NAKAYAMA STEEL WORKS,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥76.60B
• Operating Income: ¥3.02B
• Net Income: ¥1.71B
• EPS: ¥31.62

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

FY2026 Q2 was a weaker quarter with meaningful topline contraction and margin compression, resulting in a sharp decline in earnings. Revenue fell 14.4% YoY to 766.0, while operating income declined 36.9% YoY to 30.2 and net income dropped 46.7% YoY to 17.1. Gross profit was 98.9, translating to a gross margin of 12.9%, and SG&A was 68.7, or 9.0% of sales. Operating margin compressed to 3.9% this quarter from an estimated 5.4% a year ago (about 141 bps contraction). Ordinary margin similarly compressed to 3.8% from about 5.3% (circa 142 bps decline). Net margin fell to 2.2% from roughly 3.6% (about 135 bps compression), reflecting both weaker operating performance and a normalized tax rate of 33.6%. Non-operating balance was a modest net expense (-0.9), as 1.52 in non-operating income (dividends 0.53, interest 0.22) was more than offset by 2.38 in non-operating costs (interest expense 0.96 included). Despite weaker profitability, the balance sheet remains robust: current ratio is 342.8%, quick ratio 290.9%, and D/E is a conservative 0.39x. Calculated equity ratio is strong at approximately 72% (1,076.2 equity / 1,495.3 assets), signaling high solvency. Interest coverage is very healthy at 31.45x, indicating low near-term financial risk. However, capital efficiency is weak with ROIC at 2.1% (below the 5% warning threshold), and ROE is only 1.6%, pressured by low margins and modest asset turnover (0.512). Earnings quality cannot be assessed this quarter due to unreported operating cash flow; thus, the OCF/Net Income ratio is not available. Dividend sustainability is a concern, as the calculated payout ratio is 147.3%, well above earnings despite DPS being unreported in XBRL. Looking forward, the decline in revenue and spread-driven margin compression suggest cautious near-term outlook unless pricing and volumes stabilize. Focus areas are margin recovery (product spreads), inventory discipline, and capex/FCF visibility to reassess dividend capacity.

Profitability Analysis

ROE (1.6%) decomposes into Net Profit Margin (2.2%) × Asset Turnover (0.512) × Financial Leverage (1.39x). The largest adverse change is in Net Profit Margin, which fell by about 135 bps YoY (from ~3.6% to 2.2%), driven by operating margin compression (~141 bps YoY to 3.9%). Asset turnover at 0.512 is subdued for a steel manufacturer and likely worsened YoY due to a 14.4% revenue contraction against a relatively stable asset base (~1,495). Financial leverage remains low at 1.39x, providing balance sheet strength but limiting ROE uplift. Business drivers for the margin decline likely include weaker steel prices and/or volumes and less favorable input cost/price spread, with limited SG&A flexibility (SG&A at 9.0% of sales). The margin trend looks cyclical rather than one-time, but normalization depends on product mix, pricing, and cost pass-through. A cautionary sign is operating deleverage: operating income fell 36.9% vs revenue down 14.4%, indicating fixed-cost absorption pressure; SG&A ratio rose YoY on lower sales. Sustainability of current margin levels will hinge on spread recovery and throughput; without that, ROE likely remains below cost of equity.

Growth Assessment

Revenue decreased 14.4% YoY to 766.0, indicating softer demand and/or lower realized prices. Operating income decreased 36.9% YoY to 30.2, magnifying the topline decline due to operating deleverage and spread compression. Ordinary income dropped 37.6% to 29.3, and net income declined 46.7% to 17.1 as tax normalized and non-operating costs offset small non-operating income. Gross margin sits at 12.9%; operating margin at 3.9% reflects a lean profitability profile in a down-cycle phase. Non-operating contribution is limited (net -0.86), indicating earnings are primarily operational. With ROIC at 2.1%, returns are below likely WACC, signaling growth without spread recovery would not be value-accretive. Near-term growth visibility is constrained by the cyclical steel environment; stabilization in end-demand (construction, machinery, automotive) and recovery in selling prices are key to re-accelerate. Absent disclosed backlogs or guidance, we assume a cautious base case with gradual normalization rather than sharp rebound. Mix optimization and cost control (procurement, energy efficiency) can support margins but are unlikely to fully offset pricing pressure if demand remains soft.

