SK KAKEN CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥52.96B
• Operating Income: ¥5.76B
• Net Income: ¥5.31B
• EPS: ¥393.67

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: Solid bottom-line beat driven by non-operating gains and higher interest income despite slight operating profit slippage and modest top-line growth. Revenue rose 1.6% YoY to 529.6, while operating income fell 6.2% YoY to 57.6, indicating mild operating margin pressure. Ordinary income increased 11.7% YoY to 69.1 and net income climbed 15.0% YoY to 53.1, reflecting strong non-operating tailwinds. Operating margin is approximately 10.9% this quarter, down an estimated 91 bps YoY (from ~11.8%), pointing to higher SG&A or cost headwinds. Net margin improved to 10.0%, up roughly 114 bps YoY (from ~8.9%), supported by robust non-operating income, particularly interest income of 9.5. Ordinary income margin also expanded by about 119 bps YoY to ~13.1%, further underscoring the contribution from financial income. Gross margin printed at 30.2%, but the YoY change is not available due to disclosure limits. Operating cash flow was 47.7 versus net income of 53.1, yielding an OCF/NI of 0.90x—close to but below the 1.0x quality threshold, warranting monitoring. The balance sheet is exceptionally strong: cash and deposits at 1,099.1 (57% of total assets), current ratio at 610%, and debt-to-equity at 0.17x, implying low financial risk and ample optionality. Equity accounts for an estimated ~85.7% of total assets (calculated), highlighting a fortress-like capital structure. Interest coverage is extremely high at 222x, reflecting minimal leverage and steady operating earnings. Working capital is sizable at 1,194.1, anchored by cash, while receivables of 184.6 and payables of 81.9 appear manageable. Earnings quality is decent but not stellar given the sub-1.0x OCF/NI and reliance on non-operating income to lift profits. With ROE at 3.2% (NPM 10.0% × AT 0.274 × leverage 1.17x), returns remain muted due to a low asset turnover and conservative balance sheet. Forward-looking, modest demand and cost discipline will be key to restoring operating margin, while the sustainability of interest income will influence net profitability. Overall, the quarter demonstrates resilient profitability underpinned by financial income and an over-capitalized balance sheet, but improving core operations is the next lever for quality earnings growth.

Profitability Analysis

ROE decomposition: ROE 3.2% = Net Profit Margin 10.0% × Asset Turnover 0.274 × Financial Leverage 1.17x. The largest drag on ROE is low asset turnover, reflecting an exceptionally cash-rich balance sheet and conservative asset use. Net margin improved YoY (to 10.0%, +~114 bps) mainly due to non-operating interest income of 9.5, while operating margin compressed to ~10.9% (-~91 bps YoY), suggesting SG&A intensity increased or gross margin pressure. Business factors: modest revenue growth (+1.6%) amid fixed cost absorption and possible input cost stickiness likely weighed on operating margin; higher interest rates and large cash balances boosted financial income. Sustainability: higher interest income can persist near-term if cash balances remain large and yields hold, but it is exogenous and volatile versus core operations; operating margin recovery will hinge on pricing, mix, and cost control. Watchpoints: SG&A ratio is 19.3% of sales; without detailed breakdown, the negative operating leverage (operating profit -6.2% vs revenue +1.6%) implies costs rose faster than sales.

Growth Assessment

Top-line growth was modest at +1.6% YoY, consistent with a steady but subdued demand environment. Operating income decline (-6.2% YoY) indicates growth quality issues at the core operating level despite revenue expansion. Ordinary and net income growth (+11.7%/+15.0% YoY) were driven by non-operating factors (interest income 9.5), not purely by operational improvements. The current operating margin of ~10.9% suggests some compression, likely from elevated SG&A or limited gross margin expansion. With gross margin at 30.2% and D&A at 2.8, the cost base remains manageable, but evidence of operating leverage is lacking this quarter. Outlook: without a stronger demand uptick or improved cost pass-through, revenue growth is likely to remain low-single-digit. Near-term, net profit may continue to benefit from interest income given large cash holdings. Medium-term growth requires better operating discipline, pricing/mix management, and potential deployment of excess cash into accretive projects to lift ROIC/ROE.

