Nippon Chemical Industrial Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥21.00B
• Operating Income: ¥1.39B
• Net Income: ¥1.34B
• EPS: ¥152.79

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

Verdict: FY2026 Q2 was a mixed quarter with resilient top line (+1.5% YoY) but sharp operating profit compression (-42.1% YoY), partially cushioned by special gains that limited net income decline to -18.2% YoY. Revenue was 209.98, gross profit 41.61, and operating income 13.90, translating to a gross margin of 19.8% and operating margin of 6.6%. Ordinary income was 13.74, weighed by net non-operating loss (income 1.54 vs expenses 1.71), but profit before tax rose to 17.21, indicating c. 3.5 of extraordinary gains. Net income was 13.36 with an effective tax rate of 22.4%. EBITDA came in at 32.35 (15.4% margin), and interest coverage was strong at 18.5x, indicating low immediate solvency risk. Operating cash flow of 13.35 broadly matched net income (OCF/NI ≈ 1.00x), suggesting acceptable earnings quality for the half. However, capex of 28.12 exceeded OCF, implying negative implied FCF of about -14.8 for the period. Balance sheet liquidity remained sound (current ratio 151%, quick ratio 130%) with manageable leverage (D/E 0.58x). ROE was weak at 2.8%, driven by modest net margin (6.4%), low asset turnover (0.277), and only moderate leverage (1.58x). Operating margin compressed meaningfully; based on reported YoY dynamics, we estimate operating margin fell by roughly 500 bps YoY (from ~11.6% to 6.6%). Net margin likely compressed by roughly 150 bps YoY (from ~7.9% to 6.4%), aided by extraordinary gains that softened the drop. SG&A of 27.70 equates to 13.2% of sales, indicating operating deleverage as gross margin was insufficient to absorb fixed costs. ROIC of 1.9% is below a 5% threshold, signaling capital efficiency concerns as growth investments have yet to translate into returns. Dividend payout ratio is calculated at 61.4%, slightly above the 60% benchmark, and with negative implied FCF this half, the distribution may rely on balance sheet strength in the near term. Forward-looking, margin recovery hinges on price/mix, cost pass-through, and normalization of non-recurring gains; sustained capex suggests a pipeline for medium-term growth but near-term ROIC and cash conversion are key watch points.

Profitability Analysis

• ROE decomposition (DuPont): Net Profit Margin 6.4% × Asset Turnover 0.277 × Financial Leverage 1.58x = ROE 2.8% (matches reported).
• Primary driver of ROE decline: operating margin contraction; operating income fell 42.1% YoY on only +1.5% revenue growth, indicating negative operating leverage.
• Business explanation: cost pressures (materials/energy) and/or weaker mix likely compressed gross profit and could not be offset by SG&A, pushing operating margin down to 6.6%.
• Sustainability: some margin pressure may be cyclical (input costs, demand softness), while the extraordinary gains boosting PBT appear one-off; underlying operating margin recovery depends on cost pass-through.
• Warning flags: SG&A grew faster than revenue implicitly (given deleverage), with SG&A at 13.2% of sales and gross margin at 19.8%, leaving a narrow operating spread.

Growth Assessment

• Revenue growth was modest at +1.5% YoY to 209.98, suggesting stable demand but limited volume/mix expansion.
• Operating income fell to 13.90 (-42.1% YoY), implying significant margin erosion and negative operating leverage.
• Net income decline (-18.2% YoY to 13.36) was cushioned by extraordinary gains (PBT 17.21 vs ordinary income 13.74).
• EBITDA margin at 15.4% remains decent, but conversion to operating profit weakened.
• Outlook: near-term growth depends on restoring price/mix and cost pass-through amid input cost volatility; capex (28.12 in the half) positions for medium-term capacity/efficiency, but ROIC at 1.9% indicates returns lag investments.
• Non-operating support is unlikely to be a recurring growth driver; core operating recovery is necessary for sustainable EPS growth.

Financial Health

• Liquidity: Current ratio 151.4% (healthy threshold ~150%), quick ratio 130.4% (healthy). No warning for Current Ratio < 1.0.
• Solvency: D/E 0.58x (conservative), interest coverage 18.5x (strong). No D/E > 2.0 risk.
• Maturity profile: Short-term loans 118.25 vs current assets 310.08 (including cash 67.25 and receivables 119.01) indicates manageable refinancing risk, though reliance on short-term funding is notable.
• Balance sheet quality: Retained earnings 346.43 underpin equity of 477.91; investment securities 53.71 provide additional financial flexibility.
• Off-balance sheet: Not disclosed; no information on guarantees/commitments in provided data.

Cash Flow Quality

• OCF/Net Income = 1.00x (13.35/13.36), meeting the >1.0 benchmark and indicating acceptable earnings-to-cash conversion for the half.
• Implied FCF (OCF – Capex) ≈ -14.8, as capex (28.12) exceeded OCF (13.35); near-term FCF pressure evident.
• Working capital: Receivables 119.01 and inventories 42.87 vs payables 31.21 suggest cash tied up in operations; no explicit signs of end-period pull-forward or payables stretching from available data.
• Sustainability: Without improvement in operating margin or moderation of capex cadence, FCF may remain tight; however, liquidity headroom mitigates immediate risk.

Dividend Sustainability

• Payout ratio (calculated) 61.4%, slightly above the <60% comfort level; headroom is limited if earnings remain pressured.
• FCF coverage: Implied negative FCF this half suggests dividends are not covered by internally generated free cash in the period.
• Balance sheet support: Low leverage and sizeable retained earnings provide capacity to maintain dividends in the near term, but medium-term sustainability requires operating and cash flow recovery.
• Policy outlook: With ROIC at 1.9% and margins under pressure, management may balance shareholder returns against reinvestment needs; DPS trajectory likely tied to H2 margin and cash conversion improvements.

Risk Assessment

Business Risks:

• Input cost inflation (energy, raw materials) compressing margins
• Demand softness in key end markets (electronics/auto/industrial) impacting volumes and mix
• Execution risk on elevated capex not translating into commensurate returns (ROIC 1.9%)
• Dependence on non-recurring gains to support bottom line in the period

Financial Risks:

• Negative implied FCF due to capex exceeding OCF in the half
• Short-term loans reliance (118.25) introduces refinancing sensitivity despite ample current assets
• Potential FX exposure affecting import costs and export competitiveness (not quantified)

Key Concerns:

• Operating margin compressed to 6.6% with sharp YoY decline
• Low ROE (2.8%) and sub-par ROIC highlight capital efficiency challenges
• Dividend payout near threshold amid weak FCF coverage

Investment Implications

Key Takeaways:

• Top line resilient (+1.5% YoY) but operating leverage turned negative
• Extraordinary gains masked deeper weakness at the ordinary/operating level
• Liquidity and leverage are comfortable, mitigating near-term balance sheet risk
• Cash conversion is acceptable, but capex intensity drove negative implied FCF
• Capital efficiency is a priority area (ROIC 1.9%, ROE 2.8%)

Metrics to Watch:

• Gross and operating margin trajectory (pricing and cost pass-through)
• OCF/Net Income and inventory/receivables turnover
• Capex execution and post-investment ROIC uplift
• Extraordinary/one-time gains vs recurring earnings mix
• Short-term debt rollover and interest expense trend
• Dividend payout vs FCF coverage

Relative Positioning: Within Japanese specialty/industrial chemicals, the company exhibits conservative leverage and solid liquidity but lags peers on profitability and capital efficiency; near-term performance hinges on margin recovery and improved cash-funded growth.

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