Showa Iron Works Co., Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥6.32B
• Operating Income: ¥330M
• Net Income: ¥308M
• EPS: ¥374.80

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

Verdict: A mixed FY2026 Q2—top-line was essentially flat while operating profitability compressed, but ordinary and net income rose on stronger non-operating gains and a solid tax profile. Revenue slipped 0.5% YoY to 63.21, with operating income down 17.2% YoY to 3.30 and ordinary income up 4.2% YoY to 4.68. Net income increased 13.4% YoY to 3.08, aided by higher non-operating income (1.67) and contained non-operating expenses (0.30). Gross margin printed at 27.3% (17.26/63.21), and operating margin fell to 5.2% from about 6.3% a year ago, implying roughly 105 bps of operating margin compression. Conversely, net margin improved to 4.9% from roughly 4.3% last year, a circa 60 bps expansion driven by the non-operating line. Ordinary income margin also improved by roughly 34 bps YoY to 7.4%. Earnings quality was good, with OCF of 4.75 exceeding net income of 3.08 (OCF/NI = 1.54x), indicating healthy cash conversion of earnings. Liquidity is adequate with a current ratio of 139% and quick ratio of 129%, and solvency looks comfortable under interest coverage of 13.75x and D/E of 0.93x. However, capital efficiency is weak with ROE at 3.0% and ROIC at 2.1%, below a 5% warning threshold. Non-operating income dependence is elevated (non-operating income equals 54.2% of operating income), tempering the sustainability of the net profit improvement. The balance sheet shows sizable investment securities (64.33), which boosted comprehensive income (TCI 11.71) but introduce market valuation volatility. Working capital appears manageable with cash (32.63) and receivables (17.03) supportive against short-term loans (32.25) and payables (9.47). Operating deleverage is evident: SG&A held at 13.96 while modest revenue contraction pressured operating margin. With capex and dividend cash outflows unreported, free cash flow and dividend coverage cannot be fully validated, though the calculated payout ratio of 34.9% looks conservative against OCF. Forward-looking, stabilization of operating margin and improving ROIC are key; reducing reliance on non-operating items and monetizing or better utilizing investment securities could unlock value. Net: maintain focus on margin recovery, capital efficiency improvement, and working capital discipline to convert solid cash generation into sustainable returns.

Profitability Analysis

ROE (3.0%) via DuPont: Net Profit Margin (4.9%) × Asset Turnover (0.315) × Financial Leverage (1.93x). The largest drag is the low asset turnover at 0.315, indicating a capital-heavy structure relative to sales. Operating margin compressed ~105 bps YoY (from ~6.3% to 5.2%), pointing to weaker operating leverage and/or cost absorption against slightly lower revenue (-0.5% YoY). Net margin nevertheless expanded ~60 bps YoY (to 4.9%) due to stronger non-operating income and a manageable tax burden (effective tax 34.0%). Business driver: modest demand softness and fixed-cost stickiness likely pressured operating profit, while gains/interest/other non-operating items offset at the ordinary and net levels. Sustainability: reliance on non-operating income (non-operating income equal to 54.2% of OI) is less durable than operating improvements; without operating margin recovery, ROE will likely remain subdued. Watch for SG&A discipline: while absolute SG&A is 13.96, we lack a YoY SG&A figure; however, the revenue decline alongside OI compression implies negative operating leverage. Capital efficiency remains a core issue, corroborated by ROIC of 2.1%, far below typical hurdle rates.

Growth Assessment

Revenue decreased 0.5% YoY to 63.21, indicating flat to slightly softer demand. Operating income fell 17.2% YoY to 3.30, showing margin pressure despite largely stable sales. Ordinary income rose 4.2% YoY to 4.68 and net income rose 13.4% YoY to 3.08, reflecting a larger non-operating tailwind and supportive financial items. EBITDA of 4.95 implies an EBITDA margin of 7.8%, consistent with a mid-single-digit operating margin business. With non-operating income at 1.67, profit composition skews more towards below-the-line support this quarter. Outlook hinges on restoring operating margin (pricing, product mix, cost control) rather than expecting recurring non-operating gains. Given ROIC at 2.1%, incremental growth without efficiency gains risks value dilution; prioritizing higher-return projects and working capital turnover will be important. Data gaps (capex, order backlog, segment mix) limit visibility on revenue sustainability.

