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

Financial Highlights

• Net Sales: ¥6.32B
• Operating Income: ¥330M
• Net Income: ¥272M
• 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

Showa Tekko Co., Ltd. (5953) reported FY2026 Q2 (cumulative) consolidated results under JGAAP with topline softness and margin compression at the operating level, partially offset by solid non-operating gains and strong cash conversion. Revenue was 6,321 million yen, down 0.5% YoY, indicating broadly flat demand conditions with slight volume or pricing headwinds. Gross profit of 1,697 million yen implies a gross margin of 26.8%, which appears resilient but not sufficient to prevent operating margin erosion. Operating income declined 17.2% YoY to 330 million yen, translating to a 5.2% operating margin and signaling negative operating leverage given the near-flat revenue. Ordinary income of 468 million yen exceeded operating profit by 138 million yen, evidencing meaningful non-operating gains that cushioned earnings. Net income increased 13.4% YoY to 308 million yen, likely benefiting from those non-operating items and the absence of large non-recurring losses. Interest expense was modest at 18 million yen, and interest coverage was strong at 18.3x, suggesting manageable financial risk from debt servicing. Cash generation was robust: operating cash flow reached 517 million yen, 1.68x net income, indicating high earnings quality and good working-capital discipline in the period. The balance sheet shows total assets of 20,061 million yen and total equity of 10,383 million yen, implying financial leverage of 1.93x (assets/equity), consistent with moderate leverage for a manufacturing SME. Liquidity is adequate with a current ratio of 132.3% and quick ratio of 128.4%, underpinned by 2,442 million yen of positive working capital. The DuPont ROE is 2.97% on a cumulative period basis, driven by a 4.87% net margin, 0.315x asset turnover, and 1.93x leverage; on a half-year base this is low in absolute terms and would remain modest even if annualized without a step-up in H2. Ordinary margin approximates 7.4% (468 million yen over revenue), highlighting the importance of recurring non-operating contributions this half. Reported “Effective Tax Rate: 0.0%” appears undisclosed; using income tax expense of 176 million yen against ordinary income as a proxy implies a tax burden in the upper-30% range, though exact pre-tax profit (before extraordinary items) is not provided. Dividend data are not disclosed for the period (DPS reported as 0.00 indicates non-disclosure rather than true zero), so distribution policy assessment relies on historical patterns and current cash generation. Several items show as 0 (e.g., investing cash flows, cash and equivalents, equity ratio, FCF), which should be treated as unreported metrics, not actual zero values, limiting certain analyses such as free cash flow and cash balance-based liquidity tests. Overall, the company demonstrated resilient gross profitability, pressure at the operating line, supportive non-operating income, solid cash conversion, and stable liquidity/leverage, but needs improved operating leverage and asset efficiency to lift ROE.

Profitability Analysis

ROE_decomposition: DuPont ROE = Net margin (4.87%) × Asset turnover (0.315x) × Financial leverage (1.93x) = 2.97% (period basis). Net margin benefits from non-operating income given ordinary income exceeds operating income by 138 million yen. Asset turnover at 0.315x is low, consistent with asset-heavy manufacturing and the use of average assets over a half-year period. Leverage of 1.93x indicates moderate balance sheet gearing supporting ROE, but the main drag is low operating profitability and asset efficiency. margin_quality: Gross margin is 26.8% (1,697/6,321), showing reasonable pricing and cost control at the manufacturing level. Operating margin is 5.2% (330/6,321), down YoY given operating income fell 17.2% on flat sales, implying cost inflation or mix deterioration could not be fully offset. Ordinary margin effectively ~7.4% (468/6,321), reflecting positive non-operating contributions; sustainability of these items is less certain than core operations. Net margin of 4.87% is acceptable for the sector but reliant on non-operating support. operating_leverage: Revenue declined 0.5% YoY while operating income fell 17.2% YoY, indicative of negative operating leverage. Fixed-cost absorption appears weaker, and incremental costs (materials, energy, labor) likely pressured conversion from gross to operating profit. To restore positive leverage, the company would need either stronger volume/pricing in H2 or further SG&A and manufacturing efficiency gains.

Growth Assessment

revenue_sustainability: Topline was essentially flat (-0.5% YoY), suggesting steady but unspectacular demand. The small decline may reflect a cautious capex environment in end-markets, delivery timing, or a slightly adverse product mix. profit_quality: Despite lower operating income, net income rose 13.4% YoY due to non-operating gains. Cash conversion was strong (OCF/NI 1.68x), indicating earnings are supported by cash inflows and working-capital discipline. However, reliance on non-operating items raises questions about the repeatability of current net income growth. outlook: Absent visibility on order backlog or H2 guidance, a cautious outlook is warranted: modest demand, potential stabilization in input costs, and internal cost actions could lift operating margin. Non-operating gains may normalize, making operating profit improvements key to sustaining YoY net income growth.

