Kobe Steel,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.18T
• Operating Income: ¥62.56B
• Net Income: ¥64.32B
• EPS: ¥159.49

Income Statement

Balance Sheet

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 with resilient bottom line driven by below-the-line gains despite softer top line and compressed operating margins. Revenue declined 5.4% YoY to 11,814.47, while operating income fell 19.5% YoY to 625.65, indicating weaker operating leverage amid a softer steel/metal demand-price environment. Ordinary income decreased 18.7% YoY to 576.63, reflecting a negative non-operating balance (non-op income 199.10 vs non-op expenses 248.12). Net income, however, rose 11.0% YoY to 628.30, aided by approximately 179.67 of extraordinary gains (profit before tax 756.30 minus ordinary income 576.63) and a low effective tax rate of 15.0%. Gross margin was 16.7%, and operating margin was approximately 5.3%. Operating margin compressed by roughly 93 bps YoY (from ~6.23% to ~5.30%) given the steeper decline in operating profit versus revenue. Net margin expanded by an estimated 80 bps YoY (from ~4.52% to ~5.32%) on extraordinary gains and taxes, not from core operations. SG&A intensity stood at ~11.4% of sales, suggesting limited operating cost flexibility in the quarter. Interest coverage remained healthy at 9.16x, supported by curtailed interest burden (68.33) relative to operating profit. Liquidity is solid with a current ratio of 151.5% and quick ratio of 122.7%; D/E of 1.27x is within sector comfort ranges. ROE is 5.0% per DuPont, constrained by low asset turnover (0.416) and modest margins; ROIC at 3.2% is below a 5% warning threshold. Earnings quality is mixed due to reliance on non-operating and extraordinary gains; operating trends were weaker. Cash flow data were not disclosed, limiting assessment of cash earnings conversion and FCF coverage for dividends/capex. Forward-looking, the key swing factors are steel spreads, volumes in auto and machinery end-markets, power/energy cost trajectories, and any recurrence of one-off gains. Management will likely need improved price-cost spread and asset efficiency to lift ROIC above WACC; otherwise capital efficiency will remain a headwind.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (NPM) 5.3% × Asset Turnover (AT) 0.416 × Financial Leverage (FL) 2.27x = ~5.0% ROE (matches reported 5.0%). The most material change versus last year appears in the margin layer: operating income declined 19.5% on a 5.4% revenue decline, compressing operating margin by ~93 bps (from ~6.23% to ~5.30%). Net margin, however, expanded by ~80 bps due to ~179.67 of extraordinary gains and a 15.0% effective tax rate. Business drivers: softer steel/metal spreads and/or weaker shipments likely pressured operating profit, while non-operating/extraordinary items (e.g., asset-related gains) and taxation mechanics buoyed net. Sustainability: the operating margin pressure is cyclical but can persist if raw material or energy costs remain elevated relative to selling prices; the extraordinary gains are one-time by nature and unlikely to recur at the same magnitude. Asset turnover at 0.416 indicates a heavy asset base typical of steel; without volume or portfolio optimization, structural improvement is hard. Watch for concerning trends: SG&A grew as a share of sales to ~11.4% (given sales decline), implying negative operating leverage; also, non-operating dependence (non-operating income ratio 31.7%) and extraordinary gains underpinning net raise quality flags.

Growth Assessment

Revenue contracted 5.4% YoY to 11,814.47, indicative of softer demand/price in steel and related segments. Operating income fell 19.5% YoY to 625.65, showing revenue decline amplified at the operating line. Ordinary income decreased 18.7% YoY to 576.63, reflecting a negative non-operating balance. Net income increased 11.0% YoY to 628.30 on extraordinary gains (~179.67) and favorable tax rate (15.0%). Gross margin of 16.7% and operating margin of ~5.3% suggest core profitability compression. Interest coverage remains strong at 9.16x, supporting continued operations and investment activity. Given ROIC at 3.2% (<5%), the current growth profile is below the threshold for value-accretive expansion absent cost/price improvements. Outlook hinges on steel spreads, automotive production recovery (key end-market), and stabilizing energy/raw material inputs. Without recurring extraordinary gains, sustaining YoY net profit growth will require operating margin recovery and/or mix improvements. Near-term growth catalysts would include price hikes sticking, improved utilization, and contribution from high-value products; downside risks include commodity and FX volatility.

