TOHO CHEMICAL INDUSTRY COMPANY,LIMITED FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥26.00B
• Operating Income: ¥890M
• Net Income: ¥523M
• EPS: ¥24.87

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

FY2026 Q2 results show resilient operations but pressured bottom line, with stable operating profit and significantly weaker ordinary and net income due to non-operating drags and higher financial leverage. Revenue declined 2.4% YoY to 260.03, while operating income was essentially flat at 8.90 (-0.2% YoY), indicating good cost control amid softer topline. Gross profit reached 41.02 for a gross margin of 15.8%, and SG&A was contained at 32.11, preserving operating profitability. Operating margin improved modestly to 3.4% (about +7 bps YoY, by our estimate), reflecting cost discipline despite weaker sales. Ordinary income fell 14.2% YoY to 7.58, as non-operating expenses (2.53), notably interest expense (2.08), outweighed non-operating income (1.21, including 0.73 dividends). Net income dropped 39.0% YoY to 5.22, implying a stronger impact from financing costs and possibly less favorable non-operating items. The effective tax rate was 27.5%, within a normal range and not the primary driver of the bottom-line decline. Cash generation was a key positive: operating cash flow of 23.05 was 4.42x net income, signaling high earnings quality this quarter. Implied free cash flow (OCF minus CapEx) was about 7.18, sufficient to support deleveraging or dividends if maintained, although investing cash flow details were not disclosed. Leverage is elevated with D/E at 2.24x and Debt/EBITDA about 11.1x, and the quick ratio at 0.82 points to reliance on inventories for liquidity. ROE stands at 2.5% and ROIC at 1.6%, both low versus typical cost of capital, highlighting a capital efficiency challenge. Interest coverage at 4.28x is adequate but below a comfortable 5x benchmark, making interest cost control and debt management important to protect ordinary income. The balance sheet shows sufficient current assets to cover current liabilities (current ratio 145.5%), but short-term loans of 107.02 increase refinancing risk amid higher rates. Dividend affordability appears reasonable on cash flow this period, but the payout ratio of 81.8% is high relative to earnings and may constrain balance sheet repair if profits remain subdued. Forward-looking, the company needs to sustain pricing and mix improvements, manage working capital tightly, and prioritize deleveraging to mitigate ordinary income volatility and elevate ROIC.

Profitability Analysis

ROE decomposition: Net Profit Margin (2.0%) × Asset Turnover (0.381) × Financial Leverage (3.24x) = ~2.5% ROE. The weakest components are margin and asset turnover; leverage is high and a key driver of the limited ROE achieved. Versus last year, operating margin appears to have expanded modestly (about +7 bps), but ordinary and net margins compressed meaningfully due to higher non-operating expenses (interest) exceeding non-operating income. Business drivers: disciplined SG&A (32.11) and steady gross margin (15.8%) supported operating profit stability, while financing costs (interest expense 2.08) and other non-operating items eroded ordinary income (-14.2% YoY) and net income (-39.0% YoY). Sustainability: the modest operating margin improvement could be sustainable if pricing and cost measures persist; however, the drag from interest expense will likely persist until leverage is reduced or rates ease. Efficiency: asset turnover at 0.381 is low for chemicals, indicating capital intensity and inventory-rich operations; improving capacity utilization and product mix is key. Watch for SG&A growth outpacing revenue; this quarter, SG&A discipline helped offset the 2.4% revenue decline, but further topline softness would pressure operating leverage.

Growth Assessment

Revenue declined 2.4% YoY to 260.03, suggesting softer demand or price normalization in key product lines. Operating income was stable (-0.2% YoY), implying effective cost pass-through or mix improvements offsetting lower sales. Ordinary income (-14.2%) and net income (-39.0%) show growth headwinds from financial costs rather than core operations. EBITDA was 22.68 (margin 8.7%), supporting ongoing reinvestment, but leverage (Debt/EBITDA ~11.1x) limits flexibility. Near term, growth will hinge on end-market demand in specialty/basic chemicals, raw material price trends, and ability to pass through costs. With ROIC at 1.6%, incremental growth must be higher-return and capital-light to lift value creation. Outlook: stable operating profit is achievable if input cost volatility is contained and pricing holds; bottom-line recovery requires reducing non-operating expense headwinds.

