Nippon Denko Co.,Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥57.86B
• Operating Income: ¥3.16B
• Net Income: ¥1.54B
• EPS: ¥3.25

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—revenue grew modestly but profit compressed materially, with net income plunging on heavier non-operating losses and a higher effective tax burden. Revenue rose 2.5% YoY to 578.64, while operating income fell 13.6% YoY to 31.59 and ordinary income declined 43.9% YoY to 13.68. Net income decreased 71.5% YoY to 4.39, driving a thin net margin of 0.8%. Gross margin printed at 14.9%, and operating margin was approximately 5.5%. Based on reconstructed prior-period math, operating margin compressed by roughly 100–105 bps YoY (from about 6.5% to 5.5%). Ordinary income margin compressed by about 196 bps (from roughly 4.3% to 2.4%), reflecting a swing to sizable net non-operating expenses. Non-operating income of 5.38 was more than offset by non-operating expenses of 17.58, creating a net drag of around 12.2; interest expense (4.44) explains part of this, with the remainder likely valuation/FX or other items. Interest coverage remains solid at 7.1x (OI/interest), indicating manageable financial risk despite profit pressure. Effective tax rate was elevated at 34.7%, exacerbating the hit to bottom-line earnings. Liquidity is a strong counterbalance: current ratio 289.6% and quick ratio 194.1% underscore robust short-term solvency. Balance sheet strength is notable with equity of 698.29, low D/E of 0.35x, and an implied equity ratio of about 74% (equity/assets), providing cushion for volatility. Capital efficiency is weak: ROE is 0.6% and ROIC is 2.8%, well below a typical 7–8% target and below an assumed WACC, signaling value dilution risk if sustained. Cash flow data are unreported, limiting earnings quality assessment and dividend coverage analysis. A calculated payout ratio of 344.2% suggests potential unsustainability, but dividend inputs are unreported and this requires confirmation. Forward-looking, the company must restore operating margins (cost pass-through and mix) and reduce non-operating volatility to recover ROE/ROIC; liquidity affords time, but capital efficiency must improve.

Profitability Analysis

ROE decomposition (DuPont): ROE ≈ Net Profit Margin × Asset Turnover × Financial Leverage = 0.8% × 0.615 × 1.35 ≈ 0.6%, matching the reported figure. The largest adverse change is in the Net Profit Margin, which fell to 0.8%; reconstructed YoY net margin declined by roughly 197 bps (from about 2.7% to 0.8%). Asset turnover at 0.615 appears broadly stable for a materials business and likely changed less than the margin, while financial leverage at 1.35x is low and stable. The margin compression stems from two layers: (1) operating margin decline (~100 bps) as revenue grew 2.5% but operating income fell 13.6%, implying cost pressure and/or weaker pricing power; and (2) a sharp increase in net non-operating expenses (non-op income 5.38 vs non-op expenses 17.58), which halved ordinary income margin (~4.3% to ~2.4%). Sustainability assessment: part of the non-operating drag could normalize if driven by FX/valuation; however, the operating margin compression suggests ongoing input cost or mix headwinds and may persist without price adjustments or cost reductions. Watch for SG&A discipline: while the SG&A level is provided (49.79), the breakdown is unreported; we cannot verify whether SG&A growth exceeded revenue growth, but the deleverage indicates operating cost pressure relative to sales.

Growth Assessment

Top-line growth of 2.5% YoY to 578.64 is modest and likely driven by price/mix rather than volume acceleration; details are unreported. Profit growth is negative across tiers: operating income -13.6% YoY, ordinary income -43.9% YoY, and net income -71.5% YoY. Operating margin compressed by about 100 bps YoY to ~5.5%, indicating rising cost of goods and/or weaker pricing, despite a stable gross margin of 14.9% relative to the current period. Non-operating volatility significantly curtailed ordinary income, suggesting sensitivity to interest, FX, or valuation effects. With ROIC at 2.8%, returns are below typical cost of capital; sustaining current growth without margin recovery risks further value dilution. Near-term outlook hinges on cost pass-through, energy and raw material cost trends, and stabilization of non-operating items; a firmer yen could ease import costs but reduce translation benefits, whereas a weaker yen would have the opposite effect. Absence of segment detail or ASP/volume splits limits visibility on revenue sustainability; monitor end-market demand in steel and specialty materials as proxies. Management emphasis should be on mix upgrade and tighter working-capital discipline to protect margins in a low-growth environment.

