NIPPON CHUZO K.K. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥6.00B
• Operating Income: ¥76M
• Net Income: ¥222M
• EPS: ¥46.21

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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 mixed: core operations weakened sharply, but bottom-line held up thanks to large dividend income, resulting in a modest YoY increase in net profit. Revenue was 60.01 (−8.7% YoY), with gross profit of 8.39 and operating income of 0.76 (−81.8% YoY), underscoring a substantial deterioration in operating leverage. Ordinary income was 2.57 (−30.8% YoY), supported by non-operating income of 2.06, mainly dividend income of 2.01. Net income rose 3.9% YoY to 2.22, aided by a low effective tax rate of 8.2%. Operating margin compressed to 1.27% from an estimated ~6.36% a year ago (around −509 bps), reflecting weaker volumes/pricing mix and cost pressures. Ordinary margin declined to 4.28% from an estimated ~5.65% (−137 bps). Despite the operational weakness, net margin improved to 3.70% from ~3.25% (+45 bps), thanks to dividend income and a light tax burden. The interest coverage ratio stood at 3.30x, below the strong threshold (5x), indicating modest headroom amid higher debt costs. Liquidity appears adequate (current ratio 179.3%, working capital 42.65), although short-term loans of 27.10 exceed cash holdings of 3.43, highlighting reliance on receivables conversion. Capital efficiency is a key concern: ROE is 1.9% and ROIC is 0.5%, well below typical cost of capital thresholds. Non-operating income is unusually influential this quarter; dividend income of 2.01 effectively offset the collapse in operating profit. Earnings quality cannot be validated due to unreported cash flow statements; OCF/NI is not calculable. The reported payout ratio is 65.2%, slightly above the 60% benchmark for comfort, and sustainability depends on free cash flow, which is unreported. Going forward, recovery in core casting operations and cost normalization are essential; absent that, earnings will remain vulnerable if dividend inflows normalize or interest rates rise. Near-term focus should be on order trends, pricing discipline, and working capital efficiency to stabilize operating margins and cash generation.

Profitability Analysis

ROE decomposition (DuPont): Net profit margin 3.7% × Asset turnover 0.277 × Financial leverage 1.85x = ROE 1.9% (matches reported). The largest change driver YoY is net profit margin at the operating level: operating margin fell from an estimated ~6.36% to 1.27% (−509 bps), while ordinary margin slipped ~137 bps and net margin improved ~45 bps due to non-operating dividends and a low tax rate. Business reason: core revenues declined (−8.7% YoY) while costs remained elevated, compressing gross-to-operating spreads; SG&A at 7.63 consumed ~91% of gross profit, leaving limited operating cushion. Sustainability: the margin compression at the operating level appears cyclical/operational rather than one-off, and recovery will depend on volume/pricing and cost control; the supportive dividend income may not be reliably repeatable at this magnitude each quarter. Concerning trends: SG&A (7.63) nearly equals gross profit (8.39), indicating minimal operating leverage and vulnerability to any further gross margin pressure; interest coverage at 3.30x is thin relative to best-practice thresholds.

Growth Assessment

Top-line contracted 8.7% YoY to 60.01, pointing to weaker demand and/or delivery timing. Operating profit declined 81.8% YoY to 0.76, far outpacing the revenue contraction, a sign of negative operating leverage. Ordinary income fell 30.8% to 2.57, cushioned by 2.06 in non-operating income (primarily 2.01 dividends). Net income rose 3.9% to 2.22 due to non-operating income and a low tax rate. Growth quality is weak: profit growth came from financial income rather than core operations. Outlook hinges on order intake in core casting segments, the ability to pass through input cost inflation (materials/energy), and stabilization of SG&A intensity. Without improvement in operating earnings, profit growth is not sustainable if dividend income normalizes or interest expense rises.