Financial Health

Liquidity is very strong: current ratio 342.8% and quick ratio 290.9%, with current assets (911.7) far exceeding current liabilities (266.0). No warning on current ratio (<1.0) or D/E (>2.0); D/E is conservative at 0.39x. Calculated equity ratio is about 72%, reflecting a low-risk capital structure. Maturity mismatch risk appears low: cash and deposits (208.0), receivables (321.0), and inventories (137.8) comfortably cover short-term borrowings (25.4) and accounts payable (123.2). Long-term loans are modest at 62.5 relative to equity. Interest coverage of 31.45x indicates ample buffer against rate and earnings volatility. No off-balance sheet obligations were disclosed in the provided data; absence of disclosure limits visibility on guarantees or contingent liabilities common in industrials.

Cash Flow Quality

Operating cash flow was not reported, so OCF/Net Income cannot be computed and earnings quality cannot be verified. Free cash flow is also unreported; thus, coverage of dividends and capex is not assessable from this dataset. Working capital structure shows receivables (321.0) and inventories (137.8) versus payables (123.2), with positive net working capital; on lower sales, this can absorb cash and pressure OCF if not managed. No clear signs of working capital manipulation can be inferred without cash flow details; however, the magnitude of working capital (working capital 645.7 equals ~84% of YTD sales) warrants monitoring for cash conversion risk if conditions soften further. In sum, cash flow quality is indeterminable this quarter due to missing OCF/FCF disclosures.

Dividend Sustainability

The calculated payout ratio is 147.3%, implying dividends in excess of earnings capacity for the period, although DPS and total dividends are unreported in XBRL. With ROE at 1.6% and ROIC at 2.1%, internal generation is weak; without positive FCF, sustaining such a payout would be challenging. Balance sheet strength offers some buffer, but recurring over-distribution would erode retained earnings over time. Given absent OCF/FCF data, we cannot confirm coverage; prudence suggests that dividend continuity at implied levels likely requires margin recovery or reduced cash outflows. Policy outlook cannot be inferred from the dataset; investors should watch for year-end guidance on shareholder returns and capital allocation.

Risk Assessment

Business Risks:

• Spread compression risk between steel selling prices and raw materials/energy costs
• Demand cyclicality in construction, machinery, and automotive end-markets
• Inventory valuation risk if prices decline further
• Competitive pressure from domestic and regional producers
• Execution risk on cost reductions and product mix improvement

Financial Risks:

• Low ROIC (2.1%) below WACC leading to value dilution if sustained
• Potential FCF shortfalls not visible due to unreported OCF/Capex data
• Dividend coverage risk (calculated payout 147%) if cash generation is weak
• Interest rate risk on floating-rate borrowings, albeit mitigated by low leverage

Key Concerns:

• Material YoY margin compression (operating margin -141 bps; net margin -135 bps)
• Topline decline of 14.4% indicating weakening market conditions
• Earnings quality opaque due to missing cash flow disclosure
• Capital efficiency below threshold (ROIC 2.1%)
• Potential negative operating leverage if volumes/prices weaken further

Investment Implications

Key Takeaways:

• Topline down 14.4% YoY with pronounced operating deleverage
• Operating margin at 3.9% and net margin at 2.2% after ~140 bps compression
• ROE 1.6% and ROIC 2.1% indicate weak returns in current environment
• Balance sheet is robust (current ratio 343%, D/E 0.39x, equity ratio ~72%)
• Dividend sustainability is questionable with a calculated 147% payout
• Non-operating impact is minor; core performance drives earnings
• Visibility on cash generation is limited due to unreported OCF/FCF

Metrics to Watch:

• Product spread (selling prices vs raw materials/energy)
• Operating margin and SG&A ratio trajectory
• Order backlog/volume indicators and utilization rates
• Working capital days (AR and inventory turnover) and OCF once disclosed
• Capex commitments and ROIC progress
• Dividend policy updates and payout guidance

Relative Positioning: Compared with domestic steel peers, Nakayama Steel shows strong balance sheet conservatism but subpar profitability and capital efficiency this quarter; near-term performance hinges on the pace of spread recovery and demand stabilization.

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