Nikko Co., Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥7.52B
• Operating Income: ¥221M
• Net Income: ¥147M
• EPS: ¥5.11

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 Q2 recovery in profitability driven by operating leverage, with strong cash conversion but balance sheet leverage remains a key overhang. Revenue grew 1.2% YoY to 75.24, while operating income surged to 2.21 (+564.6% YoY), lifting operating margin to 2.9%. Gross profit reached 24.87, implying a gross margin of 33.1%, supported by cost of sales discipline at 50.36. SG&A was 22.66, a 30.1% SG&A-to-sales ratio, indicating tighter cost control relative to the prior year given the steep OI improvement on modest top-line growth. Operating margin expanded by roughly 249 bps YoY (from ~0.45% to 2.94%) based on the reported OI growth and revenue trend. Net income was 1.47, a 1.9% net margin, with an effective tax rate of 26.0% and limited drag from non-operating items (net non-operating loss ~0.03). Cash generation outpaced accounting profit: operating CF was 6.46 (OCF/NI = 4.39x), indicating strong earnings quality and a favorable working capital swing. Interest coverage was robust at 20.1x, reflecting manageable interest burden despite high leverage. Balance sheet remains stretched: total equity is 19.34 against total assets of 102.12 (financial leverage 5.28x) and a reported D/E of 4.28x, with retained earnings at -35.05 signaling a legacy deficit. Liquidity is adequate but not abundant: current ratio 119.2% and quick ratio 96.3%; short-term loans of 10.00 are well covered by cash of 19.09 and receivables of 23.66. Free cash flow appears positive if we proxy FCF as OCF minus capex, suggesting flexibility for debt reduction, though full investing CF detail is unreported. ROE calculated at 7.6% is mainly supported by improved margins and high leverage rather than high asset turnover (0.737x). ROIC at 10.6% (reported metric) exceeds typical cost of capital, indicating value creation in the period. Forward-looking, sustaining the margin gains while deleveraging is the key; modest top-line growth means further profit improvement must come from mix/price and structural cost actions.

Profitability Analysis

ROE decomposes to 7.6% = Net Margin (1.9%) × Asset Turnover (0.737x) × Financial Leverage (5.28x). The most material driver vs last year appears to be Net Margin, given operating income rose +564.6% on only +1.2% revenue growth, implying significant operating margin expansion (~+249 bps YoY). Business explanation: improved gross spread (33.1% gross margin) and SG&A containment (30.1% of sales) delivered strong operating leverage; non-operating items were broadly neutral. Sustainability: partial—cost discipline and mix gains can persist, but the magnitude of leverage-driven margin expansion is unlikely to repeat without stronger revenue growth. Asset turnover (0.737x) is moderate and likely stable absent a material change in asset base utilization. Financial leverage (5.28x) materially amplifies ROE; while supportive in the short term, it raises risk and limits resilience. Watch for any re-acceleration of SG&A growth exceeding revenue growth; with SG&A at 30.1% of sales, any cost creep could compress margins quickly.

Growth Assessment

Top-line growth was modest at +1.2% YoY to 75.24, suggesting stabilization rather than a demand surge. Profit growth was driven by operating efficiency: operating income rose to 2.21 (+564.6% YoY), indicating mix/pricing and cost discipline as primary levers. Gross margin at 33.1% is healthy for the business profile, though we lack YoY gross margin data to assess structural improvement. Ordinary income of 2.18 shows minimal reliance on non-operating gains this quarter, signaling a cleaner quality of earnings. EBITDA was 3.95 (5.2% margin), providing cushion for interest and maintenance capex. Outlook hinges on sustaining pricing power and cost control amid tepid revenue growth; further profit improvement will likely require continued mix upgrades and productivity gains. With ROIC at 10.6%, the company is presently creating value, but elevated leverage constrains strategic flexibility. Absence of R&D detail and limited segment disclosures obscure the durability of growth drivers. Overall, growth appears efficiency-led rather than volume-led, which is defensible but sensitive to input costs and SG&A discipline.

