Denka Company Limited FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥196.70B
• Operating Income: ¥9.74B
• Net Income: ¥3.47B
• 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

Denka Co., Ltd. (4061) reported FY2026 Q2 consolidated results under JGAAP showing resilient profitability against a soft top line. Revenue declined 1.2% YoY to ¥196.7bn, yet operating income rose 3.8% to ¥9.74bn, indicating effective cost control and/or mix improvement. Gross profit was ¥44.1bn with a gross margin of 22.4%, while operating margin improved to approximately 4.95%. Ordinary income of ¥6.79bn fell below operating income, implying notable non-operating headwinds beyond interest expense. Net income increased 15.7% YoY to ¥3.90bn, lifting the net margin to 1.98%. EBITDA was ¥23.39bn, yielding an 11.9% EBITDA margin and underscoring solid operating cash generation potential before working capital movements and non-cash charges. DuPont metrics highlight a low but positive ROE of 1.26%, driven by slim net margins (1.98%), modest asset turnover (0.309x), and moderate financial leverage (2.05x). Liquidity is adequate with a current ratio of 117.3% and a quick ratio of 78.3%, though inventory appears sizable at ¥90.0bn. Leverage is moderate with total liabilities of ¥347.2bn against equity of ¥310.4bn (D/E 1.12x), and interest coverage is healthy at about 10x, suggesting manageable debt service. Cash conversion was weak this half: operating cash flow was ¥1.54bn (OCF/NI ≈ 0.39x), pointing to working capital drag or timing effects. Ordinary income notably trails operating income by roughly ¥3.0bn when including interest, signaling non-operating losses (e.g., FX, equity-method, or other financial items). The reported “effective tax rate 0.0%” metric is not reflective of the disclosed tax charge; using NI plus tax as a proxy for pre-tax income implies an approximate effective tax rate in the low 30% range. Dividend-related disclosures (DPS, payout, cash balance, and investing cash flows) were not provided in the dataset, limiting our ability to assess capital returns and free cash flow. Overall, despite volume softness, Denka preserved profitability through cost discipline, but weak OCF and non-operating losses temper the quality of earnings. Near-term focus should be on cash conversion, inventory normalization, and the trajectory of non-operating items to validate sustainability of the profit recovery.

Profitability Analysis

ROE_decomposition:

• net_profit_margin: 1.98%
• asset_turnover: 0.309x
• financial_leverage: 2.05x
• calculated_ROE: 1.26%
• drivers_commentary: ROE is constrained primarily by a low net margin, with asset turnover modest and leverage moderate. Any sustained margin expansion should translate disproportionately into ROE improvement given leverage at ~2.0x. margin_quality:
• gross_margin: 22.4% (¥44.1bn/¥196.7bn)
• operating_margin: 4.95% (¥9.74bn/¥196.7bn)
• EBITDA_margin: 11.9% (¥23.39bn/¥196.7bn)
• ordinary_margin: 3.45% (¥6.79bn/¥196.7bn)
• net_margin: 1.98%
• commentary: YoY operating profit growth (+3.8%) against a slight revenue decline (-1.2%) indicates effective cost control and/or favorable mix. However, a sizable gap between operating and ordinary income points to non-operating losses that dilute bottom-line margins. operating_leverage: Positive in the period: operating income rose despite lower sales, implying fixed-cost absorption gains and/or mix effects. Sustainability will depend on volume recovery and continued cost discipline.

Growth Assessment

revenue_sustainability: Revenue decreased 1.2% YoY to ¥196.7bn, suggesting a soft demand environment or price/mix pressure. Inventory at ¥90.0bn (≈45.8% of H1 revenue; ≈33% of current assets) warrants monitoring for potential destocking risks. profit_quality: Operating income growth outpaced sales, but ordinary income lagged due to non-operating losses. Net income improvement (+15.7% YoY) is encouraging but quality is somewhat diluted by weak cash conversion (OCF/NI 0.39x). outlook: Cautiously constructive on operating resilience; however, normalization of non-operating items and improvement in working capital efficiency are necessary to sustain earnings momentum. Watch for pricing traction, energy/raw material cost trends, and FX impacts in H2.