Financial Health

Liquidity is solid: current ratio 151.5% and quick ratio 122.7% exceed conservative thresholds. No warning on current ratio (<1.0) or D/E (>2.0); D/E is 1.27x, within industry comfort. Working capital is positive at 4,694.85 with current assets (13,809.42) comfortably covering current liabilities (9,114.57); cash and deposits (2,289.84) plus receivables (3,724.80) and inventories (2,628.62) provide ample short-term coverage against short-term loans (2,021.01) and payables (3,643.06). Maturity mismatch risk appears moderate given the scale of current assets versus current liabilities; refinancing risk is mitigated by strong interest coverage (9.16x). Total equity is 12,523.49 against total assets of 28,428.96, implying an analytically derived equity ratio of ~44% (not provided in XBRL). Long-term loans (4,216.89) dominate the debt stack, indicating manageable rollover cadence if cash generation is steady. No off-balance sheet obligations were disclosed in the provided data; absence of disclosure does not preclude existence (e.g., guarantees) and should be checked in the notes.

Cash Flow Quality

Operating cash flow and free cash flow were not disclosed, so OCF/Net Income and FCF coverage cannot be calculated. This limits assessment of earnings-to-cash conversion and working capital dynamics. Earnings quality flags include: net income growth (+11% YoY) despite weaker operating profit (-19.5% YoY), driven by extraordinary gains (~179.67) and a low tax rate (15.0%). Non-operating balance is negative (income 199.10 vs expenses 248.12), but extraordinary gains offset this at the pre-tax level. Without OCF, we cannot confirm whether working capital inflows supported earnings or whether inventories/receivables absorbed cash; no signs of manipulation can be inferred from the disclosed data alone. For sustainability, monitoring OCF relative to net income (>1.0 desirable) and capex requirements is essential once data becomes available.

Dividend Sustainability

Annual DPS and total dividends were not disclosed, but a calculated payout ratio of 63.1% is slightly above the <60% benchmark for comfort. With FCF unreported, cash coverage of dividends cannot be assessed; reliance on accounting earnings rather than cash would elevate risk if OCF is soft. Balance sheet metrics (current ratio 151.5%, D/E 1.27x) provide some cushion, but sub-5% ROIC suggests limited headroom to raise payouts absent operating improvement. Policy outlook likely remains stable to cautious, with flexibility contingent on steel spreads and capex needs for maintenance and strategic projects (including environmental investments).

Risk Assessment

Business Risks:

• Cyclical steel demand and price volatility impacting spreads and utilization
• Exposure to automotive, construction, and machinery end-markets with potential volume swings
• Energy and raw material cost volatility (iron ore, coking coal, electricity/LNG) pressuring margins
• Execution risk on portfolio/asset optimization required to lift ROIC from 3.2%
• Dependence on extraordinary and non-operating items to support net income in this quarter

Financial Risks:

• ROIC at 3.2% below 5% warning threshold, indicating capital efficiency headwinds
• Potential cash flow shortfall risk for dividends/capex due to unreported OCF/FCF
• Negative non-operating balance (net -49.02) highlighting exposure to financial/other costs
• Refinancing and interest rate risk on 2,021.01 short-term loans and 4,216.89 long-term loans (mitigated by 9.16x coverage)

Key Concerns:

• Operating margin compression (~93 bps YoY) despite smaller revenue decline
• Net income uplift driven by ~179.67 extraordinary gains and low tax rate (15%), not core operations
• Sustained low asset turnover (0.416) limiting ROE despite leverage of 2.27x
• Data gaps (OCF, capex, DPS) hinder full assessment of cash sustainability

Investment Implications

Key Takeaways:

• Core operations softened: revenue -5.4% YoY, operating income -19.5% YoY, operating margin ~5.3%
• Net profit resilience (+11% YoY) relies on extraordinary gains (~179.67) and favorable tax
• ROE 5.0% and ROIC 3.2% underscore capital efficiency challenge
• Balance sheet/liquidity are sound (current ratio 151.5%, D/E 1.27x, interest coverage 9.16x)
• Earnings quality mixed due to below-the-line support; cash conversion unknown

Metrics to Watch:

• OCF/Net Income (>1.0 target) and FCF vs dividend and capex
• Steel price-cost spread, raw material and energy cost trends
• Utilization rates and volume recovery in auto/machinery end-markets
• Extraordinary/non-operating item recurrence and tax rate normalization
• ROIC trajectory toward >5% and ultimately >WACC
• SG&A discipline vs revenue trend to restore operating leverage

Relative Positioning: Versus domestic peers, leverage is moderate and liquidity healthy, but profitability metrics (ROE 5%, ROIC 3.2%) lag top-tier operators; sustained improvement will likely hinge on spread recovery and asset efficiency gains rather than financial leverage.

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