Financial Health

Liquidity: Current ratio 119.2% (>1.0 but below the >1.5 comfort benchmark) and quick ratio 96.3% indicate adequate but tight liquidity. Cash and deposits of 19.09 plus receivables of 23.66 cover short-term loans of 10.00 and a substantial portion of payables (27.87). Solvency: Total liabilities 82.77 vs equity 19.34 yields high leverage; reported D/E is 4.28x—warning level (>2.0). Interest coverage is strong at 20.1x, mitigating near-term solvency stress. Maturity mismatch: Current assets (73.81) exceed current liabilities (61.93), and cash-on-hand exceeds short-term loans, suggesting limited near-term refinancing risk. However, thin equity (retained earnings -35.05) reduces shock absorption capacity. Off-balance sheet: No disclosures available; absence of information means contingent obligations (e.g., guarantees, leases) cannot be assessed.

Cash Flow Quality

Earnings quality is strong with OCF/NI at 4.39x, indicating cash conversion well above benchmarks and likely working capital release. Estimated FCF (OCF 6.46 minus capex 0.87) is approximately 5.59, suggesting ample internal funding capacity; note that full investing CF is unreported, so this is a proxy. Financing CF of -1.15 implies net debt repayment and/or dividends; dividend detail is unreported. No clear signs of working capital manipulation from the limited data: receivables and inventories levels appear reasonable relative to sales, and OCF strength argues against aggressive revenue recognition. Sustainability: If OCF remains > NI and capex remains modest, FCF should comfortably cover maintenance needs and selective deleveraging.

Dividend Sustainability

Dividend data (DPS, total dividends, payout) is unreported, so direct assessment is not possible. On capacity, proxy FCF of ~5.59 suggests room for dividends after capex if the company maintains similar cash generation. Payout ratio cannot be calculated, but with NI at 1.47 and strong OCF, a modest dividend could be sustainable provided deleveraging priorities are balanced. Policy outlook is unclear given negative retained earnings (-35.05) and high leverage (D/E 4.28x), which typically shift capital allocation toward balance sheet repair over distributions.

Risk Assessment

Business Risks:

• Margin sensitivity to input cost inflation given modest top-line growth (+1.2% YoY).
• Reliance on cost control/operating leverage for profit growth; limited volume growth increases downside if costs rise.
• Potential pricing pressure in end markets; limited segment disclosure obscures mix resilience.

Financial Risks:

• High leverage: D/E 4.28x and financial leverage 5.28x elevate downside risk despite strong interest coverage.
• Thin equity base with accumulated deficit (retained earnings -35.05) limits shock absorption.
• Liquidity is adequate but not ample (current ratio 119.2%, quick ratio 96.3%), increasing sensitivity to working capital swings.

Key Concerns:

• Sustainability of the ~249 bps operating margin expansion without stronger revenue growth.
• Potential reversion of working capital tailwinds that boosted OCF (OCF/NI 4.39x).
• Data gaps (investing CF, dividend policy, segment performance) hinder full risk evaluation.

Investment Implications

Key Takeaways:

• Earnings rebound driven by operating efficiency: OI +564.6% on +1.2% revenue.
• Operating margin expansion to 2.9% (~+249 bps YoY) with gross margin at 33.1%.
• Strong cash conversion (OCF/NI 4.39x) and likely positive FCF (~5.59 proxy).
• High leverage (D/E 4.28x) and negative retained earnings constrain flexibility.
• ROE 7.6% aided by leverage; ROIC 10.6% indicates current value creation.

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio (30.1% this quarter).
• OCF sustainability and working capital movements (receivables, inventories, payables).
• Leverage reduction path (net debt, D/E) and interest coverage maintenance.
• Liquidity buffers (quick ratio >1.0 target) and short-term loan rollovers.
• Any disclosure on dividend policy and investing cash flows.

Relative Positioning: Within specialty manufacturing/ceramics peers, profitability recovery and ROIC of 10.6% are positives, but balance sheet leverage and accumulated deficits place the company at a higher-risk profile despite strong interest coverage; near-term performance is more dependent on maintaining cost gains than on robust demand growth.

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