Toho Zinc Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥53.83B
• Operating Income: ¥-672M
• Net Income: ¥-1.35B
• EPS: ¥-45.86

Income Statement

Balance Sheet

Cash Flow Statement

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: FY2026 Q2 was weak with losses at every level and stressed cash flow, driven by margin compression and high financial leverage. Revenue fell 15.2% YoY to 538.3, with gross profit of 23.3 and gross margin at 4.3%, indicating a thin spread likely pressured by zinc/lead price softness and cost inflation. Operating loss widened to -6.7 (operating margin -1.25%), while ordinary loss deteriorated to -11.8 as interest expense (6.4) and other non-operating costs outweighed modest non-operating income (4.4). Net loss reached -13.5 (net margin -2.5%), and total comprehensive loss was a much deeper -47.3, implying sizable OCI hits (likely securities valuation and/or FX). ROE was -25.3% per DuPont (NPM -2.5%, asset turnover 0.553x, leverage 18.2x), with extremely high leverage amplifying small operating shocks into large equity losses. EBITDA was barely positive at 0.17 (EBITDA margin ~0%), offering little buffer for 6.38 of interest expense, yielding interest coverage of -1.05x (warning). Operating cash flow was deeply negative at -124.4 despite the net loss of -13.5, indicating heavy cash burn; OCF/NI is mechanically 9.19x due to both being negative, but economically signals poor cash conversion and likely working capital outflows or timing effects. Liquidity at the snapshot date looks ample (current ratio 279%, quick ratio 246%), but solvency is strained with D/E at 17.2x and long-term loans of 620.3 against only 53.5 of equity. Retained earnings are deeply negative (-338.4), and book value is thin (owners’ equity 53.5; BVPS ~394 JPY), raising capital structure resilience concerns. ROIC sits at -1.1%, well below the 7–8% target range, highlighting value destruction on invested capital. With revenue down double digits and margins compressed to low single digits, FY outlook hinges on zinc/lead price recovery, smelter utilization, cost pass-through, and FX tailwinds from a weak yen. Near term, deleveraging and cash preservation are critical; dividend visibility is low given losses, negative OCF, and thin equity. Monitoring commodity prices, treatment charges, energy costs, and refinancing plans will be key for 2H recovery potential.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-2.5%) × 0.553 × 18.19 = -25.3%. The dominant driver is the negative net margin; leverage is extremely high, magnifying losses, while asset turnover is moderate for a smelting/manufacturing profile. Change analysis: Prior-period components are not disclosed, but the steep revenue decline (-15.2% YoY) alongside a razor-thin gross margin (4.3%) and an operating margin of -1.25% indicate margin compression as the principal deterioration. Business reasons: likely unfavorable commodity spreads (zinc/lead/silver realizations vs input costs), energy cost pressure, and possibly weaker by-product (sulfuric acid) pricing; non-operating drag from higher interest expense (6.38) also widened ordinary loss. Sustainability: Margin headwinds are cyclical and could partially reverse with commodity/FX, but financing costs will persist given high leverage; absent a price/cost tailwind or cost restructuring, current margin levels are not sustainably profitable. Operating leverage: SG&A (30.1) exceeds gross profit (23.3), indicating diseconomies at current scale; while full SG&A breakdown is unreported, the fixed-cost burden is too high for the depressed gross margin. Flags: Revenue decline > SG&A flexibility—SG&A did not flex down enough and now exceeds gross profit; non-operating expenses (interest) outpace operating earnings capacity, keeping ordinary income negative.

Growth Assessment

Top-line contracted 15.2% YoY to 538.3, reflecting cyclical weakness in metals pricing and/or lower volumes or treatment terms. Profitability deteriorated at all levels: gross margin 4.3%, operating margin -1.25%, ordinary margin -2.20%, net margin -2.51%, with EBITDA roughly breakeven (0.17). The profit mix is fully recurring-operational (no sizable one-time gains disclosed), so losses appear driven by core operations and financing, not transitory items. Comprehensive loss (-47.3) far exceeds net loss, suggesting additional valuation losses (e.g., securities, FX) that could reverse if markets recover but currently depress capital. Outlook hinges on zinc/lead/silver price recovery, treatment/refining charges, smelter run rates, energy and consumable costs, and FX (a weaker JPY can support revenues but raises some inputs). Given ROIC at -1.1% and interest coverage negative, growth investment should remain constrained until cash flow stabilizes. Near-term catalysts: commodity price upticks, improved by-product pricing, cost reductions, or asset optimization; risks include maintenance outages and higher financing costs. Guidance is not provided here; baseline view is cautious for 2H pending commodity/cost/FX developments.