Financial Health

liquidity:

• current_ratio: 117.3%
• quick_ratio: 78.3%
• working_capital: ¥39.95bn
• commentary: Near-term liquidity is adequate but below comfort levels for a cyclical chemicals business; elevated inventories reduce quick liquidity. solvency:
• debt_to_equity: 1.12x (total liabilities/equity)
• interest_coverage: ≈10.0x (EBIT/interest expense)
• financial_leverage: 2.05x (assets/equity)
• commentary: Leverage is moderate and coverage healthy, indicating manageable solvency risk under current earnings. capital_structure: Total assets ¥636.2bn vs equity ¥310.4bn and liabilities ¥347.2bn. Ordinary income below operating income highlights exposure to non-operating costs; maintaining coverage hinges on stable EBIT.

Cash Flow Quality

earnings_quality: OCF of ¥1.54bn versus NI of ¥3.90bn yields a 0.39x conversion ratio, signaling working capital outflow and/or timing effects. EBITDA is solid at ¥23.39bn, but translation to cash was weak this half. FCF_analysis: Investing cash flow and capex were not disclosed (reported as 0 implies unreported). As such, FCF cannot be reliably calculated from the dataset. working_capital: Inventories ¥90.0bn appear heavy relative to H1 sales; potential inventory normalization could unlock cash, but also poses margin risk if discounting occurs. Receivables/payables detail not disclosed.

Dividend Sustainability

payout_ratio_assessment: Reported DPS and payout ratio show 0.0%, which indicates non-disclosure in this dataset, not actual zero payout. Without dividend and capex data, quantitative sustainability assessment is not possible. FCF_coverage: FCF coverage cannot be assessed due to lack of investing cash flow and capex disclosure. policy_outlook: Given moderate leverage and positive earnings, the company has capacity for distributions in principle; however, weak H1 OCF and non-operating headwinds suggest a prudent stance until cash conversion improves. Historical policy details are not provided in this dataset.

Risk Assessment

Business Risks:

• Demand softness or pricing pressure in key end-markets (reflected in -1.2% YoY revenue).
• Inventory normalization risk potentially pressuring margins if sell-through lags.
• Raw material and energy cost volatility impacting gross margin.
• FX fluctuations affecting non-operating income and translation.
• Product mix shifts potentially diluting margins.

Financial Risks:

• Weak cash conversion (OCF/NI 0.39x) raising liquidity management needs.
• Non-operating losses depressing ordinary income (≈¥2.0bn beyond interest).
• Moderate leverage (D/E 1.12x) leaves less room if earnings soften.
• Potential increase in interest burden if rates rise (interest expense ¥0.97bn).
• Working capital intensity (high inventories) tying up cash.

Key Concerns:

• Sustainability of margin gains amid lower sales.
• Resolution of non-operating losses weighing on ordinary income.
• Improvement in OCF and inventory turnover in H2.

Investment Implications

Key Takeaways:

• Operational resilience evident: operating income +3.8% YoY on -1.2% revenue.
• Margins improved at the operating level; EBITDA margin 11.9%.
• Ordinary income lag highlights non-operating headwinds beyond interest.
• Cash conversion weak (OCF/NI 0.39x), pointing to working capital pressure.
• Liquidity adequate but inventory-heavy; quick ratio 78.3%.
• Leverage moderate with strong interest coverage (~10x).
• ROE low at 1.26% due to slim net margin and modest asset turnover.

Metrics to Watch:

• Operating cash flow and OCF/NI ratio (target sustained >1.0x).
• Inventory levels and inventory turnover days.
• Ordinary income bridge: FX, equity-method, and other non-operating items.
• Capex and investing cash flows to gauge FCF trajectory.
• Pricing/mix and gross margin progression.
• Interest expense trend and coverage.
• Asset turnover improvements tied to revenue recovery.

Relative Positioning: Within the Japanese chemicals space, Denka shows decent operating resilience and coverage but lags on ROE and cash conversion this half. Normalization of non-operating items and working capital will be key to improving its relative standing.

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