Dai Nippon Toryo Company,Limited FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥45.97B
• Operating Income: ¥1.82B
• Net Income: ¥1.60B
• EPS: ¥49.32

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: Mixed quarter—strong topline growth but sharp margin compression and subpar capital efficiency led to a steep drop in earnings and ROIC. Revenue rose 27.2% YoY to 459.65, with gross profit up to 126.26 and a gross margin of 27.5%. Operating income declined 28.0% YoY to 18.17, implying operating margin compressed to 3.95%. Ordinary income fell 23.2% YoY to 21.24, while net income fell 48.3% YoY to 14.05, reflecting higher non-operating drag and a heavy effective tax rate of 40.5%. On a margin basis, operating margin fell from roughly 7.0% in the prior year period to 4.0% this quarter, a compression of approximately 304 bps despite strong sales growth. Non-operating income was 5.84 versus non-operating expense of 2.78, for a modest positive net contribution of 3.06; however, total comprehensive income of 3.90 indicates sizable negative OCI (likely valuation losses on investment securities of 91.94). Cash generation broadly tracked earnings with OCF of 13.93 versus NI of 14.05 (OCF/NI 0.99x), but capex of 21.99 resulted in negative implied FCF for the period. Liquidity is adequate (current ratio 135.5%, quick ratio 113.2%); leverage is moderate (D/E 0.79x) with strong interest coverage (16.82x). DuPont shows ROE of 1.9% = 3.1% net margin × 0.343 asset turnover × 1.79x leverage; margin pressure is the principal headwind. ROIC is a weak 1.4%, well below a 5% warning threshold, flagging capital efficiency challenges. Working capital remains manageable with cash 125.35 and receivables 154.72 against short-term loans of 101.86 and payables of 201.77. Dividend payout ratio is calculated at 103.6%, suggesting potential pressure if earnings do not recover and given negative implied FCF. Forward-looking, management likely needs further price pass-through, mix improvement, and SG&A discipline to restore margins. Key watch items include raw material cost trends, pass-through effectiveness, tax normalization, and volatility in investment securities affecting OCI.

Profitability Analysis

ROE decomposition: ROE 1.9% = Net Profit Margin (3.1%) × Asset Turnover (0.343) × Financial Leverage (1.79x). The biggest moving piece this period is margin compression: operating income fell 28% YoY despite +27.2% revenue growth, implying operating margin dropped roughly 304 bps YoY (from ~7.0% to ~4.0%). Likely drivers include lagging price pass-through versus raw material/energy cost increases, unfavorable mix, and/or SG&A growth outpacing sales (SG&A 108.08 versus operating income 18.17 indicates limited operating leverage). Asset turnover likely improved modestly with strong sales against a large fixed asset base (total assets 1,341.95), but this could not offset margin compression. Leverage at 1.79x appears stable and not the determinant of ROE change. Sustainability: absent further price increases and cost normalization, the lower margin level could persist; however, if raw material prices ease and pass-through accelerates, some recovery is possible. Watch for SG&A trends versus revenue (risk if SG&A growth continues to outpace sales) and the contribution of non-operating items (non-operating income ratio 41.6% suggests earnings mix reliance outside the core).

Growth Assessment

Topline growth was robust at +27.2% YoY to 459.65, indicating healthy demand and/or successful pricing. However, profit quality deteriorated: operating income fell 28.0% YoY and net income fell 48.3% YoY, signaling adverse operating leverage and cost pressure. Gross margin at 27.5% is reasonable, but the drop in operating margin to 3.95% points to elevated SG&A and/or weak price-cost timing. Ordinary income held better than operating income due to net non-operating gains, but comprehensive income was depressed by negative OCI (likely investment securities valuation). Outlook hinges on price pass-through cadence, input cost trends (resins, solvents, energy), and mix improvements (higher-margin industrial/auto coatings versus low-margin segments). Revenue momentum appears sustainable near term, but earnings recovery requires margin repair and tax rate normalization from an elevated 40.5%.

