Chuo Katan Kogyo Co., Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥18.61B
• Operating Income: ¥882M
• Net Income: ¥1.10B
• Earnings per Unit (EPU): ¥68.85

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution 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: Strong FY2026 Q2 rebound with sharp margin expansion and solid cash conversion, but capital efficiency remains weak and a large negative OCI clouds equity gains. Revenue rose 7.5% YoY to 186.1, while operating income jumped 272.3% YoY to 8.82, evidencing material operating leverage. Ordinary income increased 149.0% YoY to 13.67, supported by 5.09 in non-operating income (notably 0.58 dividends and 0.05 interest). Net income surged 177.5% YoY to 10.85, with EPS of 68.85 yen on 15.76 million average shares. Gross profit reached 24.45 with a gross margin of 13.1%; operating margin improved to 4.7%. We estimate operating margin expanded by about 337 bps YoY (to 4.7% from ~1.4%), and net margin expanded by roughly 357 bps (to 5.8% from ~2.3%). Ordinary income margin rose to 7.3% from ~3.2%, a ~418 bps expansion. Earnings quality was solid: OCF of 16.09 exceeded net income (OCF/NI 1.48x), indicating healthy cash conversion and likely favorable working capital dynamics. Interest coverage was very strong at 54.7x and the current ratio stood at 180.8%, underscoring low near-term financial risk. However, ROIC was just 2.9% (warning threshold <5%), highlighting structurally low capital efficiency despite improved profits. Total comprehensive income was only 3.34 versus net income of 10.85, implying sizable negative OCI (likely valuation losses on securities and/or FX translation), which tempered equity accretion. Non-operating income accounted for a high 46.9% ratio (vs operating income base), suggesting part of the earnings uplift is non-core. The effective tax rate of 16.4% aided bottom-line growth and may normalize closer to statutory rates ahead. Balance sheet strength is notable with 295.1 in equity and modest reported long-term loans (11.1), implying a likely net cash position. Forward-looking, sustaining margin gains will require continued cost control and pricing discipline amid input cost and auto demand variability. Improving ROIC above 5% via asset efficiency and disciplined capex is a key medium-term imperative.

Profitability Analysis

ROE (DuPont) = Net Profit Margin (5.8%) × Asset Turnover (0.439) × Financial Leverage (1.44x) = 3.7% (matches reported). The biggest delta YoY came from margin expansion: operating income +272.3% on revenue +7.5% implies substantial operating leverage; operating margin rose ~337 bps and net margin ~357 bps. Business drivers likely included improved mix/pricing, stabilization of input costs, and SG&A discipline (SG&A 15.63 vs gross profit 24.45). Non-operating tailwinds (5.09 in non-op income, including 0.58 dividends and 0.05 interest) also boosted ordinary income, though these are not core operating gains. Asset turnover at 0.439 reflects a heavy asset base (assets 424.1) versus revenue scale, constraining ROE via low ROIC (2.9%). Sustainability: part of the margin gain appears structural (cost discipline, volume recovery), but the elevated non-operating contribution and unusually low tax rate (16.4%) may be one-off/volatile. Watch for concerning trends: while we lack SG&A detail, top-line +7.5% vs operating income +272.3% suggests positive operating leverage this period; the risk is SG&A growth catching up if wage/overhead pressures resume.

Growth Assessment

Top-line growth of 7.5% YoY to 186.1 indicates modest demand recovery, likely tied to auto-related components. Operating income growth of +272.3% far outpaced sales, driven by cost normalization and pricing/mix improvements. Non-operating income (5.09) materially lifted ordinary income (+149% YoY), but this contribution is less dependable. Net income +177.5% benefited from improved operations, non-operating gains, and a low effective tax rate (16.4%). Revenue sustainability hinges on OEM production schedules and end-demand; visibility remains moderate. Profit quality improved: gross profit 24.45 and OCF 16.09 (OCF/NI 1.48x) validate cash-backed earnings. However, total comprehensive income of 3.34 (vs NI 10.85) signals valuation/FX headwinds that could persist. Outlook: baseline assumes mid-single-digit sales growth, flattish to slightly higher operating margins if cost inputs remain stable; watch currency and steel/raw materials. A return to normalized tax rates and softer non-operating gains could temper YoY EPS growth in 2H.

