Mitsui Chemicals,Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥813.59B
• Operating Income: ¥27.94B
• Net Income: ¥15.69B
• EPS: ¥41.76

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: Weak quarter on earnings with significant margin compression and ROE sliding to sub-1%, partially offset by exceptionally strong operating cash flow. Revenue declined 8.6% YoY to 8,135.9, while operating income fell 39.3% YoY to 279.4, indicating negative operating leverage. Net income dropped 64.7% YoY to 78.4, implying a net margin of 1.0% and an effective tax rate of 40.0%, which further depressed bottom line. Operating margin is 3.4% this period versus an estimated 5.2% a year ago, a compression of roughly 175 bps. Gross margin printed at 22.1%, but the SG&A load was heavy (SG&A/revenue about 17.5%), leaving limited room for operating profit. ROE is 0.8% (DuPont: 1.0% NPM × 0.387x asset turnover × 2.15x leverage), underscoring inadequate returns on a sizable capital base. ROIC is reported at 1.7%, well below the 7–8% benchmark and below likely WACC, flagging capital efficiency concerns. Despite weak earnings, cash generation was robust: operating cash flow of 1,272.1 (16.2x net income) benefited from non-cash D&A (511.6) and likely working capital release. Free cash flow was 696.3 after capex of 546.8, enabling coverage of dividends (cash outflow 140.5) and minimal buybacks. Balance sheet remains sound with equity ratio 40.7% and D/E 1.15x; liquidity ratios were not disclosed. Equity-method income was material at 89.0, roughly 34% of profit contribution relative to profit before tax, highlighting sensitivity to affiliates. The high effective tax rate (40%) exacerbated net income decline and may normalize, but remains a watch item. Earnings quality is high this quarter (OCF > NI), yet the quality of margins is weak given price/mix pressure and elevated overhead burden. Dividend optics look stretched on a payout ratio basis (384% on interim NI), but cash coverage from FCF is ample (2.31x). Forward-looking, recovery hinges on demand normalization, inventory/supply balance, and improved spreads in key chemical chains; management must lift ROIC above the cost of capital via mix upgrade and disciplined capex.

Profitability Analysis

ROE decomposition (DuPont): ROE 0.8% = Net Profit Margin 1.0% × Asset Turnover 0.387 × Financial Leverage 2.15x. The largest deterioration came from Net Profit Margin, with operating income down 39.3% vs revenue down 8.6%, compressing operating margin by ~175 bps to 3.4%, and an elevated effective tax rate (40%) further squeezed the bottom line. Asset turnover of 0.387 reflects subdued revenue against a large asset base (assets 21,001.6), and is likely depressed by macro softness and inventory levels (inventories 4,243.6). Leverage at 2.15x is stable/benign and not the driver of ROE change. Business drivers: weaker price/mix and volumes in base/material chains, plus a heavy SG&A burden (17.5% of sales) reduced operating leverage; equity-method income (89.0) provided some cushion but was insufficient. Sustainability: margin pressure appears cyclical, suggesting partial recovery with spread normalization and cost pass-through, but ROIC at 1.7% signals structural under-earning absent portfolio mix improvements. Watch for any trend where SG&A growth outpaces revenue; YoY SG&A detail is not disclosed, so we cannot confirm, but the current SG&A intensity leaves little margin of safety.

Growth Assessment

Top line contracted 8.6% YoY, indicating broad softness in demand and/or price erosion across key product lines. Operating income fell 39.3% YoY, evidencing negative operating leverage and weaker spreads. Equity-method income of 89.0 is meaningful (about 34% of PBT), adding volatility to earnings trajectory if affiliates face commodity or regional swings. EBITDA of 791.0 (9.7% margin) shows that cash earnings capacity remains, but conversion to operating profit is constrained by SG&A and depreciation. Near-term revenue sustainability depends on recovery in downstream sectors (mobility, packaging, basic materials) and inventory normalization; current inventory level at 4,243.6 suggests potential for continued working-capital tailwinds but also underscores prior demand slack. Tax rate normalization from 40% could modestly aid net income growth if achieved. Medium-term outlook requires mix shift toward higher-margin specialties to structurally raise ROIC above WACC. Guidance not provided in the dataset; thus, our outlook embeds cautious stabilization with upside tied to improved spreads and cost discipline.

