NIHON KAGAKU SANGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥13.29B
• Operating Income: ¥1.52B
• Net Income: ¥1.25B
• EPS: ¥64.43

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: Solid topline growth with stable profits and strong cash conversion, but mild margin compression and sub-target capital efficiency persist. Revenue rose 6.2% YoY to 132.9, while operating income was flat at 15.17 (-0.6% YoY), and net income inched up 0.8% to 12.53. Gross profit reached 32.09, implying a 24.1% gross margin, and operating margin stood at 11.4%. Ordinary income was 17.34 (-1.2% YoY), supported by 2.58 in non-operating income (notably 1.22 dividend income and 0.38 interest income), partially offset by 0.41 in non-operating expenses. Net margin was 9.4%, and the effective tax rate was 27.2%. Based on YoY rates, the operating margin contracted by roughly 77 bps (prior ~12.2% to 11.4%), and the net margin contracted by ~50 bps (prior ~9.9% to 9.4%). Cash generation was strong: operating cash flow of 15.70 exceeded net income (OCF/NI 1.25x), and after capex of 10.61, implied FCF was about 5.09. The balance sheet is highly liquid (current ratio 629%, quick ratio 597%) with minimal debt (D/E 0.17x) and exceptionally high interest coverage (1,511x). However, ROE is a muted 2.6% due to low asset turnover (0.235) and conservative leverage (1.17x), and ROIC at 3.9% is below a 5% warning threshold. Total comprehensive income of 26.87 materially exceeded net income, indicating large unrealized gains (likely on investment securities), which are non-cash and potentially volatile. Non-operating income contributed meaningfully to ordinary income but remains at a manageable proportion relative to operating profit. Reported payout ratio of 121.4% is above 100%, suggesting potential pressure on dividend sustainability absent continued strong cash or balance sheet support, though dividend details were not disclosed. Overall, the quarter reflects operational resilience and strong liquidity, but improving capital efficiency (ROIC/asset turnover) remains the key medium-term challenge. Forward-looking, maintaining pricing power and cost discipline while deploying cash toward higher-return projects are critical to lift ROIC above the 5–7% range.

Profitability Analysis

ROE decomposition (DuPont): ROE 2.6% = Net Profit Margin 9.4% × Asset Turnover 0.235 × Financial Leverage 1.17x. The primary drag on ROE is low asset turnover (0.235), compounded by deliberately low leverage (1.17x), while net margin is decent for a specialty chemicals profile. YoY, operating income declined slightly (-0.6%) while revenue rose (+6.2%), implying operating margin contraction of ~77 bps to 11.4%; net margin also contracted ~50 bps to 9.4%. Business drivers: higher SG&A burden relative to sales and/or mix effects likely compressed operating margin; gross margin of 24.1% is healthy, so deleverage likely occurred below gross profit. Non-operating income (dividends/interest) cushioned ordinary income, but ordinary income still declined (-1.2%), pointing to core margin pressure. Sustainability: current margin level seems sustainable if input costs remain stable and pricing holds; non-operating contributions from dividends/interest are recurring but sensitive to market rates and equity holdings performance. Watch for SG&A growth outpacing revenue (SG&A/sales ~12.7% this period); we lack prior SG&A to confirm trend, but the margin compression suggests cost growth > revenue growth or less favorable mix.

Growth Assessment

Revenue grew 6.2% YoY to 132.9, indicating steady demand. Operating profit was broadly flat (-0.6% YoY) despite sales growth, evidencing negative operating leverage this period. Ordinary profit declined 1.2% YoY despite 2.58 of non-operating income, suggesting core pressure overshadowed financial income support. Net income rose 0.8% YoY to 12.53; however, net margin contracted as revenue growth outpaced profit growth. Growth quality is mixed: core earnings were resilient but not expanding, while comprehensive income surged to 26.87, driven by unrealized valuation gains (non-cash), not operating improvements. With depreciation at 5.16 and EBITDA at 20.33 (15.3% margin), the EBITDA profile is solid, but capital efficiency remains low (ROIC 3.9%). Outlook hinges on maintaining pricing amid raw material and energy volatility, executing disciplined cost control, and redeploying abundant cash into higher-return opportunities to lift ROIC.

