A&A Material Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥21.87B
• Operating Income: ¥651M
• Net Income: ¥758M
• EPS: ¥98.85

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: Mixed quarter—top-line grew but profitability compressed at the operating level, with headline net income buoyed by a tax benefit, while cash flow quality weakened. Revenue rose 8.0% year over year to 218.71, demonstrating solid demand resilience. Gross profit reached 49.51, implying a gross margin of 22.6%. Operating income declined 26.2% YoY to 6.51, taking the operating margin down to 3.0% despite higher sales. Ordinary income fell 32.9% to 5.90, indicating additional pressure from non-operating items and/or higher interest burden. Net income increased 42.3% to 7.58, helped by a negative effective tax rate of -6.6% (income tax: -0.47), which lifted profit after tax above pretax profit (7.11). Based on our reconstruction, the operating margin compressed by approximately 138 bps YoY to 3.0% (from ~4.4%), and the ordinary margin compressed by roughly 164 bps to 2.7%. In contrast, the net margin expanded by about 84 bps to 3.5% (~2.6% prior), driven by the tax benefit rather than improved core performance. SG&A intensity remained high at 19.7% of sales (42.99), limiting operating leverage despite revenue growth. Cash generation was weak: operating cash flow was 1.43 versus net income of 7.58 (OCF/NI 0.19x), flagging earnings quality concerns. Using reported capex of 6.65, implied free cash flow was approximately -5.22 (OCF minus capex), suggesting external financing supported cash needs in the period (financing CF: 11.94). Liquidity appears adequate on a working-capital basis (current ratio 148%, quick ratio 121%), but on-hand cash is low at 1.90 against short-term loans of 20.30, elevating refinancing and working-capital execution risk. Leverage is moderate with D/E at 1.25x, and interest coverage remains strong at 11.8x, cushioning near-term rate or earnings volatility. ROE is 3.9% via DuPont (3.5% margin × 0.503 turnover × 2.25x leverage), reflecting modest profitability and capital efficiency. ROIC at 2.6% is below the 5% warning threshold, underscoring a need for margin uplift or asset efficiency improvements. Forward-looking, sustaining growth will require improving price/mix and SG&A discipline to restore operating margins and lift ROIC; reliance on tax effects is not a durable earnings driver. Monitoring OCF recovery, capex discipline, and cost pass-through will be critical catalysts for margin normalization in 2H.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.9% = Net Profit Margin 3.5% × Asset Turnover 0.503 × Financial Leverage 2.25x. Among these, the most notable quarter-on-quarter/yoy dynamic is the net margin, which expanded to 3.5% despite weaker operating profit, driven primarily by a negative tax charge (-6.6% effective tax rate). Business drivers: operating margin compressed to 3.0% as SG&A (19.7% of sales) outpaced operating leverage from the 8% revenue growth, while non-operating items were a net drag (non-op income 0.61 vs expenses 1.22) and interest expense was 0.55. Sustainability: the tax tailwind appears non-recurring; absent this, net margin would align more closely with subdued operating performance. Asset turnover at 0.503 (half-year basis) remains modest for a materials business, reflecting an asset-intensive model; without further volume or mix gains, it is unlikely to improve sharply in the near term. Financial leverage at 2.25x is stable and not the main driver of ROE changes. Concerning trend: operating income fell 26.2% YoY on an 8% revenue increase, indicating negative operating leverage; SG&A growth likely exceeded gross profit growth. Gross margin at 22.6% leaves limited buffer for cost inflation; lacking detail on SG&A components, we infer pressure from fixed-cost absorption and/or limited price pass-through.

Growth Assessment

Revenue growth of 8.0% indicates steady end-market demand or improved pricing, but profit growth quality is weak as operating and ordinary profits declined 26–33% YoY. Net income rose 42.3% due to a tax benefit rather than stronger fundamentals. Operating margin contraction to 3.0% and ordinary margin to 2.7% point to rising cost intensity and higher non-operating drag. EBITDA of 12.02 implies an EBITDA margin of 5.5%, which is thin for absorbing further cost shocks. Near-term growth sustainability hinges on restoring operating leverage: price discipline, cost control, and utilization are required. With ROIC at 2.6%, current growth does not exceed the likely cost of capital, suggesting value creation pressure until margins improve. Outlook: if cost pass-through and SG&A restraint can lift the operating margin back toward the ~4% area achieved last year, earnings should normalize; otherwise, reliance on non-recurring tax effects will fade and net income could converge downward.

