ARAKAWA CHEMICAL INDUSTRIES,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥40.37B
• Operating Income: ¥929M
• Net Income: ¥736M
• 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

Arakawa Chemical Industries (TSE:4968) posted FY2026 Q2 consolidated results showing modest top-line growth but a sharp rebound in operating earnings from a low base. Revenue rose 2.6% year over year to ¥40.4bn, while gross profit reached ¥7.76bn, implying a gross margin of 19.2%. Operating income surged 196% YoY to ¥0.93bn, lifting the operating margin to about 2.3%, indicating meaningful operating leverage despite only modest revenue growth. Ordinary income of ¥0.64bn was below operating income, suggesting net non-operating expenses, likely including interest expense of ¥0.19bn and possibly other financial or equity-method impacts. Net income was ¥0.72bn, down 55.7% YoY, implying the prior-year period included larger non-recurring gains or that this period saw adverse below-the-line items; the step-down from operating income to ordinary income and then a rebound to net income points to extraordinary items and/or tax effects. EBITDA was ¥3.64bn, with the EBITDA margin at 9.0%, but the large D&A of ¥2.71bn indicates high capital intensity and a substantial non-cash cost burden. DuPont metrics highlight structurally low returns: net margin of 1.79%, asset turnover of 0.333x, and financial leverage of 2.14x produce an ROE of 1.28%, consistent with the reported figure. Liquidity is solid, with a current ratio of 165.6% and quick ratio of 132.0%, supported by working capital of ¥24.66bn. The capital structure shows moderate leverage, with total liabilities of ¥65.1bn and debt-to-equity of 1.15x; interest coverage on EBIT is 4.9x, adequate for the chemicals sector. Operating cash flow was strong at ¥3.40bn, equating to 4.69x net income and underscoring good earnings-to-cash conversion in the half. However, investing cash flow, cash and equivalents, and equity ratio were not disclosed in the dataset (zeros represent unreported), limiting visibility on net debt and capex/FCF. Financing cash outflow of ¥3.26bn suggests debt repayments and/or shareholder returns, though DPS is shown as zero in the dataset for the period. Inventory stood at ¥12.62bn, a manageable 20% of current assets, supporting the healthy quick liquidity. While operating profit recovered sharply, overall profitability remains thin, and ROE is subdued due to low margin and slow asset turnover. Near-term outlook will hinge on resin spread management, demand recovery in end-markets (paper/packaging, adhesives, electronics), and control of non-operating items. Data gaps around cash, capex, and dividends/FCF coverage constrain the depth of cash return assessment, so emphasis should be placed on subsequent disclosures.

Profitability Analysis

ROE at 1.28% reflects a low net margin (1.79%), modest asset turnover (0.333x), and moderate leverage (assets/equity 2.14x). Gross margin of 19.2% is reasonable for specialty chemicals but compresses significantly to an operating margin of ~2.3%, indicating high SG&A and depreciation burden. EBITDA margin is 9.0%, with D&A of ¥2.71bn consuming roughly 75% of EBITDA, leaving limited EBIT. The 196% YoY surge in operating income on 2.6% revenue growth evidences strong operating leverage off a depressed base, likely driven by better product mix, input cost pass-through, and SG&A discipline. Ordinary income trails operating income due to net non-operating costs, including ¥0.19bn interest; this drag highlights sensitivity to financing costs and other financial items. Net income at ¥0.72bn despite ¥0.83bn income tax suggests the presence of extraordinary items; reported effective tax rate metrics in the dataset are not usable due to unreported fields. Interest coverage on EBIT is 4.9x, sufficient but not ample for a cyclical chemicals player. Overall profitability quality is improving at the operating level, but returns remain constrained by capital intensity and low asset turns.

Growth Assessment

Revenue grew 2.6% YoY to ¥40.4bn, indicating steady but modest demand recovery. The substantial rebound in operating income (+196% YoY) against limited revenue growth underscores cost actions and improved spread management rather than volume-led expansion. Gross profit of ¥7.76bn implies better pricing or input normalization, supporting margin expansion. Profit quality is mixed: operating momentum is positive, but ordinary income lag and net income decline (-55.7% YoY) point to below-the-line headwinds or normalization of prior one-offs. With EBITDA at ¥3.64bn and high D&A, underlying cash earnings improved, though the durability depends on sustaining spreads and controlling fixed costs. Looking ahead, sustainability hinges on end-market trends in paper/packaging chemicals, resins for adhesives, and electronics-related demand, as well as feedstock and energy cost volatility. FX could influence overseas earnings translation and raw material costs. Overall outlook: cautious improvement at the operating line, with headline net profit sensitive to non-operating and extraordinary items.

