NIPPON KAYAKU CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥113.58B
• Operating Income: ¥10.62B
• Net Income: ¥11.73B
• EPS: ¥75.07

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: Solid top-line growth but margin compression and reliance on one-time gains; core operations softened while cash generation and liquidity remain strong. Revenue rose 4.1% YoY to 1,135.75, while operating income fell 4.9% YoY to 106.18, indicating operating margin pressure despite higher sales. Gross profit reached 338.59, implying a gross margin of 29.8%. Operating margin was approximately 9.4% this quarter (106.18/1,135.75), versus an estimated 10.2% in the prior-year period, a compression of about 89 bps. Ordinary income declined 7.0% YoY to 108.43, reflecting modest net non-operating contribution (non-op income 15.52 vs non-op expense 13.26). Profit before tax surged to 165.74, implying roughly 57 in net extraordinary gains above ordinary income, which supported bottom-line expansion. Net income nearly doubled (+95.7% YoY) to 116.89, aided by those one-time gains and a 29.2% effective tax rate. Cash generation was robust: operating cash flow was 182.88, equating to an OCF/NI of 1.56x, which signals high earnings quality this period. Balance sheet strength is notable with a current ratio of 342.9% and a quick ratio of 264.2%, underpinned by 688.05 in cash and deposits. Leverage is conservative with D/E at 0.46x and interest coverage at 52.6x, indicating ample debt-servicing capacity. Capital efficiency remains the weak spot: ROE is 4.3% and ROIC is 3.1%, both below typical cost of capital benchmarks and downbeat for long-term value creation. Capex was sizable at 119.77, but implied free cash flow remained positive at about 63.1 (OCF minus capex), supporting ongoing shareholder returns. Shareholder returns included substantial buybacks of 92.05, and the calculated payout ratio is high at 82.1%, which merits caution if earnings normalize lower without extraordinary gains. Margin compression alongside higher SG&A (implied by operating deleverage) suggests core profitability headwinds. Forward-looking, sustaining earnings will require margin recovery in core businesses, disciplined capex to lift ROIC above 5–7%, and less dependence on one-off gains.

Profitability Analysis

DuPont ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 10.3% × 0.290 × 1.46x ≈ 4.3%. The most material pressure this quarter came from operating margin compression, which, while not directly in the DuPont trio, feeds into net margin; operating margin fell from an estimated ~10.2% to 9.4% (-89 bps). Net margin was buoyed by extraordinary gains embedded between ordinary income (108.43) and profit before tax (165.74), masking weaker core profitability. Asset turnover at 0.290 indicates a relatively asset-heavy profile and subdued efficiency; no clear evidence of improvement this quarter. Financial leverage at 1.46x remains conservative, providing little ROE boost but keeping risk low. Business drivers: revenue growth (+4.1%) likely faced cost headwinds (raw materials, mix, or FX) and higher SG&A, producing negative operating leverage. The net margin uplift is not purely operational; one-time gains appear significant (~57 of pretax). Sustainability: the margin pressure from core operations could persist absent pricing power or cost relief, while the boost from extraordinary items is one-off. Concerning trend: SG&A growth likely exceeded gross profit growth (given operating income decline against rising revenue), indicating cost discipline or scale benefits were insufficient this quarter.

Growth Assessment

Top-line growth of 4.1% is healthy, suggesting steady demand across core segments. However, operating income declined 4.9%, indicating negative operating leverage and/or unfavorable mix. Ordinary income fell 7.0%, reinforcing the view that recurring earnings softened. Net income up 95.7% YoY was driven by non-recurring gains, not core business acceleration. EBITDA of 180.96 (15.9% margin) shows resilience at the cash earnings level, supported by D&A of 74.78. Non-operating result was modest (+2.26), implying the large delta to PBT was extraordinary, not recurring financial income. Revenue sustainability appears decent near term, but profitability sustainability hinges on raw material/pricing balance and SG&A control. Near-term outlook: watch for gross margin stabilization and cost normalization to restore operating margin to >10%. Medium-term, lifting ROIC (3.1%) above 5–7% will require better asset utilization and/or higher returns on new investments. Absent further one-offs, reported EPS will likely normalize lower than this quarter’s boost.