Financial Health

Liquidity is strong: current ratio 180.8% and quick ratio 170.1% comfortably exceed benchmarks. No warning on current ratio (<1.0) or D/E (>2.0); D/E is a conservative 0.44x. Working capital is positive at 70.0 (CA 156.7 vs CL 86.7), with cash 50.5 and receivables 54.6 covering a large portion of near-term obligations. Interest coverage is robust at 54.7x, and reported long-term loans are modest at 11.1; short-term loans were unreported, but the balance sheet likely sits near a net cash position. Maturity mismatch risk appears low given sizable liquid assets versus current liabilities. Off-balance sheet obligations were not disclosed; no data on guarantees/leases beyond standard operating items. Equity stands at 295.1, providing ample solvency buffer.

Cash Flow Quality

OCF/Net Income is 1.48x (>1.0), indicating healthy earnings quality with cash realization. While full investing cash flows are unreported, reported capex was 5.15; implied pre-financial-investment FCF equals roughly 10.9 (OCF 16.09 minus capex 5.15). Financing CF was -5.99, likely reflecting debt service and/or dividends, consistent with conservative capital allocation. Working capital appears well-managed given strong OCF relative to profit; no signs of revenue pull-forward or payables stretching based on provided data. Sustainability: With OCF covering capex, the company has capacity to fund maintenance investment and dividends; larger growth capex would require continued margin/OCF support. Note that comprehensive income weakness (negative OCI) does not affect OCF but reduces equity, a factor for capital allocation.

Dividend Sustainability

The calculated payout ratio is 23.6%, comfortably below the 60% benchmark, though DPS and total dividends were unreported. On an implied basis, pre-investment FCF (~10.9) appears to cover a dividend at a ~24% payout with room to spare, assuming no outsized growth capex. Balance sheet strength (equity 295.1, modest debt) further supports dividend stability. Key sensitivities are operating margin durability, normalization of the tax rate, and variability in non-operating income that could affect distributable profit. Policy outlook: absent formal guidance, the current earnings recovery and FCF profile suggest capacity to maintain or gradually increase dividends, contingent on sustaining cash generation.

Risk Assessment

Business Risks:

• Auto sector cyclicality affecting volumes and pricing
• Input cost volatility (steel, energy) impacting gross margins
• Customer concentration risk with major OEMs and Tier-1s
• FX fluctuations affecting material costs and translation effects
• Potential normalization of unusually low effective tax rate (16.4%)

Financial Risks:

• Structurally low ROIC (2.9%) despite profit rebound
• Earnings reliance on non-operating income (non-operating income ratio 46.9%)
• Negative OCI compressing comprehensive income (3.34 vs NI 10.85)
• Capex needs to sustain competitiveness could pressure FCF if OCF weakens
• Limited disclosure on short-term debt and off-balance sheet commitments

Key Concerns:

• Margin sustainability after outsized YoY expansion (operating margin +~337 bps)
• Asset efficiency and low asset turnover (0.439) weighing on ROE
• Potential decline in non-operating gains (dividends/FX/valuation) in 2H
• Working capital normalization could reduce OCF/NI from 1.48x

Investment Implications

Key Takeaways:

• Sharp earnings recovery: NI +177.5% YoY; operating margin ~4.7% with ~337 bps expansion
• High-quality earnings: OCF/NI 1.48x and strong interest coverage (54.7x)
• Balance sheet conservative: current ratio 180.8%, D/E 0.44x, positive working capital
• Capital efficiency weak: ROIC 2.9% flags need for asset productivity improvements
• Earnings mix includes sizable non-operating income; comprehensive income notably weaker than NI

Metrics to Watch:

• Operating and gross margin trajectory (cost normalization vs pricing power)
• ROIC progression toward >5%
• OCF/NI and working capital days (AR and inventory turns)
• Capex intensity vs OCF (implied FCF durability)
• Effective tax rate normalization
• Composition and volatility of non-operating income and OCI

Relative Positioning: Within Japanese auto/metal components peers, the company exhibits stronger near-term balance sheet safety and cash conversion but lags on capital efficiency (low ROIC, modest asset turnover). Sustained margin improvement and better asset productivity are needed to close the ROE gap versus higher-ROIC peers.

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