Shinhokoku Material Corp. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥4.36B
• Operating Income: ¥417M
• Net Income: ¥361M
• EPS: ¥54.18

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: A resilient quarter with flat operating performance but clear improvement in ordinary and bottom-line profitability, supported by modest non-operating tailwinds and disciplined costs. Revenue was 43.63, down 3.4% YoY, while operating income declined only 3.1% to 4.17, implying slight operating margin expansion. Ordinary income rose 10.8% YoY to 4.88, and net income increased 9.1% to 3.61, demonstrating stronger earnings leverage below the operating line. Gross profit was 10.31, yielding a gross margin of 23.6%. Operating margin was approximately 9.6% (4.17/43.63), up around 5 bps YoY by our reconstruction. Ordinary margin improved to 11.2% (4.88/43.63), expanding roughly 143 bps YoY, aided by net non-operating income of 0.10. Net margin widened to about 8.3% (3.61/43.63), up roughly 95 bps YoY, with an effective tax rate of 24.8% that appears reasonable. ROE calculates to 6.3% via DuPont (NPM 8.3% × AT 0.557 × leverage 1.36x), indicating mid-single-digit returns consistent with a conservative balance sheet. Liquidity is exceptionally strong with a current ratio of 912% and cash of 34.26 exceeding total liabilities of 21.85, implying a net cash posture even after considering long-term loans of 11.00. Interest coverage is robust at 79.1x, reflecting low financial risk. ROIC is 9.1%, above the 7–8% benchmark, suggesting efficient capital deployment relative to the company’s cost of capital. Earnings quality cannot be fully assessed because operating cash flow and capex were not disclosed; thus, we cannot confirm cash conversion or free cash flow sufficiency. The dividend payout ratio is calculated at 97.2%, which looks elevated versus a typical <60% sustainability benchmark and may rely on current earnings strength and cash reserves absent FCF data. Forward-looking, the combination of cost control and non-operating support helped offset revenue softness, but sustaining higher net margins will likely require either volume recovery or continued efficiency gains. Given ample liquidity and low leverage, the company has strategic flexibility to navigate demand variability, though the high payout ratio could constrain reinvestment if free cash flow tightens. Data gaps in cash flows and segment detail limit visibility into working capital dynamics and capex intensity, which are key to future cash generation.

Profitability Analysis

ROE decomposition (DuPont): ROE 6.3% = Net Profit Margin 8.3% × Asset Turnover 0.557 × Financial Leverage 1.36x. The most notable change versus last year appears to be the net profit margin, which improved as net income grew 9.1% despite a 3.4% revenue decline, while operating income was nearly flat and non-operating contributions modestly positive. Business drivers include slight operating margin expansion (cost discipline) and a favorable non-operating result (net +0.10), alongside a reasonable tax rate. The NPM uplift seems partly structural (cost control) but also partly supported by non-operating items, which may not be recurring at the same magnitude. Asset turnover likely compressed given lower revenue on a roughly stable asset base, a headwind to ROE. Leverage remains low (total liabilities/equity 0.38x; financial leverage 1.36x), limiting ROE amplification but keeping risk contained. SG&A was 6.00; with revenue down, the operating margin still improved, indicating operating discipline; however, we cannot confirm SG&A YoY growth versus revenue due to limited disclosure in the breakdown.

Growth Assessment

Top-line contracted 3.4% YoY to 43.63, indicating subdued demand or pricing pressure in the period. Operating income declined 3.1% to 4.17, outperforming sales and implying modest operating leverage improvement. Ordinary income (+10.8%) and net income (+9.1%) growth exceeded operating trends, assisted by a positive non-operating balance and stable tax rate. Gross margin held at 23.6%, suggesting input costs and pricing were reasonably managed. With ROIC at 9.1%, the company appears to be generating returns above common cost-of-capital estimates, supporting value creation even in a soft revenue environment. Sustainability of profit growth will depend on stabilizing revenue and maintaining cost efficiency; reliance on non-operating gains should be treated as opportunistic rather than structural. Absence of R&D and capex disclosures limits visibility on future growth investments. Near-term outlook hinges on end-market recovery and inventory/receivables normalization, which we cannot evaluate fully due to data gaps. Margin resilience is a positive indicator, but sustaining net margin expansion without top-line support could be challenging.