Financial Health

Liquidity: Current ratio 147.8% and quick ratio 120.9% are above benchmarks, indicating adequate short-term coverage; however, cash and deposits are only 1.90 versus short-term loans of 20.30, implying dependence on receivables/inventory conversion and ongoing facility access. Solvency: Debt-to-equity 1.25x (loans total 61.32) is within a manageable range; interest coverage of 11.84x is strong. No explicit red flags from current ratio (<1.0) or D/E (>2.0). Maturity mismatch: current assets of 196.22 comfortably exceed current liabilities of 132.72, but low cash-on-hand heightens refinancing and working-capital execution risk. Off-balance sheet: none reported in the provided data. Equity base of 192.88 supports leverage (asset/equity 2.25x). Debt/EBITDA at 5.10x (provided) suggests moderate leverage for a materials company; deleveraging would benefit from stronger OCF.

Cash Flow Quality

OCF/Net Income is 0.19x, well below the 0.8 threshold, indicating low earnings cash conversion this half. With capex of 6.65 and OCF of 1.43, implied FCF is approximately -5.22 (subject to limitations since full investing CF is unreported). The gap between NI (7.58) and OCF (1.43) likely reflects working capital build and/or non-cash tax effects (negative tax expense), but the lack of detail constrains attribution. Interest coverage is healthy, but negative FCF implies dividend and capex needs are currently dependent on financing (financing CF: 11.94). Working capital manipulation signs are not evident from point-in-time balances; the cash conversion cycle inferred from period-end balances is roughly ~46 days (DSO ~40, DIO ~39, DPO ~33), which is reasonable for the industry. Sustained improvement in OCF is necessary to support capex and any shareholder returns without increasing leverage.

Dividend Sustainability

Dividend details are unreported; calculated payout ratio is 61.6%, slightly above the <60% benchmark. Given implied negative FCF (-5.22) this period, dividend coverage by internally generated cash was weak. With OCF underperforming and capex at 6.65, any dividend would currently rely on the balance sheet and external funding (financing CF positive at 11.94). Policy outlook cannot be confirmed due to lack of DPS and total dividends data; sustainability will depend on restoring operating margin and OCF in 2H and on capex phasing.

Risk Assessment

Business Risks:

• Operating margin compression amid cost inflation and limited price pass-through (operating margin 3.0%).
• Execution risk on SG&A control with high SG&A ratio (19.7% of sales).
• Demand cyclicality in construction/materials end-markets impacting volumes and utilization.
• Potential variability in tax expense (negative effective tax rate this term) creating volatile net income.

Financial Risks:

• Low cash-on-hand (1.90) versus short-term loans (20.30) increases reliance on credit lines and WC turnover.
• Negative implied FCF (-5.22) necessitating external funding to cover capex and potential dividends.
• Moderate leverage (D/E 1.25x; Debt/EBITDA 5.10x) could constrain flexibility if earnings soften.
• Interest rate risk on floating-rate borrowings and refinancing costs.
• Earnings quality risk (OCF/NI 0.19x) signals potential cash conversion weakness.

Key Concerns:

• ROIC at 2.6% below 5% warning threshold, indicating subpar capital efficiency.
• One-off tax benefit driving net income growth; core profitability weaker.
• Operating and ordinary income down 26–33% YoY despite 8% sales growth (negative operating leverage).
• Liquidity concentration in receivables/inventory rather than cash, increasing execution risk if collections slow.

Investment Implications

Key Takeaways:

• Revenue growth solid (+8%), but core profit metrics deteriorated (OP -26%).
• Net income growth driven by a tax credit; sustainability questionable.
• Operating margin compressed by ~138 bps YoY to 3.0%; ordinary margin by ~164 bps.
• Earnings quality weak (OCF/NI 0.19x); implied FCF negative (~-5.22).
• Leverage moderate with strong interest coverage, but cash buffer thin.
• ROE modest at 3.9%; ROIC at 2.6% highlights value-creation challenge.

Metrics to Watch:

• Operating margin trajectory and SG&A ratio in 2H.
• OCF/NI and working capital movements (AR and inventory turnover).
• Capex phasing versus OCF to restore positive FCF.
• Effective tax rate normalization (removal of one-off benefits).
• Debt/EBITDA and short-term refinancing profile.
• Pricing power and cost pass-through to defend gross margin.

Relative Positioning: Versus domestic building/materials peers, the company shows respectable liquidity ratios and strong interest coverage but lags on capital efficiency (ROIC 2.6%) and currently exhibits weaker operating leverage and cash conversion; margin recovery and OCF normalization are required to close 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