Financial Health

Liquidity is very strong: current ratio 342.9% and quick ratio 264.2%; no warning thresholds breached. Cash and deposits of 688.05 comfortably exceed short-term loans of 104.14 and accounts payable of 234.66, minimizing maturity mismatch risk. Total liabilities are 1,226.79 versus equity of 2,692.24, yielding D/E of 0.46x—conservative. Long-term loans are 292.77; noncurrent liabilities total 573.97, manageable given cash flow and interest coverage of 52.56x. Working capital is ample at 1,585.52, though inventories (513.48) and receivables (574.47) indicate significant cash tied in operations. No off-balance sheet obligations were reported in the provided data. There is no red flag on solvency or liquidity under current conditions.

Cash Flow Quality

OCF/Net Income of 1.56x indicates high-quality earnings with strong cash conversion. Implied free cash flow is approximately 63.1 (182.88 OCF minus 119.77 capex), positive despite meaningful investment. Financing cash outflow of -36.91 combined with share repurchases of -92.05 suggests shareholder returns were largely funded from internally generated cash and existing cash balances. No evident signs of working capital manipulation from the aggregate data; however, detailed movements (AR, AP, inventory deltas) are not disclosed for confirmation. Given OCF strength, current dividend and buyback capacity appears covered near term, but sustainability depends on maintaining OCF if one-off gains dissipate.

Dividend Sustainability

The calculated payout ratio is high at 82.1%, above the <60% benchmark for comfort, implying a tighter coverage buffer. While total dividends paid were not disclosed, OCF and implied FCF of ~63.1 suggest dividends could be covered if they are moderate; however, concurrent buybacks of 92.05 significantly raise total shareholder return outflow. With ROIC at 3.1% and ROE at 4.3%, aggressive payouts risk crowding out reinvestment needed to lift returns. Policy outlook should emphasize balanced allocation: prioritize capex/efficiency projects that can raise ROIC above 5–7% while keeping dividend growth in line with sustainable FCF. Coverage is acceptable near term but sensitive to normalization of earnings without extraordinary gains.

Risk Assessment

Business Risks:

• Raw material and energy cost volatility pressuring gross margins
• Pricing power limitations leading to negative operating leverage
• Product mix shifts reducing operating margin
• Regulatory and quality risks in chemicals/pharma-related lines
• Execution risk in capital projects given low ROIC (3.1%)

Financial Risks:

• High payout ratio (82.1%) relative to core earnings strength
• Earnings sensitivity to absence of one-time gains that lifted PBT
• Working capital intensity (high AR and inventory) impacting cash conversion in downturns
• FX exposure on exports/imports affecting margins and earnings volatility

Key Concerns:

• Core operating margin compressed by ~89 bps YoY
• Dependence on extraordinary gains to achieve +95.7% NI growth
• ROE 4.3% and ROIC 3.1% below cost-of-capital benchmarks
• Potential slowdown in OCF if volumes or pricing soften

Investment Implications

Key Takeaways:

• Top-line growth solid (+4.1%) but core profit under pressure (-4.9% operating income)
• Extraordinary items (≈57 pre-tax) drove bottom-line surge; not recurring
• Cash generation strong (OCF/NI 1.56x), liquidity and leverage highly conservative
• Capital efficiency weak (ROIC 3.1%, ROE 4.3%), necessitating margin and asset-turn improvements
• Shareholder returns robust (buybacks 92.05), but payout ratio high at 82.1%—monitor sustainability

Metrics to Watch:

• Operating margin trajectory back toward >10%
• Gross margin vs raw material cost trends
• OCF and inventory/receivable turns for cash conversion
• ROIC progression from 3.1% toward >5–7%
• Extraordinary gains/losses and their recurrence
• Capex discipline and returns on growth/efficiency projects

Relative Positioning: Financially conservative balance sheet and strong liquidity provide resilience versus peers, but lower ROIC/ROE and recent operating margin compression place the company behind best-in-class specialty chemical peers on capital efficiency and core profitability.

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
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