Financial Health

Liquidity is strong: current ratio 289.6% (>1.5 benchmark) and quick ratio 194.1% (>1.0 benchmark). No warning on current ratio (<1.0) or leverage (D/E 0.35x well below 2.0 threshold). Balance sheet quality is robust with total equity 698.29 vs total assets 941.02, implying an equity ratio near 74% and low solvency risk. Interest-bearing debt detail is partially unreported, but disclosed short-term loans (50.00) and long-term loans (43.36) are manageable relative to equity and cash (61.33). Maturity mismatch risk appears low: current assets 458.73 cover current liabilities 158.42 comfortably; cash plus receivables (169.82) cover accounts payable (33.89) and interest-bearing short-term loans (50.00) to a significant extent when combined with inventory liquidity. Off-balance sheet obligations are not disclosed; none can be assessed from the data provided.

Cash Flow Quality

Operating cash flow is unreported; thus, OCF/Net Income cannot be assessed and we cannot validate earnings conversion. Free cash flow and capex are unreported, preventing an evaluation of investment intensity and sustainability of shareholder returns. Working-capital dynamics (receivables and inventories) are only point-in-time; without prior-period comparatives, we cannot confirm any build or release that may have flattered or depressed earnings. Absence of OCF data is a material limitation—flagging that earnings quality cannot be confirmed for this quarter.

Dividend Sustainability

Dividend data are unreported; however, a calculated payout ratio of 344.2% against the very low net income suggests potential unsustainability if based on actual cash distributions. With OCF and FCF unreported, we cannot verify whether dividends (if paid) are covered by free cash flow. Given ROIC of 2.8% and compressed margins, sustaining elevated cash returns would likely require balance sheet draw or a profit recovery; the strong equity base provides temporary flexibility but does not resolve long-term coverage. Policy outlook cannot be inferred from the filing; monitor management guidance and any announced DPS for confirmation.

Risk Assessment

Business Risks:

• Commodity price volatility (manganese, ferroalloys, specialty metals) impacting spreads and inventory valuations
• Energy and electricity cost inflation in Japan pressuring conversion margins
• Demand cyclicality tied to steel and industrial end-markets (domestic and China/global)
• Pricing power limitations leading to delayed cost pass-through
• Operational mix risk if higher-margin products underperform

Financial Risks:

• Non-operating volatility (FX/valuation) that materially affects ordinary income
• Interest rate risk affecting interest expense and discount rates
• Short-term funding exposure (50.00 in short-term loans) albeit mitigated by strong liquidity
• Potential impairment risk on investment securities (125.09) in adverse markets

Key Concerns:

• ROIC at 2.8% (<5% warning), indicating sub-WACC returns
• Net margin compressed to 0.8% and net income down 71.5% YoY
• Ordinary income down 43.9% YoY driven by net non-operating losses (~12.2)
• Operating margin down ~100 bps YoY despite 2.5% revenue growth
• Dividend sustainability questionable given calculated payout ratio >300% and lack of FCF data

Investment Implications

Key Takeaways:

• Top line +2.5% YoY to 578.64 but profit compressed across all levels
• Operating margin ~5.5%, down ~100 bps YoY; ordinary income margin ~2.4%
• Net non-operating expense of ~12.2 significantly reduced ordinary income
• Strong liquidity (current ratio 2.90x, quick ratio 1.94x) and low D/E (0.35x)
• Capital efficiency weak: ROE 0.6%, ROIC 2.8%
• Interest coverage healthy at 7.1x despite profit headwinds
• Effective tax rate high at 34.7%, magnifying bottom-line pressure
• Dividend coverage uncertain; reported payout math implies strain though DPS is unreported

Metrics to Watch:

• Operating margin and gross-to-operating spread recovery
• Non-operating items (FX, valuation, interest) and ordinary income stability
• Input cost trends (energy, raw materials) and pricing pass-through
• Working capital turns (receivables, inventories) once OCF is disclosed
• ROIC trajectory toward >5% and ideally 7–8% target range
• Any DPS guidance vs FCF once cash flow statements are available

Relative Positioning: Within Japanese materials and metals peers, the company exhibits superior balance sheet strength and liquidity but underperforms on capital efficiency (ROIC 2.8%) and earnings stability, with higher sensitivity to non-operating items; recovery depends on cost normalization and improved pricing discipline.

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