Sumitomo Electric Industries,Ltd. FY2026 FY Earnings Report

Financial Highlights

• Net Sales: ¥5.11T
• Operating Income: ¥418.17B
• Net Income: ¥268.90B
• EPS: ¥473.78

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

FY2026 was a solid year for Sumitomo Electric with broad-based growth and clear margin expansion, capped by robust cash generation and a healthy balance sheet. Revenue rose 9.2% YoY to ¥5,110.2bn, while operating income climbed 30.4% to ¥418.2bn, lifting the operating margin to 8.2%. Net income attributable to owners surged 90.7% to ¥369.5bn, helped by strong operations and sizable extraordinary gains. Gross profit increased to ¥1,034.0bn, and gross margin improved to 20.2%, indicating better pricing/mix and cost pass-through. Ordinary income rose 39.3% to ¥431.3bn, with equity-method income more than doubling to ¥31.4bn, underscoring improved affiliate performance. Operating margin expanded by approximately 133 bps YoY (from 6.9% to 8.2%), and gross margin expanded by about 139 bps. Net margin expanded roughly 309 bps YoY to 7.2%, though this includes a one-time tailwind from extraordinary income. Operating cash flow was ¥425.2bn, exceeding net income (OCF/NI ~1.15x), indicating good earnings quality despite working capital build. Free cash flow was ¥250.3bn after ¥222.2bn of capex, covering dividends 2.0x. The balance sheet remains strong with current ratio 1.80x, quick ratio 1.04x, and Debt/EBITDA 0.61x; interest coverage (EBITDA basis) was a robust 26.5x. Short-term debt is 55% of total debt but is well-cushioned by cash and large liquid working capital assets. By segment, Automotive remained the core earnings engine (¥179.7bn OI), while Infocommunications delivered standout margin (23.7%) and profit growth. Extraordinary income of ¥98.1bn (notably ¥79.2bn gain on sale of subsidiaries’ stock) boosted bottom-line growth and will not recur at the same magnitude. Management’s next-year outlook implies low-single-digit revenue growth and flattish operating profit, with lower net profit given the absence of large one-time gains. Overall, execution improved across pricing, mix, and cost discipline, though working capital efficiency (DSO 67 days, DIO 91 days) is an area to monitor. The dividend payout (c.33%) appears well supported by FCF, and leverage headroom remains ample for investment. Continued improvement in Infocommunications and disciplined capex (CapEx/Depreciation ~1.06x) support medium-term earnings resilience. Key watch items are working capital normalization, Automotive customer/program dynamics, and sustainability of high-margin growth in non-Automotive segments.

Profitability Analysis

ROE decomposition: ROE of 13.0% = Net Profit Margin (7.2%) × Asset Turnover (1.059x) × Financial Leverage (1.70x). The largest YoY improvement came from Net Profit Margin, which expanded by about 309 bps on stronger operating margin (+133 bps) and sizable extraordinary gains. Business drivers included price/mix improvement in Automotive harnesses/components, higher-margin growth in Infocommunications, and operating leverage from volume. The margin uplift from operations appears largely sustainable given the mix shift and cost pass-through, while the extraordinary income (notably gains on sale of subsidiaries’ stock) is non-recurring. Asset turnover held broadly steady around 1.06x, reflecting consistent capital intensity and inventory levels; leverage remained conservative at 1.70x and was not the source of ROE improvement. SG&A grew to ¥615.9bn, but operating income growth (+30.4%) outpaced revenue growth (+9.2%), evidencing positive operating leverage. Equity-method income increased to ¥31.4bn, contributing to ordinary margin expansion without materially distorting operating quality.

Growth Assessment

Top-line growth of 9.2% was broad-based across core segments, with Infocommunications up 46.3% and contributing materially to mix improvement. Operating profit increased 30.4% as pricing, volume, and product mix drove margin expansion, particularly in Infocommunications (23.7% margin) and Electronics (9.7%). Net profit rose 90.7%, aided by operational gains and net extraordinary income of approximately ¥73.9bn. Equity-method income doubled to ¥31.4bn, indicating stronger affiliate performance. EBITDA grew to ¥628.0bn (12.3% margin), supporting reinvestment capacity. Looking ahead, management’s guidance implies modest revenue growth (+3.7%) and essentially flat operating income (+1.6%), with profit attributable to owners guided lower (¥320.0bn) due to the anticipated absence of this year’s large one-time gains and normalized tax/financial items. Segment momentum is favorable in Infocommunications and stable-to-improving in Environment & Energy and Electronics; Automotive remains the anchor but carries customer/program concentration risk. Investment pace remains disciplined (CapEx/Depreciation ~1.06x), supporting maintenance and selective growth without stressing cash flow.

