Furukawa Electric Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥610.66B
• Operating Income: ¥19.36B
• Net Income: ¥14.53B
• EPS: ¥183.83

Income Statement

Balance Sheet

Cash Flow Statement

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 solid with modest top-line growth translating into double-digit profit gains, underpinned by stable gross profitability and disciplined non-operating items. Revenue rose 7.1% YoY to 6,106.6, while operating income increased 10.3% YoY to 193.6, and ordinary income grew 8.0% to 205.0. Net income advanced 15.7% to 129.5, benefitting from a modest positive non-operating contribution and contained tax burden (effective rate 30.3%). Gross profit was 1,027.0, implying a gross margin of 16.8% that supports profitability amid cost pressures. Operating margin stands at 3.17%, and ordinary margin at 3.36%, indicating slight uplift from non-operating items (net +11.5). Given revenue growth outpaced cost inflation in aggregate and operating profit grew faster than revenue, operating margin likely expanded YoY, though the precise basis-point change is not disclosed. SG&A of 833.4 equates to 13.7% of sales; without a YoY breakdown, we infer operating leverage contributed to the OI increase. Earnings quality is acceptable: operating cash flow was 122.7 versus net income of 129.5, an OCF/NI ratio of 0.95x that is slightly below 1.0 but not concerning. However, with capex of 219.9 exceeding OCF, implied FCF was negative this half, signaling investment-led cash usage. Leverage is elevated with D/E at 1.68x and interest coverage at 4.37x—adequate but below the ‘strong’ threshold—so further de-leveraging would enhance resilience. Liquidity is sound with a current ratio of 132% and quick ratio of 116%, comfortably covering short-term obligations including 1,473.2 in short-term loans. ROE is modest at 3.4% (DuPont: 2.1% margin × 0.592 turnover × 2.68x leverage), mainly constrained by thin net margins. ROIC at 2.4% is below the 5% warning threshold, underscoring capital efficiency challenges and the need for higher returns on ongoing investments. Dividend affordability appears tight on a half-year view with a 65.5% payout ratio and negative implied FCF; full-year seasonality and second-half cash conversion will be important. Forward-looking, management will need to sustain operating leverage, improve cash conversion, and manage capex to lift ROIC. Watch commodity cost passthrough (copper, aluminum), optical fiber demand recovery, and automotive/energy project mix for margin trajectory. Overall, the quarter shows operational progress with improving profits, but capital efficiency and leverage remain key medium-term improvement areas.

Profitability Analysis

ROE (3.4%) decomposes to Net Profit Margin (2.1%) × Asset Turnover (0.592) × Financial Leverage (2.68x). The biggest drag on ROE is the low net profit margin, given reasonable asset turnover for a manufacturing-heavy business and relatively high leverage. Operating income growth (+10.3% YoY) outpaced revenue (+7.1% YoY), implying positive operating leverage and likely mild operating margin expansion; non-operating net income contributed ~+11.5 to ordinary income, aided by 18.8 in dividends and 5.1 in interest income offset by 44.3 in interest expense. The business drivers likely include pricing/mix and cost control in cable, energy systems, and telecom/optical solutions, partially offset by higher financing costs. Sustainability: modest margin improvements from cost discipline and mix could persist, but sensitivity to metal price passthrough and demand cycles remains. Financial leverage (2.68x) is propping up ROE; without margin gains, ROE would be weaker—this is not a durable strategy absent higher returns. Potential concern: SG&A at 13.7% of sales appears contained, but lack of YoY SG&A detail prevents confirming whether SG&A grew faster than revenue. Focus should be on turning incremental gross profit into operating profit (tight SG&A control) and lifting net margin via lower interest burden over time.

Growth Assessment

Top-line growth of 7.1% YoY to 6,106.6 indicates steady demand across core segments. Operating income growth (+10.3%) exceeding revenue implies healthier operating leverage and discipline on costs. Net income rose 15.7%, benefiting from the operating uplift and a small non-operating tailwind, alongside a normalized tax rate (30.3%). Gross margin at 16.8% is consistent with value-added product mix in cables, optical components, and energy systems; maintaining pricing power against metal price volatility is key for sustainability. Revenue sustainability hinges on infrastructure and telecom investment cycles and automotive electrification; risks include macro slowdown and project timing shifts. Profit quality is supported by EBITDA margin of 6.6%, though still modest; structural margin expansion will require mix upgrades, productivity gains, and lower defect/claim costs. Outlook: if H2 maintains current pricing and demand, full-year profit growth is achievable; however, higher interest costs and capex-led cash use could constrain bottom-line and equity returns absent further margin progress.