Financial Health

Liquidity is adequate: current ratio 139.1% and quick ratio 129.0%, comfortably above the 1.0x warning threshold. No explicit red flag on leverage: reported D/E is 0.93x (well below the 2.0x warning), and interest coverage is strong at 13.75x. Maturity profile shows short-term loans of 32.25 vs cash of 32.63 and current assets of 94.05 against current liabilities of 67.60—limited maturity mismatch risk near term. Noncurrent liabilities are modest at 29.16. Equity is 103.83, supporting solvency and covenant headroom. Investment securities are large at 64.33, which strengthens asset-based liquidity but introduces market price risk; it also explains the sizable total comprehensive income (11.71). No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF of 4.75 exceeds net income of 3.08, yielding an OCF/NI of 1.54x—healthy earnings quality with solid cash conversion. Free cash flow cannot be determined due to unreported investing CF and capex; hence dividend and capex coverage cannot be fully confirmed. The positive OCF suggests either resilient operating profitability or constructive working capital movements; however, without a cash flow breakdown, we cannot attribute the source (receivables, inventories, payables) precisely. No signs of aggressive working capital manipulation are evident from the static balance sheet snapshot, but monitoring AR and inventory turns vs payables is advisable. Financing CF was -1.67, implying net debt repayment or dividends, but dividend cash outflow is unreported.

Dividend Sustainability

The calculated payout ratio is 34.9%, which is conservative versus the <60% benchmark. With OCF/NI at 1.54x, cash generation appears sufficient to support dividends in principle, but lack of capex and investing CF disclosure prevents a full FCF coverage assessment. Total dividends paid and DPS are unreported, limiting precision in sustainability analysis. Given low ROIC (2.1%), distributing excess cash rather than pursuing low-return investments could be shareholder-friendly, but sustainability ultimately depends on maintaining positive OCF and operating margin recovery.

Risk Assessment

Business Risks:

• Operating margin compression (~105 bps YoY) despite flat revenue suggests negative operating leverage.
• Dependence on non-operating income (non-operating income equals 54.2% of operating income) to support net profit.
• Low ROIC at 2.1% indicates capital inefficiency and potential value dilution from growth without returns improvement.
• Demand softness in core end-markets (revenue -0.5% YoY) and potential pricing pressure.
• Exposure to market valuation swings in investment securities (64.33) impacting comprehensive income.

Financial Risks:

• Concentration of borrowings in short-term loans (32.25) raises refinancing sensitivity despite adequate liquidity.
• Equity returns are low (ROE 3.0%), which may constrain valuation and capital market flexibility.
• Interest rate risk on short-term debt could lift finance costs from current low base (interest expense 0.24).
• Potential volatility in non-operating line items affecting earnings stability.

Key Concerns:

• Capital efficiency flagged (ROIC 2.1% < 5% threshold).
• Sustainability of net income growth reliant on non-operating factors rather than operating improvement.
• Limited disclosure on capex, dividends paid, and investing CF constrains FCF assessment.

Investment Implications

Key Takeaways:

• Top-line stable but operating margin under pressure; ordinary and net income supported by non-operating gains.
• Cash conversion strong (OCF/NI 1.54x), liquidity adequate (current ratio 139%) and coverage robust (ICR 13.75x).
• ROE (3.0%) and ROIC (2.1%) remain weak; efficiency improvement is central to value creation.
• Large investment securities balance introduces P/L volatility via comprehensive income.
• Balance sheet leverage moderate (D/E 0.93x) with manageable near-term refinancing risk.

Metrics to Watch:

• Operating margin trajectory (target recovery from 5.2% toward prior ~6.3%).
• Mix of operating vs non-operating profit (aim for lower non-operating dependence).
• ROIC progression toward >5% medium-term.
• Working capital turns: AR and inventory relative to sales; OCF sustainability.
• Debt maturity profile and cost of debt amid interest rate changes.
• Movements in investment securities and impact on comprehensive income.

Relative Positioning: Within Japanese mid-cap industrials, profitability and capital efficiency are below average (ROIC 2.1%, ROE 3.0%), but liquidity and coverage are sound. The earnings mix leans more on non-operating contributions than peers with stronger operating franchises, suggesting higher earnings volatility and a greater need for cost/price actions to normalize margins.

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