Fuso Pharmaceutical Industries,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥31.23B
• Operating Income: ¥1.25B
• Net Income: ¥831M
• EPS: ¥97.40

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 weak, with sharp profit compression despite modest topline growth. Revenue rose 5.0% YoY to 312.29, but operating income fell 48.8% to 12.47 and net income declined 45.8% to 8.31, indicating significant margin pressure. We estimate operating margin compressed by roughly 420 bps YoY to 4.0% (from about 8.2% a year ago), given revenue growth and the magnitude of the operating income decline. Gross margin printed at 26.8%, but elevated SG&A of 59.47 limited operating leverage. Non-operating result was a drag: non-operating income of 1.56 was more than offset by non-operating expenses of 4.47, reducing ordinary income to 11.31 (-47.2% YoY). Interest expense remains modest at 0.72 and interest coverage is still strong at 17.3x, but the earnings base has shrunk. Cash flow quality was mixed: operating cash flow of 7.69 covered 0.93x of net income, slightly below the >1.0x high-quality benchmark. With capex of 13.91, implied FCF was negative this half, necessitating financing inflows (+4.77). Liquidity is tight: the current ratio is 109.5% and the quick ratio 80.9%, with substantial short-term loans of 188.27 versus cash of 62.64. Leverage is at the upper end of comfort (D/E 1.43x) for this sector, and ROIC of 1.8% is well below a typical cost of capital, flagging capital efficiency concerns. DuPont shows a low ROE of 2.4%, driven by a thin net margin (2.7%) and slow asset turnover (0.366), partially offset by leverage (2.51x). The payout ratio is high at 93.3%, inconsistent with negative implied FCF, and raises sustainability questions if earnings/margins do not recover. Earnings quality risks include reliance on working capital and non-operating items that were net negative this quarter. Forward-looking, a margin recovery plan (price/mix, cost control, procurement) and working capital normalization are critical to stabilize cash generation. Monitoring drug price revisions, input cost dynamics, and inventory discipline will be key to assessing second-half recovery potential.

Profitability Analysis

ROE decomposition (DuPont): ROE 2.4% = Net Profit Margin 2.7% × Asset Turnover 0.366 × Financial Leverage 2.51x. The component that appears to have changed most YoY is the net profit margin, inferred from a 48.8% drop in operating income against +5.0% revenue, with operating margin compressing ~420 bps to ~4.0%. Business drivers likely include adverse price/mix, cost inflation in raw materials/energy/logistics, and SG&A rigidity limiting operating leverage. Non-operating expense outpacing non-operating income further depressed ordinary profit, compounding margin pressure at the bottom line. Asset turnover of 0.366 is low, reflecting a balance sheet with sizable receivables (264.91) and inventories (126.42) relative to sales, which likely worsened operating efficiency. Financial leverage at 2.51x supports ROE, but with ROIC at 1.8% the incremental leverage does not translate into acceptable equity returns. Sustainability: the net margin compression looks partly cyclical and partly structural; some normalization is possible if cost inputs ease or pricing improves, but immediate reversal is uncertain given healthcare pricing constraints. Concerning trends: SG&A of 59.47 likely grew faster than revenue (given sharp OI decline), indicating negative operating leverage; management needs to restrain fixed costs or drive higher value-added sales.

Growth Assessment

Topline growth of 5.0% to 312.29 shows demand resilience, but profit growth is not sustainable under current cost structure. Operating income fell 48.8% to 12.47 and ordinary income fell 47.2% to 11.31, signaling poor conversion of revenue to profit. Gross margin at 26.8% and EBITDA margin at 7.7% highlight limited operating headroom for a manufacturer/distributor profile. Non-operating expenses (4.47) exceeded non-operating income (1.56), adding volatility and curbing ordinary profit. With ROIC at 1.8% (below a 5% warning threshold), incremental growth is value-dilutive unless margins or asset efficiency improve. Outlook hinges on: cost normalization (materials/energy), pricing discipline in institutional channels, productivity initiatives to reduce SG&A intensity, and tighter working capital turns. Near term, we expect cautious guidance bias until evidence of margin uplift or inventory/receivable normalization emerges.

