The Japan Steel Works,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥135.66B
• Operating Income: ¥12.19B
• Net Income: ¥10.14B
• EPS: ¥137.11

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 solid beat with strong top-line growth translating into outsized profit gains and improved margins. Revenue rose 25.3% YoY to 1,356.6, while operating income expanded 47.1% YoY to 121.9 and ordinary income increased 47.0% to 126.5. Net income jumped 67.9% YoY to 100.9, supported by both margin expansion and a modest positive non-operating contribution. Gross profit reached 319.0, resulting in a gross margin of 23.5% and indicating healthy pricing and/or mix benefits relative to cost of sales. Operating margin improved to roughly 9.0%, and net margin to 7.4%, evidencing operating leverage. We estimate operating margin expanded by about 130 bps YoY (from ~7.7% to ~9.0%), and net margin by ~190 bps (from ~5.6% to ~7.4%). Interest coverage is robust at 41.6x, reflecting low financing burden relative to earnings. Liquidity remains strong with a current ratio of 217.5% and a quick ratio of 213.6%, providing ample short-term headroom. Leverage is moderate with a D/E of 0.94x, aligned with an asset-intensive manufacturer. Non-operating income (11.19) exceeded non-operating expenses (6.64), adding a net tailwind to ordinary profit; dividend income (4.73) and interest income (0.92) were notable items. The effective tax rate of 27.5% is within a normal range and not a drag on net results. Earnings quality cannot be fully assessed this quarter because operating and free cash flows were not disclosed. Capital efficiency is the main blemish: ROE is 5.0% and ROIC is 4.9%, the latter slightly below the 5% warning threshold. The payout ratio is calculated at 63.4%, a touch above the 60% benchmark; without cash flow data, dividend sustainability requires monitoring. Looking ahead, the combination of margin gains and strong liquidity positions the company to invest for ROIC improvement, but sustaining the step-up will hinge on cost control, project execution, and order quality. Overall, the quarter’s results demonstrate healthy operating momentum with improving profitability, tempered by still-subpar capital efficiency and limited disclosure on cash flows.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (NPM) × Asset Turnover (AT) × Financial Leverage (FL) = 7.4% × 0.345 × 1.94 = 5.0% ROE (matches reported). Key driver change: NPM improved materially YoY, as operating income (+47.1%) outpaced revenue (+25.3%), implying operating margin expansion (+130 bps) and net margin expansion (~+190 bps). Business reason: better operating leverage from volume growth and improved mix/pricing versus cost of sales, with only modest reliance on non-operating gains (non-operating income ratio 11.1%). Sustainability: Margin gains appear primarily operating-driven; they are more sustainable than one-off items, but durability will depend on backlog quality, input cost stability, and execution on long-cycle projects. Asset turnover is low (0.345), typical for asset-heavy manufacturers; absent asset base reduction, further ROE upside must come from margin or growth. Financial leverage at 1.94x is moderate and not the main ROE lever. Red flags check: No explicit SG&A breakdown was provided; however, operating profit growth outpaced revenue growth, suggesting SG&A discipline and/or gross margin uplift rather than SG&A inflation.

Growth Assessment

Top-line growth of 25.3% YoY fed through to operating profit growth of 47.1% and net profit growth of 67.9%, indicating positive operating leverage and improved cost absorption. Gross margin stands at 23.5%; operating margin at ~9.0% vs ~7.7% a year ago (estimate), confirming margin expansion. Ordinary income grew in line with operating income (+47.0%), and non-operating contributions were supportive but not dominant, implying the growth is primarily core-operating in nature. Interest expense remains modest (2.93), and interest coverage is strong, so financing does not constrain growth. With ROIC at 4.9%, capital efficiency lags management value-creation thresholds (typical target >7–8% in industrials), suggesting a focus on better project returns and asset turnover is needed to sustain value-accretive growth. Revenue sustainability cannot be fully judged without order intake/backlog data; however, the magnitude of YoY gains implies solid demand through the half. Outlook implications: maintaining mid-to-high single-digit operating margins while growing the top line would lift ROE; absent higher ROIC, incremental growth risks diluting capital efficiency. Near-term, profit trajectory appears favorable if execution and cost discipline persist.

