ENSHU Limited FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥9.44B
• Operating Income: ¥19M
• Net Income: ¥-626M
• EPS: ¥10.75

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

Enshu Co., Ltd. (TSE: 6218) reported FY2026 Q2 consolidated results under JGAAP showing a sharp top-line contraction alongside very thin operating profitability. Revenue was ¥9.435 billion, down 15.5% YoY, reflecting a soft order environment typical of cyclical capital goods, likely in machine tools and related equipment. Despite the revenue decline, operating income was essentially flat at ¥19 million, translating to an operating margin of only 0.2%, indicating heavy margin pressure but also some cost controls that prevented an operating loss. Ordinary income was a loss of ¥26 million, underscoring non-operating burdens—primarily interest costs—given interest expense of ¥82 million and limited operating profit. Net income was ¥67 million (EPS ¥10.75), implying that below-ordinary items (e.g., extraordinary income under JGAAP) offset the ordinary loss; the reported effective tax rate (0.0%) points to the peculiarity of the income mix this period rather than normalized taxation. Gross margin printed at 12.7%, highlighting product mix and pricing pressure; EBITDA margin was 6.7%, but EBITDA was largely non-cash given depreciation of ¥611 million, leaving little EBIT (¥19 million) after fixed cost absorption. DuPont metrics show a thin net margin of 0.71%, asset turnover of 0.337x, and financial leverage of 2.79x, combining to a low ROE of 0.67%—consistent with the reported ROE. Liquidity appears sound with a current ratio of 161.9% and working capital of ¥5.829 billion, aided by sizable current assets (¥15.249 billion) relative to current liabilities (¥9.420 billion). Solvency is more mixed: total liabilities of ¥19.433 billion against equity of ¥10.028 billion imply a debt-to-equity of 1.94x and leverage of 2.79x; interest coverage on an EBIT basis is weak at roughly 0.2x. Operating cash flow of ¥258 million exceeded net income (OCF/NI 3.85x), which is supportive for earnings quality, but free cash flow cannot be assessed as investing cash flows were not disclosed. Financing cash flow was an outflow of ¥938 million, suggesting debt repayment or reduced borrowings, which can be constructive for balance sheet risk if sustained. Dividend payments were not disclosed for the period (DPS reported as zero), consistent with conserving cash amid low profitability. Based on reported NI and EPS, implied shares outstanding are roughly 6.23 million; using balance sheet equity, indicative BVPS would be around ¥1,600, but share data were not disclosed in the feed. Overall, the company maintains liquidity, but profitability and interest coverage are weak, and leverage remains elevated for the margin profile. The near-term outlook hinges on order recovery, pricing discipline, and working capital normalization to sustain positive OCF while improving ordinary income.

Profitability Analysis

ROE decomposition shows: Net profit margin 0.71% × Asset turnover 0.337 × Financial leverage 2.79 = ~0.67% ROE, indicating low profitability mainly driven by thin margins and slow asset turns, partially offset by leverage. Operating margin is 0.2% (¥19m EBIT on ¥9,435m sales), reflecting heavy fixed cost absorption and pricing/mix headwinds; ordinary margin is -0.3% due to interest and other non-operating items. Gross margin of 12.7% is modest for capital goods, suggesting price competition and/or high material and manufacturing costs; EBITDA margin of 6.7% indicates a substantial non-cash component (depreciation ¥611m), leaving limited operating earnings. Interest expense of ¥82m versus EBIT of ¥19m yields EBIT interest coverage of ~0.23x, which constrains ordinary profit and highlights sensitivity to rate and leverage. The flat operating income despite a 15.5% sales decline implies cost mitigation, but operating leverage remains adverse: revenue contraction transmitted almost entirely to gross profit and left minimal buffer at the operating line. Margin quality is fragile, with heavy reliance on depreciation add-backs to support cash generation. To improve ROE, management would need to restore gross margin (pricing, mix, productivity), improve asset utilization (inventory turns, capacity), and reduce financing costs.

Growth Assessment

Revenue decreased 15.5% YoY to ¥9.435bn, indicative of end-market softness and potential order deferrals typical in machine tools and factory automation cycles. The sustainability of revenue will depend on order intake and backlog; without disclosed order metrics, visibility is limited. Operating income was flat at a low base (¥19m), suggesting cost rationalization offset some volume/mix pressure but leaving the business with limited operating leverage upside until volumes recover. Ordinary loss (-¥26m) shows growth in headline net profit is not yet underpinned by core earnings; net income (¥67m) appears supported by non-core/extraordinary items under JGAAP. Profit quality is therefore mixed: OCF exceeded NI, but recurring profitability (ordinary income) remains weak. Outlook hinges on demand from automotive and general machinery customers, capex cycles, and FX; a modest rebound in capital goods spending could lift sales and margins given high fixed cost absorption, but pricing discipline and supply chain cost normalization are needed for sustained improvement. Near-term guidance is not provided here; in the absence of disclosed backlog, we assume a cautious outlook with potential second-half improvement if orders recover.