Financial Health

Liquidity is very strong: current assets 63.23 vs current liabilities 6.93 yields a current ratio of 912.4%, and quick ratio matches due to unreported inventories. No warning flags: current ratio is far above 1.0. Solvency is conservative with a debt-to-equity ratio of 0.38x (total liabilities/equity). Long-term loans are 11.00, while cash and deposits are 34.26; cash exceeds total liabilities (21.85), suggesting a net cash stance even before considering other assets. No immediate maturity mismatch risk: current assets comfortably exceed current liabilities. Interest coverage is 79.1x, indicating low refinancing or interest-rate stress. Off-balance sheet obligations were not disclosed; we have no information on guarantees or leases beyond what may be embedded in SG&A. Equity stands at 57.66, providing a solid buffer against shocks.

Cash Flow Quality

Operating cash flow, investing cash flow, and capex are not disclosed, preventing direct assessment of earnings-to-cash conversion. We cannot compute OCF/Net Income; therefore, we cannot flag or clear cash quality based on the >1.0 benchmark. Free cash flow sustainability for dividends and capex cannot be evaluated rigorously; however, the sizable cash balance (34.26) provides near-term coverage. Working capital quality cannot be fully assessed; accounts receivable are 6.66 but we lack inventories and payables turnover metrics, limiting detection of any working capital-driven earnings management. No signs of aggressive non-operating gains exist beyond a modest net +0.10, but without OCF data, caution is warranted.

Dividend Sustainability

The calculated payout ratio is 97.2%, which is high relative to the <60% benchmark for sustainability and could be pressured if earnings soften. Free cash flow coverage is not calculable due to missing OCF and capex data, so we cannot confirm dividend coverage from internal cash generation. The balance sheet’s strong cash position offers a buffer to support dividends in the short term. Without visibility into capex needs and growth investments, maintaining a ~100% payout may crowd out reinvestment or increase reliance on the cash war chest. Policy outlook likely hinges on management’s growth capex pipeline and earnings trajectory; a more moderate payout would enhance flexibility if growth opportunities arise.

Risk Assessment

Business Risks:

• Top-line softness (-3.4% YoY) indicating demand or pricing headwinds.
• Input cost and commodity price volatility affecting the 23.6% gross margin.
• Potential customer concentration typical in specialty materials (not disclosed).
• FX exposure if export-oriented, impacting margins and reported revenue.
• Execution risk in sustaining operating discipline amid lower sales.

Financial Risks:

• High dividend payout ratio (97.2%) may pressure cash if earnings or OCF weaken.
• Interest rate risk on 11.00 of long-term loans, albeit mitigated by strong cash.
• Limited visibility on capex and OCF could mask future funding needs.

Key Concerns:

• Earnings quality cannot be validated due to unreported OCF and capex.
• Net income growth outpaced operating income, indicating some dependence on non-operating factors.
• Asset turnover of 0.557 is modest; further revenue declines would weigh on ROE.

Investment Implications

Key Takeaways:

• Operating margin slightly expanded (~+5 bps) despite revenue decline, reflecting cost control.
• Ordinary and net margins expanded meaningfully (+143 bps and +95 bps YoY), aided by non-operating support and a stable tax rate.
• Balance sheet is cash-rich; cash exceeds total liabilities, with conservative leverage (D/E 0.38x).
• ROIC at 9.1% is healthy and above common targets, indicating efficient capital use.
• High payout ratio (~97%) may not be sustainable without robust free cash flow.

Metrics to Watch:

• Operating cash flow and OCF/NI ratio (target >1.0).
• Capex and free cash flow to assess dividend coverage.
• Revenue trajectory and order backlog to gauge asset turnover recovery.
• Gross and operating margins to confirm cost discipline durability.
• Net non-operating items to evaluate recurrence vs one-off effects.

Relative Positioning: Compared to peers in materials with similar scale, the company exhibits stronger liquidity, low leverage, mid-single-digit ROE supported by improved net margins, and above-benchmark ROIC, but faces a relatively aggressive payout policy and lower asset turnover that could cap ROE absent revenue recovery.

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