Earth Corporation FY2026 Q1 Earnings Report

Financial Highlights

• Net Sales: ¥47.91B
• Operating Income: ¥6.34B
• Net Income: ¥4.51B
• EPS: ¥204.02

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Segment Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

FY2026 Q1 was solid on revenue growth and stable operating profit, but net profit softened on normalization of one-offs and higher below-OP items. Revenue rose 7.0% YoY to 479.1, supported by both Household Products (+5.6%) and General Sanitary Management (+8.9%). Gross profit increased to 210.6 with a gross margin of 44.0% (down ~28 bps YoY). Operating income inched up 1.1% to 63.4, implying an operating margin of 13.2% (down ~78 bps YoY from ~14.0%). Ordinary income rose 2.4% to 63.0, aided by resilient core operations and minimal interest burden (interest coverage ~151x). Net income declined 4.7% to 44.6, with net margin at 9.3% (down ~115 bps YoY), reflecting the absence of prior-year extraordinary income and modestly higher tax. SG&A grew 8.6% YoY to 147.2, outpacing sales and compressing operating leverage; salaries and advertising were key drivers. Segment-wise, Household Products remained the core profit engine (OI 62.8; margin 14.6%), while General Sanitary Management expanded profit faster (+32.5% YoY) but at a low margin (3.3%). Balance sheet quality mixed: receivables (+56% YoY) and inventories (+20% YoY) expanded, while cash declined (-26% YoY); short-term borrowings rose sharply (+189% YoY), lifting refinancing risk. Liquidity is adequate (current ratio 130.5%), but the quick ratio is 89.1% and cash/short-term debt is 0.81x. Leverage remains moderate with D/E at 0.97x and debt/capital 20.7%. ROE printed 5.4% via NPM 9.3%, asset turnover 0.295, and leverage 1.97x; the margin component drove most of the YoY downtick. Earnings quality appears more recurring this year as extraordinary gains were negligible (0.03 loss), but working capital intensity remains a headwind. Guidance check: Q1 progress versus full-year is front-loaded on profit (OI at ~70% of plan; NI at ~72%), implying either conservatism in guidance or expected cost/seasonality headwinds later in the year. Forward-looking, sustaining double-digit operating margins will hinge on inventory normalization into peak summer season, maintaining pricing, and controlling SG&A. The spike in short-term debt and elongated cash conversion cycle require active working capital management to preserve cash and dividend capacity.

Profitability Analysis

ROE decomposition (DuPont): ROE 5.4% = Net Profit Margin 9.3% × Asset Turnover 0.295 × Financial Leverage 1.97x. The largest YoY change was the decline in net margin (from ~10.5% to 9.3%), outweighing modest leverage increase (from ~1.84x to 1.97x) and a slight dip in asset turnover (from ~0.300 to 0.295). Margin compression stemmed from SG&A growth (+8.6% YoY) exceeding revenue growth (+7.0%), alongside the normalization of below-OP items (absence of prior extraordinary gains and slightly higher tax burden at 28.4%). This margin pressure is partly cyclical/seasonal given a Q1 inventory build and higher promotional spend ahead of the insecticide peak season; sustainability should improve into Q2–Q3 if price discipline holds and SG&A growth normalizes. Operating leverage was negative this quarter as cost lines (notably salaries 40.1 and advertising 13.8) outpaced sales; monitoring SG&A intensity will be key to restoring margin expansion.

Growth Assessment

Top-line expanded 7.0% YoY to 479.1, driven by broad-based growth across segments. Operating profit grew 1.1% to 63.4 as SG&A intensity rose, compressing margins to 13.2%. Ordinary profit improved 2.4% to 63.0, reflecting minimal financing costs and subdued non-operating swings. Net profit declined 4.7% to 44.6 as extraordinary gains normalized and taxes increased. R&D spend was 7.71 (1.6% of sales), indicating a brand/marketing-led growth model rather than technology-led expansion. Segment growth was healthier in General Sanitary Management (+8.9% revenue, +32.5% OI) but remains a small earnings contributor (3.3% margin). Revenue sustainability into peak summer should be supported by inventory positioning (finished goods dominant), but working capital intensity could weigh on incremental growth if channel inventory is elevated. Pricing and mix remain essential to defend gross margin at ~44%.

