CHUGOKUKOGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥5.75B
• Operating Income: ¥-123M
• Net Income: ¥-14M
• EPS: ¥-5.40

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 operationally with an operating loss, but cash flow and comprehensive income were resilient due to dividends and valuation gains. Revenue declined 3.2% YoY to 57.53, while gross profit was 10.27 and SG&A of 11.51 drove an operating loss of -1.23. Ordinary income was -0.42, but profit before tax turned positive at 0.09, implying unreported extraordinary gains of roughly 0.51. Net income was -0.17 (EPS -5.40 JPY), yet total comprehensive income was a solid 2.48, likely from unrealized gains on investment securities (book value 26.20) and dividend income (0.46). Gross margin stood at 17.9% and operating margin at approximately -2.1%; we cannot quantify YoY basis-point changes due to missing prior margin data. Non-operating income of 0.87 (notably dividends of 0.46) partially cushioned the operating shortfall. Cash generation was strong: operating cash flow (OCF) of 5.13 far exceeded net loss, aided by EBITDA of 0.29 and likely working capital inflows. Liquidity is adequate with a current ratio of 151.7% and working capital of 20.05, and solvency is acceptable with D/E of 1.05x and an estimated equity ratio of ~48.7%. Interest coverage is negative on an EBIT basis due to the operating loss, but the small interest burden (0.04) limits near-term debt service risk. ROE was -0.3% per DuPont (NPM -0.3%, AT 0.463, leverage 2.05x), and ROIC was -0.9%, both below acceptable thresholds. The effective tax rate of 266.7% reflects loss-level earnings with discrete tax items rather than normalized taxation. Capex was modest at 1.05, and financing cash flow was -1.05 (likely debt repayment), leaving net cash inflow on operations to support liquidity. The earnings profile currently depends on investment income and valuation gains rather than core operations. Forward-looking, cost discipline and gross margin recovery will be essential to restore operating profitability, while equity holdings introduce volatility to comprehensive income. Key watchpoints include SG&A efficiency, order momentum to arrest the revenue decline, and sustainability of working capital-driven OCF.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (-0.3%) × 0.463 × 2.05 ≈ -0.3%. The margin component is the primary drag, as operating margin is -2.1% and net margin is -0.3%, despite support from non-operating income and extraordinary items. Asset turnover at 0.463 indicates modest efficiency for a mid-sized manufacturer; leverage at 2.05x is not excessive. The biggest change driver this quarter appears to be operating margin weakness: SG&A (11.51) exceeded gross profit (10.27), pushing EBIT negative. Business reason: soft topline (-3.2% YoY) combined with fixed-cost SG&A rigidity and a relatively low gross margin (17.9%) undermined operating leverage. Non-operating support (dividends 0.46, other 0.41) reduced the net loss and, alongside extraordinary gains (implied ~0.51), allowed pre-tax profitability, but these are not substitutes for core earnings. Sustainability: dividend income from securities may be recurring but is market-dependent; extraordinary gains and valuation-driven comprehensive income are one-time/volatile. Concerning trend: SG&A ratio to sales is ~20.0%, above gross margin, which is structurally unsustainable without either gross margin expansion or SG&A reduction.

Growth Assessment

Revenue declined 3.2% YoY to 57.53, indicating near-term demand softness. Operating income fell to -1.23 (-20.5% YoY), with operating margin roughly -2.1%. Non-operating income (0.87) partially mitigated the deterioration, and extraordinary gains (implied 0.51) lifted PBT to 0.09. Profit quality is mixed: core operations weakened, but dividend income and valuation gains supported bottom line and comprehensive income. EBITDA was positive at 0.29, suggesting the business remains cash-generative before D&A, albeit thin. Without prior-period margin details, bps trend cannot be quantified; however, the current SG&A burden relative to gross profit signals negative operating leverage. Near-term outlook hinges on restoring volumes and/or pricing to lift gross margin above the ~20% SG&A level, and implementing cost controls. If order intake stabilizes and inventory discipline persists (implied by strong OCF), earnings could normalize; otherwise, reliance on non-operating gains will persist. We do not have segment data to assess growth drivers or customer concentration; thus, growth sustainability is uncertain.