Financial Health

Liquidity: Current ratio not calculable due to missing current liabilities; no warning triggered as we cannot observe Current Ratio < 1.0. Cash and equivalents were 1,689.2, and operating cash flow was strong. Solvency: D/E is 1.15x and equity ratio is 40.7%, both within conservative-to-moderate range for chemicals. Interest coverage not calculable (interest expense undisclosed). Maturity mismatch risk cannot be fully assessed due to missing breakdown of short-term vs long-term debt; however, sizable current assets (9,416.5) and inventories provide some buffer. Off-balance sheet obligations: none disclosed in provided data.

Cash Flow Quality

Earnings quality is high this quarter: OCF/Net Income = 16.22x, supported by substantial D&A (511.6) and likely working-capital release. Free cash flow of 696.3 is positive after capex of 546.8, leaving room to fund dividends (140.5) and maintain balance sheet strength. Working capital: inventories stand at 4,243.6; the scale suggests meaningful sensitivity of OCF to inventory cycles—this quarter likely benefited from inventory drawdown. No signs of aggressive working-capital manipulation are evident from disclosed line items, but lack of receivables/payables detail limits conclusions. Sustained FCF depends on maintaining cash discipline as spreads recover and restocking eventually reverses the WC tailwind.

Dividend Sustainability

On an interim earnings basis, the payout ratio appears elevated at 384.1% due to depressed net income, which is not necessarily indicative of full-year policy. Cash coverage is comfortable: FCF coverage at 2.31x and cash dividends paid of 140.5 are well within OCF capacity. With ROIC at 1.7% and earnings under pressure, sustained dividend growth likely requires margin recovery or portfolio mix improvement; otherwise, payout growth could outpace earnings power. Capital allocation remains balanced near term given strong OCF; any step-up in capex would tighten coverage. Policy outlook: likely to prioritize stable dividends over buybacks (repurchases were de minimis at 0.08) until earnings normalize.

Risk Assessment

Business Risks:

• Commodity and chemical spread volatility impacting gross and operating margins
• Demand softness in downstream sectors (mobility, packaging, industrial) affecting volumes
• High SG&A intensity (17.5% of sales) limiting operating leverage
• Elevated effective tax rate (40%) depressing net income
• Equity-method income (89.0) contributing ~34% of PBT, adding affiliate performance volatility

Financial Risks:

• ROIC at 1.7% is below likely WACC, indicating capital efficiency shortfall
• Potential liquidity/maturity mismatch not assessable due to missing current liabilities detail
• Interest rate risk on undisclosed interest-bearing debt structure
• FX fluctuations affecting both operating results and affiliate contributions

Key Concerns:

• Margin compression (~175 bps YoY in operating margin) and negative operating leverage
• Low ROE (0.8%) and sub-scale asset turnover (0.387), pointing to underutilized asset base
• Dividend optics strained relative to interim earnings (payout 384%), though cash coverage is adequate
• Dependence on inventory cycle for OCF; potential reversal could weaken cash flows

Investment Implications

Key Takeaways:

• Earnings weakened materially with operating margin at 3.4% and ROE at 0.8%
• Cash flow was a bright spot: OCF 1,272.1 and FCF 696.3 comfortably cover shareholder returns
• ROIC at 1.7% highlights need for mix upgrade, cost actions, and capital discipline
• Equity-method income is a meaningful swing factor and warrants close monitoring
• Balance sheet leverage moderate (D/E 1.15x; equity ratio 40.7%), supporting flexibility if spreads recover

Metrics to Watch:

• Operating margin and spread recovery across key chains
• Working-capital movements (especially inventories) and OCF sustainability
• ROIC trajectory vs capex plans
• Effective tax rate normalization
• Equity-method income run-rate and volatility
• SG&A as a percentage of sales and operating leverage

Relative Positioning: Within the Japanese chemicals peer set, the company shows weaker current profitability and ROIC but solid cash generation and a moderate balance sheet; near-term relative performance hinges on spread normalization and execution on mix shift toward higher-value specialties.

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