Financial Health

Liquidity is adequate: current ratio 132.3% and quick ratio 115.5% exceed minimum thresholds, with working capital of 1,414.9. No explicit warning on current ratio (<1.0) is needed; it is above 1.0 but below the 1.5 comfort benchmark. Short-term loans of 1,473.2 are sizable but are covered by current assets (5,791.5), including cash (666.1), receivables (2,625.3), and inventories (738.6), mitigating maturity mismatch risk. Total liabilities are 6,469.7 versus equity of 3,849.7, implying a D/E of 1.68x—above the 1.5 conservative benchmark; leverage is a caution point though still below the 2.0 warning threshold. Interest coverage at 4.37x (EBIT/interest) is acceptable but not strong; sensitivity to rate increases persists. Long-term loans of 1,075.0 provide term funding, but the mix skews to short-term debt, warranting careful refinancing management. No off-balance sheet obligations are reported in the provided data; contingent liabilities cannot be assessed due to disclosure limits.

Cash Flow Quality

OCF/Net Income is 0.95x (122.7 / 129.5), slightly below 1.0 but within acceptable range, indicating broadly aligned accrual and cash earnings this half. With capex of 219.9 exceeding OCF, implied free cash flow is approximately -97.2, suggesting investment outflows driving negative FCF in H1. This is not uncommon seasonally but requires H2 cash conversion to fund capex and shareholder returns without incremental leverage. Working capital detail is limited; receivables (2,625.3) remain large versus payables (1,359.5), consistent with the project nature of the business—watch for collection discipline to avoid OCF pressure. No clear signs of working capital manipulation are evident from available data, but absence of inventory and receivable turnover metrics restricts a deeper assessment. Financing cash inflow of 248.5 likely funded capex and WC needs, highlighting reliance on debt in the period.

Dividend Sustainability

The calculated payout ratio is 65.5%, modestly above the <60% benchmark, suggesting a slightly stretched position relative to earnings. DPS and total dividends paid are unreported, limiting precision. On a cash basis, implied FCF was negative this half (OCF 122.7 vs capex 219.9), indicating dividends, if paid, were not covered by FCF in H1 and likely relied on cash on hand or financing. Sustainability will depend on H2 cash generation and capex profile; if OCF normalizes above capex for the full year, coverage can improve. Given leverage (D/E 1.68x) and interest coverage below the ‘strong’ threshold, a conservative dividend stance would be prudent until ROIC improves. Policy outlook cannot be inferred from data provided; watch guidance and capital allocation commentary.

Risk Assessment

Business Risks:

• Commodity price volatility (copper, aluminum) affecting cost of sales and pricing passthrough
• Demand cyclicality in telecom/optical fiber and infrastructure projects impacting volumes and mix
• Automotive and energy project execution risk, including delays and cost overruns
• Global supply chain disruptions affecting lead times and working capital
• Margin pressure from competition in cables and components

Financial Risks:

• Elevated leverage (D/E 1.68x) increasing sensitivity to earnings volatility
• Interest rate risk with interest coverage at 4.37x and interest expense of 44.3
• Liquidity reliance on short-term loans (1,473.2) necessitating ongoing refinancing
• Negative implied FCF in H1 due to capex exceeding OCF

Key Concerns:

• Low ROIC at 2.4% (below 5% threshold) indicating capital efficiency challenges
• Thin net margin (2.1%) constraining ROE despite leverage
• Potential currency volatility impacting exports and imported raw materials
• Data gaps (lack of segment, SG&A breakdown, and full cash flow details) limit visibility on drivers

Investment Implications

Key Takeaways:

• Solid H1 profit growth: revenue +7.1%, OI +10.3%, NI +15.7%
• Operating leverage likely improved margins; operating margin now ~3.17%
• Cash conversion acceptable (OCF/NI 0.95x) but capex-led negative implied FCF
• Leverage is elevated (D/E 1.68x); interest coverage 4.37x requires vigilance
• Capital efficiency weak (ROIC 2.4%); improving returns is a priority

Metrics to Watch:

• Operating margin progression and SG&A as % of sales
• OCF and FCF trajectory in H2 vs capex plan
• Net debt and interest coverage amid rate environment
• Gross margin stability vs metal price movements
• Order backlog and demand indicators in telecom/energy/auto

Relative Positioning: Within Japan’s electrical components and cable peers, Furukawa Electric shows improving profit momentum but lags on capital efficiency (ROIC 2.4%) and carries higher leverage than conservative benchmarks; execution on margin improvements and cash generation will be key to narrowing the gap.

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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