Financial Health

Liquidity: current ratio 145.5% is acceptable, but quick ratio 81.6% (<100%) indicates reliance on inventories (158.29) to meet obligations. Solvency: D/E of 2.24x exceeds the 2.0x caution threshold (warning), and Debt/EBITDA ~11.1x indicates high leverage. Interest coverage at 4.28x is moderate; a deterioration in EBITDA or higher rates would pressure ordinary income. Maturity profile: short-term loans are 107.02 versus cash 59.22 and receivables 136.88; current assets (360.38) cover current liabilities (247.74), but refinancing risk exists if credit conditions tighten. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF of 23.05 is 4.42x net income, indicating strong cash conversion this period; likely aided by working capital release (specific movements not disclosed). CapEx was 15.87, implying positive FCF of roughly 7.18 from OCF minus CapEx, though full investing cash flows are unreported. The strength in OCF versus NI reduces earnings quality concerns in the short term; however, sustainability depends on whether working capital benefits are repeatable. No clear signs of working capital manipulation are observable from the limited disclosures, but the low quick ratio suggests careful monitoring of inventory turns and receivable collections. Financing cash flow was -4.66, indicating some debt service or dividend payments, but details are limited.

Dividend Sustainability

The calculated payout ratio is 81.8%, which is high versus the <60% benchmark and leaves a thin earnings buffer. Based on OCF of 23.05 and CapEx of 15.87, implied FCF of ~7.18 could cover dividends if payout aligns with the calculated ratio (dividend outflow implied at ~0.43 based on NI 5.22), suggesting near-term cash coverage. However, elevated leverage and interest burden argue for prioritizing balance sheet strengthening. Dividend visibility is constrained by unreported DPS and total dividend payments; policy stability may depend on maintaining operating margins and managing debt costs.

Risk Assessment

Business Risks:

• Raw material price volatility affecting gross margins (naphtha/energy-linked inputs).
• Demand softness in end-markets for chemicals leading to revenue pressure (-2.4% YoY).
• Pricing power risk if cost pass-through weakens, compressing operating margins.
• Operational efficiency risk from inventory intensity (quick ratio 0.82).
• Environmental/regulatory compliance costs potentially rising for chemical operations.

Financial Risks:

• High leverage: D/E 2.24x and Debt/EBITDA ~11.1x increase refinancing and covenant risk.
• Interest rate risk: interest expense 2.08 already suppresses ordinary income; coverage 4.28x.
• Short-term funding reliance: short-term loans 107.02 create rollover risk.
• Potential liquidity pressure if inventory turns slow, given quick ratio <1.0.

Key Concerns:

• Net income down 39.0% YoY despite stable operating profit, driven by non-operating expense drag.
• Low capital efficiency: ROIC 1.6% and ROE 2.5% below cost of capital.
• Ordinary income decline (-14.2% YoY) signals sensitivity to financial costs.
• Sustainability of strong OCF uncertain if working capital tailwinds reverse.
• Limited disclosure on investing cash flows and dividend amounts limits full assessment.

Investment Implications

Key Takeaways:

• Core operations held up: operating income -0.2% YoY with slight margin expansion to ~3.4%.
• Bottom line under pressure: ordinary income -14.2% and net -39.0% on higher non-operating expenses.
• Cash generation strong: OCF 23.05 (4.42x NI), implied FCF positive (~7.18).
• Leverage elevated: D/E 2.24x, Debt/EBITDA ~11.1x; interest coverage moderate at 4.28x.
• Capital efficiency weak: ROIC 1.6% and ROE 2.5% necessitate higher-return allocation.
• Liquidity adequate but inventory-dependent: current ratio 145.5%, quick ratio 81.6%.

Metrics to Watch:

• Operating margin and gross margin trajectory vs input cost trends.
• Non-operating expense, especially interest expense, and interest coverage.
• Debt/EBITDA and net debt movement (deleveraging progress).
• Working capital metrics: inventory days, receivable collection, quick ratio.
• ROIC improvement from portfolio/mix and capex discipline.
• OCF/NI ratio sustainability and CapEx level relative to maintenance needs.

Relative Positioning: Versus domestic chemical peers, the company shows average-to-weak operating margins, higher leverage, and lower ROIC, offset by strong current-period cash conversion; balance sheet repair and efficiency gains are needed to close the gap.

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