Financial Health

Liquidity is exceptionally strong: current ratio 629% and quick ratio 597%, with cash and deposits of 202.6 far exceeding current liabilities of 53.3. No warning on current ratio (<1.0) or D/E (>2.0); D/E is conservative at 0.17x. Interest-bearing debt detail is partially unreported, but short-term loans are only 0.80, and interest expense is de minimis (0.01), corroborated by an interest coverage ratio of 1,511x. Maturity mismatch risk is negligible given cash and current assets comfortably cover short-term obligations (working capital 281.9). Equity is 482.8 (owners’ equity equals total equity), implying a robust capitalization. Off-balance sheet obligations are not disclosed; none identified in the provided data.

Cash Flow Quality

Earnings quality is strong: OCF/Net Income is 1.25x (>1.0 threshold), indicating profits are backed by cash. Implied free cash flow is positive at about 5.09 (OCF 15.70 minus capex 10.61), sufficient to fund organic investments. Financing CF was -10.69, likely reflecting dividends and/or share-related cash outflows, but specifics are unreported. No signs of working capital manipulation are evident from available data; cash conversion appears healthy, though lack of prior-period working capital detail limits deeper diagnostics. With significant cash on hand and modest capex, near-term FCF sustainability appears solid, contingent on stable OCF.

Dividend Sustainability

The reported payout ratio (calculated) is 121.4%, which is above the <60% benchmark for comfortable sustainability and above 100%, implying distributions may exceed earnings. However, DPS and total dividends paid are unreported, so this ratio may be based on guidance or partial-period assumptions. On a cash basis, implied FCF of ~5.09 is positive, but coverage of dividends cannot be confirmed. Given the very strong balance sheet (cash 202.6) and minimal debt, the company has capacity to support near-term dividends even at elevated payout levels; longer-term sustainability would require either higher earnings/OCF or a recalibration of payout. Policy outlook is unclear due to missing disclosures; monitor board guidance and payout policy commentary.

Risk Assessment

Business Risks:

• Raw material and energy price volatility impacting gross margins
• Product mix and pricing power risk leading to operating margin compression
• Dependence on financial income (dividends/interest) to support ordinary profit in weaker quarters
• Regulatory/environmental compliance costs in chemical manufacturing
• Customer concentration or cyclical end-markets (e.g., electronics, automotive) exposure

Financial Risks:

• Equity price risk due to sizable investment securities balance (111.6), which can drive volatile OCI
• Dividend sustainability risk with a calculated payout ratio of 121.4%
• ROIC at 3.9% below 5% threshold, indicating capital inefficiency and potential value dilution if not improved
• Foreign exchange exposure on imports/exports (not disclosed but typical for the sector)

Key Concerns:

• Operating margin contraction (~77 bps) despite revenue growth
• Low asset turnover (0.235) constraining ROE (2.6%)
• Reliance on non-operating income to stabilize ordinary profit in the face of core pressure
• Large gap between comprehensive income (26.87) and net income (12.53), highlighting market-driven valuation effects

Investment Implications

Key Takeaways:

• Topline growth was healthy (+6.2%), but operating leverage was negative this quarter
• Cash generation is robust (OCF/NI 1.25x) and FCF positive (~5.09)
• Balance sheet is fortress-like with ample cash and minimal debt
• Capital efficiency is the main weakness (ROIC 3.9%, ROE 2.6%) driven by low asset turnover
• Non-operating income provides a cushion but introduces exposure to market rates and equity markets

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio
• ROIC versus a 5–8% target band
• Asset turnover improvement via portfolio optimization and capacity utilization
• OCF/NI ratio and working capital turns (AR and inventory days)
• Payout ratio and DPS guidance versus FCF
• Sensitivity to raw material costs and FX

Relative Positioning: Compared to Japanese specialty chemical peers, the company exhibits superior liquidity and low leverage but lags on capital efficiency (ROIC/ROE). Margins are solid mid-teens at EBITDA and low double-digit at operating level, yet growth conversion to profit is constrained by cost/mix dynamics and low asset turnover.

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