand softness in certain end-markets evidenced by a 1.2% YoY revenue decline
• Execution risk on large capex (310.10) with lag to returns, risking continued negative FCF
• Operational leverage risk if SG&A creeps higher ahead of revenue

Financial Risks:

• Quick ratio of 0.916 indicates reliance on inventory conversion to meet short-term obligations
• High effective tax rate (69.7%) suppressing net income and cash after tax
• Net non-operating expense drag (29.49) reducing ordinary income
• ROIC at 1.1% well below cost of capital, risking value dilution if not improved

Key Concerns:

• Negative total comprehensive income (-13.36) signals equity volatility from OCI (e.g., securities valuation or FX)
• Short-term loans (597.13) exceed cash (289.43), increasing refinancing and rollover dependence
• Potential sensitivity to FX (JPY) given import feedstocks and export exposure typical for chemical producers
• If capex stays elevated without margin or turnover uplift, leverage could drift up and dividend flexibility narrow

Investment Implications

Key Takeaways:

• Operating margin expanded ~23 bps YoY to 4.95% despite a 1.2% revenue decline
• High cash conversion (OCF/NI 2.95x) contrasts with negative proxy FCF due to heavy capex
• Bottom-line efficiency is constrained by a 69.7% tax rate and net non-operating expenses
• Balance sheet is moderately levered (D/E 1.05x) with adequate current ratio but sub-1.0 quick ratio
• Capital efficiency is weak (ROIC 1.1%, ROE 1.3%), making returns on new investments the critical swing factor

Metrics to Watch:

• Gross margin and energy/feedstock cost trends
• SG&A ratio vs revenue growth to gauge operating leverage
• Effective tax rate normalization and drivers
• Working capital metrics: DSO (~83 days), inventory days (~96 days), and OCF trajectory
• Capex intensity vs EBITDA growth and resulting ROIC uplift
• Non-operating items (interest and other) and their impact on ordinary income
• Comprehensive income/OCI swings (securities and FX valuation)

Relative Positioning: Within the Japanese chemicals cohort, Denka shows improving operating discipline but lags on capital efficiency and cash FCF due to elevated capex; liquidity is adequate but not robust, placing it mid-to-lower tier on returns and free cash generation near term.

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