Financial Health

Liquidity is tight: current ratio 109.5% is only slightly above 1.0 and quick ratio 80.9% is below the 1.0 benchmark, warranting caution. Explicit warning: Current Ratio is not below 1.0, but Quick Ratio < 1.0 indicates potential short-term liquidity strain if inventory conversion slows. Short-term loans are high at 188.27 against cash of 62.64; however, current assets of 483.42 exceed current liabilities of 441.31, mitigating immediate maturity mismatch risk. Working capital is positive at 42.11, but concentration in receivables (264.91) and inventories (126.42) increases collection/obsolescence risk. Solvency: total liabilities 486.85 vs equity 340.08 implies D/E 1.43x—near the conservative boundary for the sector. Long-term loans are modest at 24.62, so refinancing risk centers on short-term debt rollover. Interest coverage is strong at 17.32x, suggesting adequate capacity to service interest despite lower operating profit. No off-balance sheet obligations were reported in the dataset.

Cash Flow Quality

OCF/Net Income is 0.93x, slightly below the >1.0x high-quality benchmark, implying moderate working capital absorption or non-cash earnings elements. With capex of 13.91 and OCF of 7.69, implied FCF is around -6.22 this half, indicating reliance on financing cash inflows (+4.77) to fund investments and distributions. Earnings-to-cash conversion should improve if receivables collection accelerates and inventories normalize; otherwise, pressure on liquidity could persist. No clear signs of aggressive working capital management are visible from the limited data, but the elevated receivables level vs sales suggests close monitoring of DSO. Dividend coverage by FCF appears weak this period given negative implied FCF; sustainability will depend on 2H cash generation.

Dividend Sustainability

The calculated payout ratio is high at 93.3%, inconsistent with the negative implied FCF in the half (OCF 7.69 less capex 13.91). With liquidity tight (quick ratio 0.81) and reliance on short-term debt, maintaining such a high payout risks crowding out growth capex or stressing the balance sheet if earnings do not recover. Coverage from operating cash flows is inadequate this period; thus, dividend sustainability is vulnerable to margin and cash conversion recovery in 2H. Policy outlook likely shifts toward prudence: prioritize cash preservation, working capital normalization, and selective capex until ROIC improves.

Risk Assessment

Business Risks:

• Pricing pressure and drug price revisions in Japan eroding gross and operating margins
• Raw material and energy cost inflation compressing margins
• High receivables and inventories relative to sales, risking slower cash conversion
• Operational fixed-cost rigidity leading to negative operating leverage when sales slow

Financial Risks:

• Tight liquidity with quick ratio at 0.81 and significant short-term borrowings (188.27)
• Leverage near the upper bound for the sector (D/E 1.43x)
• Negative implied FCF in the half, increasing dependence on refinancing
• Potential interest rate sensitivity due to short-term debt reliance

Key Concerns:

• Operating margin compressed by ~420 bps YoY to ~4.0%
• ROIC at 1.8% well below a typical cost of capital, signaling value dilution
• Non-operating expenses exceeding non-operating income, weakening ordinary profit
• High payout ratio (93.3%) despite weak cash generation

Investment Implications

Key Takeaways:

• Revenue growth (+5.0% YoY) failed to translate into profit; OI down 48.8%
• Operating margin compressed ~420 bps to ~4.0%; EBITDA margin 7.7%
• Cash conversion soft (OCF/NI 0.93x) and implied negative FCF due to capex
• Liquidity tight (quick ratio 0.81) with heavy short-term debt exposure
• Capital efficiency poor (ROIC 1.8%, ROE 2.4%)
• Dividend payout high versus cash generation, raising sustainability risk

Metrics to Watch:

• Operating margin and gross margin trajectory in 2H
• Receivables and inventory turnover (DSO/DIO) and impact on OCF
• Short-term debt balances and refinancing terms
• Capex cadence versus OCF to assess FCF recovery
• Non-operating income/expense balance and interest expense trend
• ROIC versus management cost of capital assumptions

Relative Positioning: Versus domestic small/mid-cap pharma and IV solution suppliers, profitability and capital efficiency appear below average, leverage is toward the high end, and liquidity is tighter; near-term performance hinges on cost control and working capital normalization to restore margins and cash flow.

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