Financial Health

Liquidity is exceptionally strong: current ratio 609.7% and quick ratio 600.0%; there is no warning threshold breach. Solvency is conservative with debt-to-equity at 0.17x and calculated equity ratio around 85.7% (equity 1,656.8 / assets 1,934.4). Interest coverage of 221.7x indicates negligible refinancing risk. Short-term loans total 30.0 against current assets of 1,428.3 and cash of 1,099.1, implying no maturity mismatch risk. Off-balance-sheet obligations were not disclosed (N/A), so contingent liabilities or guarantees cannot be assessed. Overall capital structure is over-capitalized with large cash reserves, providing significant resilience and financial flexibility.

Cash Flow Quality

OCF/Net Income at 0.90x is slightly below the 1.0x benchmark, a mild quality flag but not alarming. Free cash flow is not disclosed; however, low D&A (2.84) hints that maintenance capex is likely modest, supporting the probability of positive FCF, although this cannot be confirmed. Financing CF of -16.98 suggests cash outflows for dividends, share repurchases, or debt reduction; precise allocation is undisclosed. Working capital quality: receivables (184.6) exceed payables (81.9), typical for the sector; without movement data, we cannot assess period-to-period working capital swings or potential window-dressing. No signs of aggressive cash flow management are evident from available data, but the sub-1.0x OCF/NI merits monitoring.

Dividend Sustainability

The calculated payout ratio is 35.4%, comfortably below the 60% threshold, implying capacity to sustain and potentially grow dividends subject to earnings stability. FCF coverage cannot be calculated due to missing capex and investing CF data, but large net cash (cash 1,099.1) provides a substantial buffer. With interest coverage extremely high and limited leverage, dividend risk is low from a balance sheet perspective. Key dependence: sustaining net income if non-operating gains moderate; improving operating margin would strengthen dividend safety further. Policy details (DPS, schedule) are undisclosed this period, limiting precision on forward payout expectations.

Risk Assessment

Business Risks:

• Operating margin pressure amid modest revenue growth (+1.6% YoY) and higher SG&A intensity
• Raw material and energy cost volatility affecting gross margin for coatings/chemicals
• End-market sensitivity to construction and refurbishment cycles, including weather seasonality
• Competitive pricing pressure in domestic paint markets impacting mix and ASP
• Execution risk in cost control and productivity needed to restore operating leverage

Financial Risks:

• Earnings reliance on non-operating interest income (9.5) to lift net profit
• Market risk on investment securities (129.96) with potential valuation swings
• OCF/NI at 0.90x indicating slightly softer cash conversion
• Concentration of assets in cash (1,099.1) leading to low asset turnover and subdued ROE
• Potential reinvestment risk if excess cash is not deployed into accretive projects

Key Concerns:

• Operating income decline (-6.2% YoY) despite revenue growth
• Operating margin compression (~-91 bps YoY) versus net margin expansion driven by financial income
• Low ROE (3.2%) constrained by low asset turnover (0.274)
• Data limitations (capex, FCF, segment mix) hinder full assessment of structural profitability

Investment Implications

Key Takeaways:

• Bottom line outperformed due to strong non-operating gains; core operating performance softened
• Operating margin compressed to ~10.9% while net margin rose to 10.0% on higher interest income
• Balance sheet strength is exceptional with ~86% equity ratio and net cash exceeding JPY 1.0 trillion-equivalent in 100M units
• ROE at 3.2% remains muted due to low asset turnover; ROIC reported at 7.5% indicates room to improve capital efficiency
• Cash-rich position offers optionality for investment, shareholder returns, or M&A once visibility improves

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio
• Gross margin trends versus raw material cost movements
• Non-operating income sustainability (interest income trajectory and cash balance)
• OCF/NI conversion and working capital turns (AR and AP days)
• Capital allocation actions (capex, buybacks, dividends) and their impact on ROIC/ROE

Relative Positioning: Versus domestic paint peers, the company is more cash-heavy with extremely low leverage and superior liquidity, translating to lower financial risk but also lower ROE; operating execution and capital deployment will be the key differentiators to close the return 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