Financial Health

Liquidity: Current assets 2,841.3 vs current liabilities 1,306.3 produce a current ratio of 217.5% and quick ratio of 213.6%—both strong. Cash and deposits of 779.3 comfortably exceed short-term loans of 125.3, implying low near-term refinancing risk. Solvency: Total liabilities 1,906.8 and total equity 2,029.3 yield D/E of 0.94x, a moderate leverage profile for an equipment/machinery manufacturer. Interest coverage at 41.6x is robust. Maturity mismatch: No immediate concern—ample cash and working capital (1,535.0) versus current debt obligations. Off-balance sheet: Not disclosed; no information provided on guarantees or long-term commitments, so residual risk may exist but cannot be assessed. No warnings triggered (Current Ratio well >1.0; D/E well <2.0).

Cash Flow Quality

Operating cash flow, capex, and free cash flow were not disclosed, so OCF/Net Income and FCF coverage cannot be evaluated. As such, earnings quality cannot be confirmed, and no judgment on cash conversion is possible this quarter. Working capital indicators (AR 447.0; inventory 51.3; AP 222.5) suggest a build-to-order profile with sizable receivables relative to inventory, but without cash flow details we cannot infer collection timing or any working capital release/absorption. No signs of earnings manipulation can be assessed from the provided data. Monitoring need: next quarter’s OCF relative to net income (benchmark >1.0) and capex intensity will be key to assess sustainability.

Dividend Sustainability

The calculated payout ratio is 63.4%, slightly above the <60% benchmark for comfort. DPS and cash dividends were not reported, and FCF coverage is not calculable due to missing cash flow data. Balance sheet liquidity is strong, which helps near-term dividend safety, but longer-term sustainability hinges on OCF generation and capex needs. With ROIC at 4.9%, management may need to prioritize investments that lift returns; absent improved cash conversion, maintaining a >60% payout could crowd out growth capex. Policy outlook cannot be inferred from the data; watch for guidance on payout ratios and capital allocation in subsequent disclosures.

Risk Assessment

Business Risks:

• Execution risk on large, long-cycle projects that can affect margins and delivery timing
• Dependence on favorable pricing/mix to sustain recent margin expansion
• Supply chain/input cost volatility that could pressure the 23.5% gross margin
• Demand cyclicality in end markets relevant to heavy machinery/equipment

Financial Risks:

• Capital efficiency risk: ROIC at 4.9% is below value-creation thresholds
• Receivables concentration and collection timing risk given sizable AR relative to inventory
• Dividend sustainability risk with a 63.4% payout ratio and no FCF disclosure
• Potential exposure to interest rate changes, albeit mitigated by strong coverage (41.6x)

Key Concerns:

• Insufficient cash flow disclosure prevents assessment of earnings quality and FCF coverage
• ROE at 5.0% and ROIC below 5% suggest limited value creation despite earnings growth
• Reliance on continued operating leverage; any slowdown in revenue could compress margins
• Non-operating items contributed positively; a reversal would modestly pressure ordinary income

Investment Implications

Key Takeaways:

• Strong revenue growth (+25.3% YoY) translated into outsized profit gains (OP +47.1%, NI +67.9%)
• Material margin expansion: operating margin ~9.0% (up ~130 bps YoY), net margin 7.4% (up ~190 bps)
• Robust liquidity (current ratio 217.5%, quick ratio 213.6%) and strong interest coverage (41.6x)
• Moderate leverage (D/E 0.94x) provides balance sheet flexibility
• Capital efficiency remains weak: ROE 5.0%, ROIC 4.9% (warning)
• Dividend payout ratio at 63.4% is slightly elevated; cash flow coverage unknown
• Non-operating items are supportive but not a dominant profit driver (non-op income ratio 11.1%)

Metrics to Watch:

• Operating cash flow and OCF/NI ratio (>1.0 desirable)
• Free cash flow after capex and dividend coverage
• Order intake/backlog and book-to-bill to gauge revenue sustainability
• ROIC trajectory (target >7–8%); drivers: margin, asset turnover, disciplined capex
• Working capital turns (AR collection, inventory management)
• Any changes in payout policy and capital allocation priorities
• Interest rate sensitivity and debt maturity profile

Relative Positioning: Compared to typical Japanese heavy machinery peers, the company exhibits stronger-than-average liquidity and interest coverage this quarter, with competitive margin momentum, but lags on capital efficiency (ROIC/ROE) and provides limited cash flow transparency—key factors that could constrain relative re-rating until addressed.

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