Financial Health

Liquidity: Current ratio 279% and quick ratio 246% indicate solid short-term liquidity; working capital is 471.6. No red flag on current ratio (<1.0) as it is well above threshold. Solvency: Total liabilities 920.0 against equity 53.5 yield D/E ~17.2x (warning); long-term loans are 620.3 (noncurrent liabilities 656.5), implying a structurally leveraged balance sheet. Equity base is thin (owners’ equity 53.5; retained earnings -338.4), suggesting limited loss-absorbing capacity. Maturity profile: Current liabilities 263.5 are more than covered by current assets 735.0, so near-term maturity mismatch risk is low; however, refinancing risk on sizable long-term debt persists over medium term. Interest coverage at -1.05x underscores debt service stress. Off-balance sheet: Not disclosed here; no data on guarantees or contingent liabilities—cannot assess.

Cash Flow Quality

OCF is -124.4 versus net income -13.5; while the OCF/NI metric prints 9.19x due to both being negative, the underlying signal is adverse—cash burn far exceeds accrual losses. EBITDA is only 0.17 and capex was -7.70, implying negative FCF even before financing and despite limited investment scale. Without a working capital breakout, the OCF shortfall likely reflects inventory/receivables build or timing of payables and procurement amid price volatility; there could also be cash interest and other outflows captured in OCF under JGAAP. Sustainability: Current cash generation is insufficient to cover interest expense (6.38), maintenance capex, and any dividends. No indications of aggressive working capital pull-forward (e.g., payables stretch) can be confirmed from the snapshot; however, the magnitude of OCF suggests operational stress rather than mere timing. Monitoring quarterly WC movements (AR, inventory, AP) and OCF normalization is critical.

Dividend Sustainability

Dividend data are unreported; however, fundamentals point to low sustainability. Earnings are negative (EPS -45.86 JPY), OCF is deeply negative (-124.4), and equity is thin with retained earnings at -338.4. With interest coverage negative and ROIC -1.1%, internal cash generation does not support distributions. FCF coverage cannot be calculated, but given OCF and capex, coverage would be poor. Unless 2H cash flow sharply improves or external funding is used (undesirable given leverage), capacity to pay or grow dividends appears very limited. Policy outlook likely prioritizes liquidity preservation and balance sheet stabilization over returns.

Risk Assessment

Business Risks:

• Commodity price volatility (zinc, lead, silver, and by-products like sulfuric acid) impacting smelting spreads and revenues
• Energy and consumable cost inflation eroding refining margins
• Operational risks at smelting/refining facilities (maintenance outages, yield issues)
• FX fluctuations (JPY) affecting both revenues and input costs
• Counterparty and customer concentration risk typical in metals chains

Financial Risks:

• Very high leverage (D/E 17.2x) and thin equity base (owners’ equity 53.5) heightening solvency risk
• Negative interest coverage (-1.05x) indicating insufficient operating earnings to service debt
• Refinancing risk on substantial long-term loans (620.3) amid potential rate increases
• Equity erosion from comprehensive losses (-47.3) increasing risk of covenant pressure
• Cash flow risk with OCF -124.4 limiting investment and flexibility

Key Concerns:

• Gross margin at 4.3% and EBITDA near zero leave no buffer against cost or price shocks
• SG&A (30.1) exceeding gross profit (23.3) indicates scale-mismatch at current demand/price levels
• Ordinary loss (-11.8) driven by interest burden (6.38) prolongs bottom-line weakness
• Retained earnings deeply negative (-338.4) constraining shareholder equity and resilience
• OCI-driven capital volatility as seen in total comprehensive loss (-47.3)

Investment Implications

Key Takeaways:

• Revenue down 15.2% YoY to 538.3 with operating margin -1.25% and net margin -2.5%
• OCF -124.4 signals significant cash burn despite a modest accounting loss
• Leverage is structurally high (D/E 17.2x) with long-term loans 620.3 and negative interest coverage
• ROIC -1.1% well below target ranges; current capital deployment is value destructive
• Balance sheet liquidity is adequate near term (CR 279%) but solvency risk is elevated

Metrics to Watch:

• Zinc/lead/silver prices and treatment/refining charges (impact on gross margin)
• Quarterly OCF and working capital movements (AR, inventory, AP) to confirm cash normalization
• EBITDA and interest coverage trajectory toward positive territory
• Equity and comprehensive income swings (securities valuation, FX) affecting capital
• Net debt trend and refinancing plans for long-term loans

Relative Positioning: Compared with healthier metals peers, the company is operating with thinner margins, significantly higher financial leverage, and weaker cash generation, making it more sensitive to commodity and financing conditions; near-term defensiveness hinges on liquidity while medium-term recovery depends on commodity tailwinds and cost 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
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