Financial Health

Liquidity: Current ratio 179.3% and quick ratio 179.3% indicate adequate short-term coverage; no warning triggered (<1.0). Working capital is 42.65, and accounts receivable of 45.06 provide liquidity upon collection, but cash on hand is low at 3.43. Solvency: Reported D/E ratio is 0.88x; interest-bearing debt from disclosed items totals 37.85 (short-term 27.10, long-term 10.75) versus equity of 117.51, implying moderate leverage. Interest coverage of 3.30x is below a strong threshold (5x), suggesting sensitivity to further earnings pressure or higher rates. Maturity mismatch: Short-term loans (27.10) exceed cash (3.43), but current assets (96.46) comfortably exceed current liabilities (53.81), mitigating near-term refinancing risk subject to receivable collections. No off-balance sheet obligations are reported in the provided data.

Cash Flow Quality

Operating cash flow is unreported; OCF/Net Income cannot be assessed, preventing a direct quality check (benchmark >1.0). Given operating profit weakness and reliance on dividend income, there is a risk that accounting earnings outpace cash generation if working capital has built up or if dividends are not matched by cash inflows in the same period. Free cash flow and capex are unreported; thus, sustainability of dividends and debt service cannot be verified. Working capital: high receivables (45.06) vs low cash (3.43) implies dependence on collections; no inventory data was disclosed, which limits assessment of potential inventory build or liquidation. No explicit signs of working capital manipulation can be inferred from the limited dataset.

Dividend Sustainability

Payout ratio is 65.2%, slightly above the <60% comfort benchmark. With FCF unreported, coverage cannot be validated. Given operating profit compression and reliance on non-operating dividends to support earnings, sustaining a >60% payout could be challenging if OCF weakens or if investee dividends decline. Balance sheet flexibility exists (current ratio 179.3%), but interest coverage at 3.30x argues for prudence. Dividend policy outlook likely hinges on restoring operating profitability and maintaining investee payout streams.

Risk Assessment

Business Risks:

• Demand cyclicality in core casting end-markets (construction machinery, shipbuilding, industrial equipment) impacting volumes and utilization.
• Input cost volatility (scrap steel, alloys, energy) pressuring gross margins when pass-through is delayed.
• High SG&A intensity relative to gross profit, limiting operating leverage recovery.
• Dependence on dividend income to support earnings amid weak operations.

Financial Risks:

• Interest coverage at 3.30x leaves limited buffer against further earnings shocks or rate increases.
• Short-term loans (27.10) exceed cash (3.43), increasing reliance on receivable collections and refinancing.
• ROIC at 0.5% well below typical WACC, signaling capital efficiency and value-creation risk.
• Payout ratio at 65.2% may outpace sustainable free cash flow if operating recovery lags (FCF unreported).

Key Concerns:

• Operating margin collapse to 1.27% from an estimated ~6.36% YoY.
• Earnings quality risk due to heavy non-operating contribution (2.06, mainly dividends of 2.01).
• Data limitations: no OCF, capex, or inventory disclosure, hindering assessment of cash conversion and investment needs.
• Potential tax normalization from an unusually low effective tax rate (8.2%) could reduce net income leverage.

Investment Implications

Key Takeaways:

• Core profitability weakened materially; net profit resilience was non-operating driven.
• Operating margin compressed by an estimated ~509 bps YoY; ordinary margin by ~137 bps.
• Net margin improved ~45 bps, but sustainability is questionable without operating recovery.
• Liquidity is adequate, but interest coverage (3.30x) and low cash balance merit monitoring.
• ROIC of 0.5% highlights insufficient returns on capital; improvement plans are needed.

Metrics to Watch:

• Order backlog and book-to-bill for core casting products.
• Gross margin progression and SG&A as a % of sales.
• Operating cash flow, working capital days (AR and inventory days) once disclosed.
• Non-operating income sustainability, especially dividend income from securities.
• Interest coverage trend and debt maturity profile.

Relative Positioning: Within Japanese industrial castings/forgings peers, profitability and capital efficiency are currently on the weak side (low ROE/ROIC, compressed operating margin), with above-average dependence on non-operating income to sustain ordinary and net profit.

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
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