Financial Health

liquidity: Current ratio 132.3% and quick ratio 128.4% indicate adequate short-term coverage. Working capital is 2,442 million yen. Cash and equivalents are undisclosed (reported as 0), so immediate liquidity buffers cannot be quantified, but overall current assets appear sufficient against near-term obligations. solvency: Debt-to-equity is 0.97x, pointing to moderate leverage. Interest expense is low at 18 million yen, and interest coverage of 18.3x indicates comfortable capacity to service debt. Financial leverage (assets/equity) is 1.93x, consistent with a balanced capital structure for a mid-size manufacturer. capital_structure: Total assets are 20,061 million yen funded by 10,383 million yen equity and 10,109 million yen liabilities, a near 50/50 split. Equity ratio is undisclosed (reported 0.0%), but implied equity/asset is roughly 51.7%, suggesting a healthy buffer.

Cash Flow Quality

earnings_quality: OCF/Net income is 1.68x (517/308), indicating high-quality earnings with good cash realization. This ratio suggests working capital either released cash or was tightly managed. FCF_analysis: Investing cash flows and capex are undisclosed (reported as 0), so free cash flow cannot be computed reliably for the period. EBITDA was 466 million yen, providing a proxy for internal funding capacity before working capital and capex. working_capital: Current assets of 9,995 million yen versus current liabilities of 7,553 million yen yield positive working capital. Inventories are reported at 298 million yen; given the quick ratio is close to the current ratio, inventory intensity appears low in the disclosed data. The OCF strength implies no material working-capital drain in the half.

Dividend Sustainability

payout_ratio_assessment: DPS and payout ratio are reported as 0.00, which should be treated as not disclosed rather than true zero. With net income of 308 million yen and strong OCF, the company appears to have capacity for distributions, but no formal payout information is available for the half. FCF_coverage: FCF is reported as 0 due to undisclosed investing cash flows. Consequently, dividend coverage by FCF cannot be assessed from the provided data. policy_outlook: Without explicit guidance, dividend policy visibility is limited. Given moderate leverage and healthy interest coverage, sustained profitability and OCF would support future distributions, but priority may remain on reinvestment if capex needs are significant.

Risk Assessment

Business Risks:

• End-market cyclicality in construction, industrial equipment, and capital goods impacting order intake and pricing
• Raw material and energy cost volatility affecting gross margins if pass-through lags
• Product mix shifts toward lower-margin items compressing operating margin
• Execution risk in cost reduction and manufacturing efficiency initiatives
• Supply chain constraints and lead-time variability impacting deliveries
• Labor availability and wage pressures in a tight domestic market

Financial Risks:

• Exposure to interest rate increases, albeit mitigated by low interest expense and high coverage
• Potential working-capital swings that could absorb operating cash flow
• Refinancing and covenant risks if leverage were to increase from current levels
• Currency risk on imported components or materials if applicable

Key Concerns:

• Negative operating leverage despite flat revenue highlights margin sensitivity
• Dependence on non-operating gains to support ordinary and net income in the half
• Limited disclosure on cash, investing cash flows, and equity ratio constrains full FCF and solvency assessment

Investment Implications

Key Takeaways:

• Revenue essentially flat (-0.5% YoY) with operating income down 17.2% YoY indicates pressure on core operations
• Non-operating gains lifted ordinary income to 468 million yen and supported net income growth (+13.4% YoY)
• Cash conversion is strong (OCF/NI 1.68x), underscoring sound earnings quality
• Liquidity appears adequate (current ratio 132.3%, quick ratio 128.4%) with moderate leverage (D/E 0.97x)
• ROE at 2.97% (period basis) remains subdued due to low asset turnover and modest operating margin

Metrics to Watch:

• Gross and operating margin trajectory in H2, including cost pass-through effectiveness
• Order backlog and book-to-bill to gauge demand momentum
• Non-operating income components and sustainability
• Working-capital metrics (DSO, DPO, inventory days) and their cash impact
• Capex and investing cash flows to assess true free cash flow
• Leverage ratios (net debt/EBITDA, interest coverage) once cash is disclosed

Relative Positioning: Within Japan small/mid-cap industrials and machinery-adjacent manufacturers, Showa Tekko exhibits moderate leverage and solid cash conversion but below-peer ROE due to low asset turnover and mid-single-digit operating margins; sustaining gross margins and improving operating efficiency will be key to narrow the profitability 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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