Financial Health

Liquidity is solid: current ratio 1.80x and quick ratio 1.04x, with working capital of ~¥1,076.9bn. Solvency is conservative: Debt/EBITDA 0.61x, interest coverage 17.6x (EBIT basis) and 26.5x (EBITDA basis), D/E 0.70x, and Debt/Capital 11.9%. Short-term debt ratio is 55.1%, implying some refinancing concentration; however, cash/short-term debt coverage is 1.12x and is further supported by sizeable receivables and inventories. Maturity mismatch risk is manageable given liquidity buffers and strong operating cash flow. Notable YoY balance sheet movements include a 33% reduction in short-term loans (–¥103.6bn), strengthening near-term interest burden and rollover risk, and a ¥284.5bn increase in retained earnings, reflecting profit accretion. Investment securities increased by ~¥108.3bn, enhancing financial asset flexibility. Deferred tax liabilities rose by ~¥62.3bn, consistent with valuation gains and timing differences. The capital structure provides ample headroom for capex and selective strategic investments.

Notable B/S Changes

Short-term loans: -¥103.6bn (-33.0%) - Reduced reliance on short-term funding, easing near-term refinancing pressure. Retained earnings: +¥284.8bn (+17.6%) - Profit accretion strengthens equity and future investment/dividend capacity. Investment securities: +¥108.3bn (+17.9%) - Higher financial asset base, potential for income/valuation volatility. Deferred tax liabilities: +¥62.3bn (+48.1%) - Reflects valuation gains and timing differences, modestly increases future tax obligations. Inventories: +¥95.5bn (+10.3%) - Supports growth but elevates working capital and obsolescence risk if demand slows. Net defined benefit asset: +¥92.9bn (+36.9%) - Improved funded status reduces medium-term pension risk.

Cash Flow Quality

OCF of ¥425.2bn exceeded net income (OCF/NI ~1.15x), indicating healthy cash realization. Free cash flow was ¥250.3bn after ¥222.2bn in capex, supporting both dividends and balance sheet strength. Cash conversion (OCF/EBITDA) was 0.68x, reflecting working capital consumption, notably higher inventories (DIO 91 days) and slower collections (DSO 67 days). Accruals ratio of –1.1% is benign and supports earnings quality. CapEx/Depreciation at ~1.06x signals maintenance-plus investment, consistent with stable capacity and modernization rather than aggressive expansion. No indications of aggressive working capital pull-forwards; rather, the drag suggests demand support and pipeline buildup that should unwind as deliveries progress. Overall, cash flow quality is good but would improve further with working capital normalization.

Dividend Sustainability

The annual dividend per share totaled ¥154 (pre-split basis), implying a payout ratio around 33.1%. Free cash flow coverage of dividends was strong at ~2.05x. With Debt/EBITDA at 0.61x and ample liquidity, the dividend appears well supported under current operating conditions. Share repurchases were de minimis. Post-announced 4-for-1 stock split, guidance implies an annual DPS equivalent of ¥156 pre-split, consistent with a stable-to-modestly rising policy. Given OCF durability and modest capex intensity, dividend sustainability is high absent a severe downturn.

Risk Assessment

Business risks include Customer/program concentration in Automotive, which accounts for 56.1% of revenue, Inventory build and slower collections (DIO 91 days, DSO 67 days) increasing execution risk if demand softens, Commodity and raw material price volatility affecting input costs and pricing pass-through, Supply chain disruptions impacting lead times and working capital, Technology and product cycle risks in Infocommunications and Electronics.

Financial risks include Short-term debt concentration (55.1% of debt) creates refinancing timing risk, Cash conversion at 0.68x EBITDA indicates dependence on working capital release to enhance cash generation, Foreign exchange translation volatility impacting OCI and equity valuation components.

Key concerns include One-time gains (net extraordinary ~¥73.9bn) elevated FY2026 net income; normalization could reduce bottom line, Receivables at 67 DSO and inventories at 91 DIO raise CCC and tie up cash, Automotive end-market cyclicality could pressure volumes and margins if global production slows.

Investment Implications

Key takeaways include Broad-based growth with 133 bps operating margin expansion to 8.2%, Earnings quality solid (OCF/NI 1.15x) despite working capital drag, Segment mix improving: Infocommunications margin 23.7%, Electronics 9.7%, Leverage low (Debt/EBITDA 0.61x) and liquidity ample (current ratio 1.80x), FY2026 net income benefited from ~¥73.9bn net extraordinary gains; FY2027 guide embeds normalization.

Metrics to watch include Working capital efficiency: DSO, DIO, and overall cash conversion, Automotive program ramps and pricing/mix sustainability, Infocommunications order pipeline and margin retention, Equity-method income trajectory, CapEx/Depreciation and ROCE versus guidance.

Regarding relative positioning, Within Japanese diversified manufacturers, Sumitomo Electric combines healthy operating margins, improving mix, and conservative leverage. While cash conversion trails best-in-class due to working capital, the company’s scale, segment diversity beyond Automotive, and balance sheet strength position it favorably versus peers exposed to single end-markets or higher leverage.