Financial Health

Total assets are ¥121.26bn with equity of ¥56.69bn, yielding assets/equity of 2.14x and a debt-to-equity ratio (approximated by total liabilities/equity) of 1.15x—moderate leverage. Liquidity is comfortable: current assets ¥62.26bn vs current liabilities ¥37.61bn gives a current ratio of 165.6%, and a quick ratio of 132.0% after excluding inventories (¥12.62bn). Working capital is ample at ¥24.66bn, providing resilience against input price swings and demand variability. Interest expense is ¥0.19bn, and EBIT-based interest coverage is 4.9x, indicating capacity to service debt under current earnings. Equity ratio in the dataset appears as 0.0% due to non-disclosure; based on reported totals, the implied equity ratio would be approximately 46.8% (equity/assets), though this is a simple approximation and may differ from the company’s definition. Cash and equivalents were not disclosed in the dataset, limiting assessment of net debt and near-term refinancing risk.

Cash Flow Quality

Operating cash flow of ¥3.40bn is 4.69x net income, signaling strong cash realization from earnings, aided possibly by working capital release and non-cash D&A. With D&A at ¥2.71bn, the OCF performance corroborates the improvement in core operations. Investing cash flow is unreported in the dataset (shown as 0), so free cash flow cannot be reliably determined for the period; the provided FCF figure of 0 reflects missing data, not true zero. Financing cash flow was an outflow of ¥3.26bn, likely debt repayment and/or distributions; however, DPS is listed as zero in the dataset, so the cash outflow likely skews toward deleveraging or lease/other financing. Working capital appears well-managed given the liquidity ratios; inventory of ¥12.62bn and quick ratio of 132% suggest no evident build-up stress this period. Earnings quality looks solid given OCF > NI and sizable non-cash charges, but the absence of capex detail is a key limitation.

Dividend Sustainability

The dataset shows annual DPS at 0 and a payout ratio of 0.0%, which should be interpreted as not disclosed for this interim period rather than definitive zero. Without investing cash flow and cash balance disclosure, free cash flow coverage of dividends cannot be assessed; the reported FCF coverage of 0.00x reflects missing data. On fundamentals, interim OCF of ¥3.40bn and moderate leverage would typically support some distribution capacity, but high capital intensity (D&A ¥2.71bn) implies ongoing capex needs that could constrain free cash flow. Policy outlook cannot be inferred from the provided data; review of the company’s stated dividend policy and full-year guidance is necessary for a robust assessment.

Risk Assessment

Business Risks:

• Feedstock and energy price volatility impacting resin spreads and margins
• Demand cyclicality in paper/packaging, adhesives, and electronics-related end markets
• Competitive pricing pressure in commodity-like product lines
• Regulatory and environmental compliance costs for chemical manufacturing
• FX fluctuations affecting raw material costs and overseas earnings translation
• Customer concentration risks in specific industrial segments

Financial Risks:

• Thin operating margin (~2.3%) leaving limited buffer against shocks
• Non-operating expense drag (interest and other items) depressing ordinary income
• High capital intensity (D&A ¥2.71bn) necessitating ongoing capex to sustain capacity
• Potential working capital swings typical of chemicals (inventory and receivables cycles)
• Limited visibility on cash balances and capex due to unreported items in the period

Key Concerns:

• ROE of 1.28% driven by low net margins and slow asset turnover
• Net income down 55.7% YoY despite operating profit recovery, implying below-the-line headwinds
• Unreported investing CF and cash balance impede free cash flow and dividend assessments

Investment Implications

Key Takeaways:

• Operating profit recovery is robust (+196% YoY) on modest sales growth, indicating effective cost and spread management
• Profitability remains thin (OPM ~2.3%), keeping ROE subdued (1.28%)
• Cash conversion is strong (OCF/NI 4.69x), but capex and FCF are not disclosed
• Balance sheet is moderate in leverage (D/E ~1.15x) with solid liquidity (current ratio 166%)
• Ordinary and net income are pressured by non-operating factors; volatility in below-the-line items is a swing factor

Metrics to Watch:

• Gross and operating margin trajectory versus raw material indices (rosin, petrochemical feedstocks, energy)
• Ordinary income vs operating income gap (non-operating gains/losses, interest)
• Capex and investing cash flows to gauge sustainable free cash flow
• Working capital turns (inventory days, receivable/payable days) and asset turnover
• Interest coverage and liability mix amid potential rate changes
• Any extraordinary items and effective tax rate normalization

Relative Positioning: Within Japanese mid/small-cap chemicals, Arakawa exhibits below-peer profitability and ROE but adequate liquidity and moderate leverage; near-term improvement is driven more by operating discipline than by structural growth, leaving it sensitive to input costs and non-operating items until margins and asset turns structurally improve.

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
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