Financial Health

Liquidity: Current ratio 151.7% is healthy; quick ratio 151.7% (inventories unreported) also appears solid. Working capital is 20.05, with cash 8.66 and receivables 26.42 comfortably exceeding short-term loans of 9.24 and payables 9.28. Solvency: D/E of 1.05x is within a conservative range; estimated equity ratio is ~48.7% (60.53/124.17), indicating a strong capital base. Interest-bearing debt (short- plus long-term loans) totals about 13.81 versus equity of 60.53, manageable. No explicit off-balance sheet obligations reported. Maturity profile: Short-term loans (9.24) are significant but covered by liquid assets and receivables; rollover risk appears moderate. No explicit covenant risks noted. We explicitly note no warning triggers: Current ratio > 1.0 and D/E < 2.0.

Cash Flow Quality

OCF was 5.13 versus net income of -0.17, yielding OCF/NI of -30.18x, which triggers the mechanical threshold but in context reflects strong cash conversion in a loss quarter. Positive OCF despite an operating loss suggests favorable working capital movements and D&A support (1.52), not earnings aggressiveness per se. Free cash flow is approximately 4.08, using Capex of 1.05 (Investing CF details otherwise unreported), indicating sufficient internal funding capacity. Financing CF of -1.05 likely reflects debt repayment; dividends and buybacks are unreported. No clear signs of working capital manipulation are evident from the limited data, but the large swing versus NI warrants monitoring of receivables and payables timing. Interest expense is low (0.04), reducing cash drain from financing. Overall, cash flow quality this quarter is better than income statement quality, but sustainability depends on maintaining working capital discipline.

Dividend Sustainability

Dividend data are unreported; payout ratios are not reliably calculable given negative net income (calculated payout -402.4% is not meaningful). From a capacity standpoint, FCF approximates 4.08 this quarter, suggesting room to fund modest dividends if policy requires, but this presumes OCF normalizes without one-off working capital tailwinds. With ROE -0.3% and ROIC -0.9%, distributing excess cash while core EBIT is negative would be conservative only if management prioritizes shareholder returns over reinvestment and is confident in cash generation. Equity base is strong (~48.7% equity ratio), which can buffer payouts short term, but sustainability requires a return to positive operating margin. Policy outlook cannot be inferred due to missing DPS history; monitor upcoming guidance.

Risk Assessment

Business Risks:

• Operating margin pressure: SG&A (20.0% of sales) exceeds gross margin (17.9%), risking continued operating losses.
• Revenue softness (-3.2% YoY) with potential demand or pricing pressures.
• Dependence on non-operating income (dividends 0.46) and extraordinary gains to offset core weakness.
• Exposure to equity market valuation swings affecting comprehensive income and potentially net worth (investment securities 26.20).

Financial Risks:

• Negative interest coverage on EBIT basis due to operating loss, albeit with small absolute interest (0.04).
• Short-term loan reliance (9.24) introduces refinancing risk if cash conversion weakens.
• High effective tax rate volatility (266.7%) can distort after-tax results at low profit levels.

Key Concerns:

• ROIC at -0.9% is well below cost of capital, signaling value dilution if prolonged.
• Earnings quality flagged by OCF/NI ratio threshold (mechanically), requiring validation of working capital sustainability.
• Lack of segment and inventory disclosure limits visibility into margin drivers and demand health.

Investment Implications

Key Takeaways:

• Core operations loss-making (EBIT margin ~-2.1%) despite positive EBITDA.
• Cash generation strong (OCF 5.13) with positive estimated FCF (~4.08).
• Non-operating income and valuation gains materially influenced bottom line and comprehensive income.
• Balance sheet is solid (equity ratio ~48.7%, D/E 1.05x), mitigating near-term solvency risk.
• ROE (-0.3%) and ROIC (-0.9%) remain below acceptable thresholds; improvement requires cost and margin actions.

Metrics to Watch:

• Gross margin versus SG&A ratio (target: gross margin consistently above ~20%).
• Operating margin trajectory and order backlog/new orders.
• Working capital metrics: receivable days and any inventory rebuilds (inventories currently unreported).
• Contribution of non-operating/extraordinary items to earnings versus core EBIT.
• Equity securities valuation impact on OCI and capital.
• Short-term debt rollover and interest costs as rates evolve.

Relative Positioning: Against domestic small-cap industrial peers, the company exhibits weaker operating profitability but stronger-than-expected cash generation and a comparatively healthy balance sheet; reliance on non-operating income and valuation gains raises earnings volatility relative to peers with steadier core 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