Financial Health

Liquidity: current ratio 135.5% (adequate, but below the 1.5x healthy benchmark), quick ratio 113.2% (healthy). No warning triggers: Current Ratio is above 1.0 and D/E is 0.79x (<2.0). Solvency: total liabilities 591.45 against equity 750.49; leverage is moderate with strong interest coverage (16.82x). Maturity profile: short-term loans 101.86 are covered by cash 125.35 and receivables 154.72; current assets 529.74 comfortably exceed current liabilities 391.00, indicating manageable maturity mismatch risk. Accounts payable 201.77 provide supplier financing; inventory is 87.20 (reasonable relative to sales scale). Off-balance sheet obligations: none reported; data limitations prevent assessment of leases, guarantees, or contingent liabilities.

Cash Flow Quality

OCF/Net Income is 0.99x, near the >1.0 benchmark and indicates broadly aligned earnings and cash generation. Depreciation and amortization of 14.68 support non-cash add-backs, while working capital details are not disclosed; no clear signs of aggressive working capital management from available data. Capex of 21.99 exceeded OCF of 13.93, implying negative period FCF and raising questions about near-term funding for both investment and dividends. With financing CF of 1.70 and adequate cash on hand (125.35), near-term liquidity is sufficient, but sustained negative FCF would pressure the balance sheet or require incremental borrowings.

Dividend Sustainability

The calculated payout ratio is 103.6%, which is above the <60% benchmark and not sustainable if earnings and cash flows remain at current levels. Given implied negative FCF (OCF 13.93 versus capex 21.99), dividend coverage from FCF looks weak this period; coverage would need to come from cash balances or financing. DPS details are unreported, and total dividends paid are not disclosed, limiting precision. Unless margins recover and capex normalizes or is internally funded, the current payout trajectory may be difficult to maintain. Policy outlook: expect management to prioritize margin recovery and capex discipline; dividend policy could tilt to stability but may require reassessment if cash generation does not improve.

Risk Assessment

Business Risks:

• Raw material and energy cost volatility impacting gross and operating margins
• Pricing pass-through lag versus input inflation
• Product mix shift toward lower-margin segments
• Demand cyclicality in construction and industrial/auto end-markets
• High effective tax rate (40.5%) depressing net income

Financial Risks:

• Negative implied FCF due to capex exceeding OCF in the period
• Valuation volatility in investment securities (91.94) driving negative OCI and comprehensive income
• Reliance on non-operating items (non-operating income ratio 41.6%) to support ordinary income
• Short-term debt (101.86) exposure to interest rate increases, albeit currently well covered

Key Concerns:

• ROIC at 1.4% signals weak capital efficiency versus a 5% warning threshold
• Operating margin compressed by ~304 bps YoY despite strong sales, questioning structural profitability
• Payout ratio above 100% and negative implied FCF raise dividend sustainability questions
• Comprehensive income sharply below net income, indicating balance sheet valuation risk

Investment Implications

Key Takeaways:

• Strong topline growth did not translate into profit growth due to margin compression
• ROE of 1.9% and ROIC of 1.4% are below cost-of-capital proxies, highlighting efficiency issues
• Cash earnings are broadly aligned with accounting profit, but capex drove negative implied FCF
• Balance sheet is sound with moderate leverage and ample liquidity
• Earnings mix shows meaningful non-operating contributions and volatile OCI

Metrics to Watch:

• Operating margin recovery trajectory and SG&A discipline
• Price pass-through versus raw material cost indices (resins, solvents, energy)
• Effective tax rate normalization
• Working capital turnover (AR and inventory days) and cash conversion
• Capex intensity versus OCF and resulting FCF
• Valuation movements in investment securities and comprehensive income

Relative Positioning: Versus larger domestic paint peers, profitability and capital efficiency are weaker (low ROIC/ROE, higher reliance on non-operating items), while leverage and liquidity are conservative; restoring operating margin and stabilizing OCI are key to narrowing 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