Financial Health

Total assets were ¥27.968bn and equity ¥10.028bn, implying an equity-to-asset ratio of roughly 35.9% (company field for equity ratio was not disclosed). Total liabilities were ¥19.433bn, for a debt-to-equity of 1.94x and financial leverage of 2.79x. Liquidity is adequate: current assets ¥15.249bn vs current liabilities ¥9.420bn yield a current ratio of 161.9% and working capital of ¥5.829bn; the quick ratio of 131.9% indicates support from liquid current assets. Inventories of ¥2.826bn represent a meaningful share of current assets; managing turns will be important in a downcycle. Interest expense of ¥82m versus minimal EBIT results in weak interest coverage (~0.23x on EBIT), a constraint on credit profile despite acceptable balance sheet capitalization. Financing cash outflows of ¥938m suggest deleveraging or dividend/other financing uses; if this reflects net debt reduction, it would improve solvency. Overall, balance sheet capacity exists, but profitability must improve to comfortably service financing costs.

Cash Flow Quality

Operating CF was ¥258m versus net income of ¥67m, for an OCF/NI ratio of 3.85x, indicating cash earnings exceeded accounting profit—supported by depreciation (¥611m) and likely working capital inflows. Free cash flow cannot be assessed due to undisclosed investing CF; FCF is therefore not derivable from the provided data. EBITDA of ¥630m closely mirrors depreciation, highlighting that cash generation relies heavily on non-cash addbacks with limited underlying margin. Working capital appears supportive this period, with strong current and quick ratios; however, inventory of ¥2.826bn amid falling sales requires monitoring for potential cash absorption in subsequent periods. The quality of earnings is mixed: cash conversion is good this quarter, but ordinary income is negative and interest coverage is weak, which can erode cash generation if working capital reverses. Sustainability of positive OCF will depend on maintaining receivables collections, controlling inventory, and stabilizing margins.

Dividend Sustainability

DPS is reported as ¥0.00 and payout ratio 0.0%, indicating no dividend for the period. Given low profitability (ROE 0.67%, operating margin 0.2%) and ordinary loss, a conservative stance on distributions aligns with balance sheet preservation. With investing CF undisclosed, FCF coverage of dividends cannot be calculated; however, the absence of dividends removes near-term cash obligations. Financing CF outflow of ¥938m suggests prioritization of balance sheet actions over shareholder returns. Unless ordinary income improves and free cash flow visibility increases, dividend capacity will remain constrained. Policy-wise, the company may target stability over growth in payouts, resuming distributions only with sustained improvement in core profitability and cash generation.

Risk Assessment

Business Risks:

• Cyclical demand in machine tools and capital goods leading to volatile orders and revenue
• Pricing pressure and adverse product mix compressing gross margins (12.7% in the period)
• High operating leverage with low operating margin (0.2%) amplifying earnings swings
• Customer concentration risk in automotive/general machinery end-markets
• Supply chain and component cost volatility affecting cost of sales
• FX fluctuations impacting export competitiveness and input costs
• Technology and competitive intensity from domestic and overseas peers

Financial Risks:

• Weak interest coverage (~0.23x EBIT/interest) heightening sensitivity to rates and earnings slippage
• Elevated leverage (D/E 1.94x; assets/equity 2.79x) vs. low margin profile
• Potential working capital reversal risk if inventories/receivables increase as sales stabilize
• Dependence on non-operating items for net profitability while ordinary income is negative
• Limited buffer to absorb shocks given minimal EBIT against fixed costs

Key Concerns:

• Ordinary income loss despite positive net income, questioning core earnings quality
• Sustained revenue decline (-15.5% YoY) without disclosed backlog/order visibility
• Thin gross and operating margins constraining self-funding capacity
• Uncertain capex/FCF profile due to undisclosed investing cash flows

Investment Implications

Key Takeaways:

• Revenue fell 15.5% YoY to ¥9.435bn with operating income flat at ¥19m, indicating severe margin pressure but some cost containment
• Ordinary loss (-¥26m) and weak EBIT interest coverage (~0.23x) underscore financial sensitivity
• ROE is low at 0.67% driven by thin net margin (0.71%) and slow asset turns (0.337x), partially offset by leverage (2.79x)
• Liquidity is adequate (current ratio 161.9%, working capital ¥5.829bn) but solvency relies on improving core earnings
• OCF exceeded net income (3.85x), but FCF can’t be assessed; sustainability depends on working capital discipline and margin recovery
• No dividend this period; distributions likely contingent on recovery in ordinary income and FCF visibility

Metrics to Watch:

• Order intake, backlog, and book-to-bill to gauge revenue recovery potential
• Gross margin trajectory and pricing/mix changes
• EBIT and ordinary income improvement and EBIT/interest coverage
• Inventory turns and working capital intensity vs. sales trend
• Operating cash flow relative to net income (OCF/NI) and any disclosed capex/FCF
• Leverage (D/E) and financing cash flows indicating deleveraging progress
• FX exposure and hedging effectiveness

Relative Positioning: Relative to domestic machine tool and capital goods peers, Enshu exhibits lower margins, weaker ordinary profitability, and higher sensitivity to financing costs, albeit with acceptable liquidity; scaling, mix improvement, and deleveraging are needed to close the performance 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
• 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