Financial Health

Liquidity is adequate: current ratio 130.5% and working capital 227.9. Quick ratio is 89.1%, indicating reliance on inventory conversion. Leverage is moderate with D/E 0.97x and debt/capital 20.7%; interest coverage is very strong at ~151x. Maturity profile skews short: short-term loans are 214.2 (99.4% of interest-bearing debt) versus cash of 173.9 (cash/STD 0.81x), signaling refinancing risk and sensitivity to rolling facilities. Receivables rose 56% YoY to 362.6 and inventories to 309.3, while payables rose modestly; this elevates funding needs for working capital. Asset retirement obligations are 5.20 (~0.65% of liabilities), manageable. Deferred tax liabilities stand at 36.9. Notable maturity mismatch risk exists due to the heavy short-term debt reliance against a large receivables/inventory position; active management of CCC is required to mitigate rollover risk.

Notable B/S Changes

Short-term loans: +140.0 (+188.7%) - Increased reliance on short-term funding to support expanded working capital; elevates refinancing risk. Accounts receivable: +130.6 (+56.3%) - Extended trade terms/seasonal shipments; heightens collection and credit risk. Cash & deposits: -59.4 (-25.5%) - Cash absorption from working capital and debt-funded operations; reduces immediate liquidity cushion. Inventories: +50.7 (+19.6%) - Pre-peak finished goods build; requires strong seasonal sell-through to avoid discounting.

Cash Flow Quality

Working capital intensity increased: receivables (+130.6) and inventories (+50.7) expanded significantly while cash declined (-59.4), and short-term borrowings rose (+140.0). This pattern suggests cash absorption in Q1 consistent with seasonal pre-peak builds and extended trade terms, which can depress operating cash conversion despite solid EBIT. FX losses (1.70) and minimal extraordinary items imply more recurring earnings composition this year; however, elongated collection and inventory cycles raise the risk that accounting profit outpaces cash generation intra-year. Dividend and capex coverage should be managed prudently until receivables and inventory normalize through the summer season.

Dividend Sustainability

Retained earnings of 465.9 provide a substantial buffer, and leverage is moderate, supporting baseline capacity to continue shareholder returns. With profit front-loaded versus guidance, cash sustainability will hinge on the pace of working capital release in peak season. Given the predominance of short-term debt funding and a quick ratio below 1.0, maintaining conservative payout discipline until CCC normalizes would preserve balance sheet flexibility.

Risk Assessment

Business risks include Concentration in Household Products (83.6% of sales) exposes earnings to category dynamics and seasonality., Inventory accumulation ahead of peak season raises obsolescence and discounting risk if demand underperforms., FX volatility affects non-operating results (recurring FX losses reported)., Low R&D intensity (1.6%) could constrain long-term product differentiation in competitive household categories..

Financial risks include Refinancing risk from 99% short-term debt concentration and cash/STD of 0.81x., Elongated working capital cycles (high DSO and DIO) create cash flow timing risk and potential covenant pressure if sustained., Margin compression risk from SG&A growth outpacing revenue..

Key concerns include Long cash conversion cycle flagged at 432 days could weigh on OCF despite solid accounting profits., Receivables growth (+56% YoY) increases credit and collection risk with key distributors., Finished goods-heavy inventory profile may necessitate promotions, risking further margin pressure if channel sell-through slows..

Investment Implications

Key takeaways include Core profitability remains resilient with a 13.2% operating margin despite SG&A pressure., Net profit decline primarily reflects normalization of one-offs and tax, not a deterioration in core operations., Working capital expansion is the primary headwind; refinancing risk elevated by short-term debt spike., Q1 profit progress versus full-year guidance is ~70%+ across OI/NI, suggesting conservative guidance or expected back-half headwinds., Segment mix stable; Household Products remains the earnings anchor while General Sanitary Management grows from a low base..

Metrics to watch include Operating margin trajectory (target: stabilize above 13% through peak season)., Receivables balance and DSO normalization post-Q2., Inventory levels and DIO reduction into summer sell-through., Short-term debt balance and cash/STD ratio (aim to restore >1.0x)., SG&A growth vs revenue growth (seek <= revenue growth)., FX impact relative to operating profit (<10% threshold)..

Regarding relative positioning, Within Japanese household products peers, Earth Chemical exhibits solid gross and operating margins with moderate leverage but lags on working capital efficiency and R&D intensity; execution on CCC normalization will determine whether earnings translate into strong cash generation.