ARAKAWA CHEMICAL INDUSTRIES,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥40.37B
• Operating Income: ¥929M
• Net Income: ¥-8M
• EPS: ¥36.53

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 was a modest operational recovery with clear margin improvement, but headline net profit quality is mixed due to a very high effective tax rate and negative comprehensive income. Revenue rose 2.6% YoY to 403.7, with gross profit of 85.1 and a gross margin of 21.1%. Operating income jumped 196% YoY to 9.3, lifting the operating margin to about 2.3% versus roughly 0.8% a year ago (about +150 bps), indicating operating leverage from cost controls and/or improved mix. Ordinary income was 6.4, pressured by a negative net non-operating balance (non-operating income 3.5 vs non-operating expenses 6.4). Profit before tax was 6.7, yet net income printed 7.2, accompanied by a strikingly high effective tax rate of 101.2% and a negative total comprehensive income of -0.5, suggesting sizable OCI losses (likely valuation losses on investment securities) and non-recurring below-the-line effects. EBITDA was 36.4, implying an EBITDA margin of 9.0% and interest coverage of 3.9x, which is adequate but below the >5x strong threshold. Liquidity is sound with a current ratio of 161.6% and a quick ratio of 130.5%, and working capital is ample at 233.9. Leverage is moderate with D/E at 1.14x, but Debt/EBITDA at 8.3x is elevated for a chemicals name and warrants monitoring. Operating cash flow of 12.5 exceeded net income (OCF/NI 1.73x), indicating decent earnings quality this period, but free cash flow was likely negative given capex of -18.9. ROE, at 1.3%, remains low due to modest net margin (1.8%), slow asset turnover (0.333x), and only moderate leverage (2.14x). ROIC of 0.6% is well below the 5% warning line, underscoring capital efficiency challenges despite the margin rebound. The negative comprehensive income highlights market-related headwinds (securities valuation) that are not reflected in net profit. Dividend sustainability looks stretched with a calculated payout ratio of ~140% against likely negative FCF in the half. Looking forward, continued price optimization and input cost normalization are key to sustaining the operating margin gains, while capex discipline and balance sheet management will be needed to improve ROIC and cash returns.

Profitability Analysis

ROE (1.3%) = Net Profit Margin (1.8%) × Asset Turnover (0.333x) × Financial Leverage (2.14x). The primary constraint on ROE is the low net margin, despite a notable recovery in operating income. Operating margin improved to ~2.3%, up roughly 150 bps YoY, driven by better gross-profit capture (21.1% GPM) and contained SG&A (18.8% of sales), implying positive operating leverage on modest revenue growth (+2.6% YoY). Asset turnover at 0.333x remains sluggish for a specialty/basic chemicals profile, reflecting a capital-intensive asset base relative to half-year sales. Financial leverage is moderate (2.14x) and contributes to ROE, but not enough to offset weak margin and turnover. The largest delta YoY appears in the margin component (operating margin up sharply), likely aided by input cost stabilization, price increases, and product mix; however, durability depends on raw material prices and demand elasticity. Non-operating items were a drag (net negative), and a very high effective tax rate distorted bottom-line conversion. Sustainability: gross margin improvements could persist if procurement/pricing discipline holds, but the extraordinary tax rate is non-recurring by nature. Watch for any reversal in SG&A discipline; with SG&A at ~18.8% of sales vs GPM at 21.1%, the margin of safety is thin.

Growth Assessment

Top-line grew 2.6% YoY to 403.7, indicating stabilization rather than strong expansion. Operating income surged 196% YoY to 9.3, evidencing operating leverage on modest growth and improved cost pass-through. Ordinary income of 6.4 was constrained by higher non-operating expenses (6.4) overshadowing non-operating income (3.5). Net income fell 55.7% YoY to 7.2, reflecting tax and below-the-line distortions rather than core deterioration, given the strong OI recovery. EBITDA margin at 9.0% suggests improved earnings power despite soft absolute profitability. The negative total comprehensive income (-0.5) points to market-related headwinds (e.g., securities valuation), which could reverse or deepen depending on markets. Near-term growth sustainability hinges on ongoing recovery in end-markets (paper/packaging, adhesives, specialty resins), continued price/mix optimization, and manageable raw material costs. Capex of 18.9 indicates ongoing investment, potentially supporting medium-term product competitiveness and productivity. Risks to the outlook include input cost volatility, FX, and demand softness in key applications; upside could come from disciplined pricing and specialty mix upgrades.

Financial Health

Liquidity is healthy: current ratio 161.6% (>150% benchmark) and quick ratio 130.5% (>100%). No warning for current ratio <1.0. Working capital stands at 233.9, supported by cash 90.7, receivables 257.8, and inventories 118.0. Short-term loans are sizable at 204.8 versus current assets of 613.4, but the maturity mismatch risk is mitigated by ample receivables and cash; still, rollover and interest-rate risk bear watching. Total liabilities are 645.7 against total equity of 566.9, giving D/E of 1.14x (within a conservative range for chemicals but not low). Long-term loans are 96.5, providing some tenor balance. Interest coverage is 3.94x—adequate but below the >5x strong benchmark, implying sensitivity to interest rate increases or earnings dips. No explicit off-balance sheet obligations were reported in the provided data. Equity ratio was not reported; however, the balance sheet composition indicates a moderate leverage profile with room for improvement.

Cash Flow Quality

OCF of 12.5 exceeds net income of 7.2 (OCF/NI 1.73x), indicating solid earnings-to-cash conversion this period. Working capital appears reasonably managed given positive OCF despite modest growth; no overt signs of aggressive working capital release are evident from the limited data. Free cash flow is likely negative in the half: OCF (12.5) minus capex (18.9) implies approximately -6.4, reflecting investment outlays outpacing internal cash generation in the period. Financing CF of 3.2 suggests some reliance on debt or other financing to bridge capex and/or other uses. With interest coverage at 3.9x and Debt/EBITDA at 8.3x, balance sheet capacity is not unconstrained; cash discipline will be important if operating momentum stalls. Overall, cash flow quality is acceptable, but sustainability of positive OCF needs to be confirmed across seasonally stronger/weaker quarters, and investment pacing merits scrutiny.

Dividend Sustainability

The calculated payout ratio of 139.8% indicates that dividends (based on current period net profit) exceed internally generated earnings capacity. With likely negative free cash flow in the half (derived FCF about -6.4), dividend coverage by FCF is weak for this period. DPS and total dividends paid were unreported, limiting precision. Unless the second half delivers stronger OCF or capex moderates, sustaining an above-earnings payout could pressure the balance sheet or crowd out growth investments. Company policy was not provided; if a stable or progressive DPS policy is in place, monitoring FCF coverage and leverage metrics will be critical. A reversion to a normalized effective tax rate could help reported payout optics, but cash coverage—not accounting profit—should guide sustainability.

Risk Assessment

Business Risks:

• Raw material price volatility (rosin, petroleum-derived inputs) affecting gross margins.
• End-market demand softness in paper/packaging, adhesives, and specialty chemical applications.
• Competitive pricing pressure limiting pass-through and mix improvement.
• Potential continued valuation losses on investment securities, impacting comprehensive income.

Financial Risks:

• Elevated Debt/EBITDA at 8.3x and sub-5x interest coverage, increasing sensitivity to rate hikes and earnings volatility.
• Large short-term loan balance (204.8) requiring rollover amid changing credit conditions.
• Negative free cash flow in the half due to capex outpacing OCF.
• High effective tax rate this period (101.2%) creating volatility in reported earnings and payout optics.

Key Concerns:

• Very low ROIC (0.6%), signaling capital efficiency challenges.
• Negative total comprehensive income (-0.5), suggesting market-related headwinds not captured in NI.
• Dependence on maintaining SG&A discipline; margin recovery could reverse if opex creeps ahead of revenue.
• Data limitations on segment mix, extraordinary items, and dividend policy obscure forward risk calibration.

Investment Implications

Key Takeaways:

• Core profitability improved: operating margin up ~150 bps on modest +2.6% revenue growth.
• Bottom-line quality mixed: effective tax rate 101.2% and negative OCI drove a disconnect between OI and NI/TCI.
• Cash conversion decent (OCF/NI 1.73x), but capex led to likely negative FCF for the half.
• Balance sheet is liquid (CR 162%, QR 131%) with moderate D/E (1.14x), but leverage vs EBITDA is high (8.3x).
• ROE (1.3%) and ROIC (0.6%) remain weak; sustained improvement requires both higher margins and better asset turnover.

Metrics to Watch:

• Gross margin trajectory and price/cost spread by product line.
• Operating margin and SG&A as a percentage of sales.
• OCF, FCF, and working capital turns (DSO/DIO) to validate cash sustainability.
• Debt/EBITDA and interest coverage for leverage risk.
• Comprehensive income components (valuation gains/losses) and any extraordinary items.
• Effective tax rate normalization and its drivers.

Relative Positioning: Within Japanese chemicals, Arakawa shows improving operating execution off a low base but still lags peers on capital efficiency and leverage-adjusted resilience; maintaining margin gains and converting them into sustained FCF will be key to closing 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