Koken Boring Machine Co., Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥4.84B
• Operating Income: ¥80M
• Net Income: ¥54M
• EPS: ¥-8.89

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

Koken Boring Machine Co., Ltd. (TSE: 6297) delivered FY2026 Q2 consolidated results marked by resilient top-line growth but notably weaker profitability. Revenue rose 9.0% year on year to ¥4,841 million, indicating steady demand in core drilling and related machinery lines. Despite higher sales, cost pressures and/or expense growth compressed margins, with operating income down 32.2% YoY to ¥80 million and ordinary income at ¥22 million. The company recorded a net loss of ¥75 million (EPS: -¥8.89), reflecting thin operating margin and financial/non-operating burdens. Gross margin stood at 26.3%, but the operating margin was only 1.65%, illustrating significant SG&A drag or mix effects. DuPont analysis shows a negative net margin (-1.55%), modest asset turnover (0.357x), and financial leverage of 2.63x, resulting in a calculated ROE of -1.46%. Liquidity appears comfortable with a current ratio of 186.7% and a quick ratio of 141.5%, supported by sizable working capital of ¥4,142.8 million. Based on reported balance sheet totals, the implied equity ratio is around 38% (equity of ¥5,141 million over assets of ¥13,542 million), indicating a moderate capital cushion. Interest coverage at about 1.8x (operating income basis) is thin and warrants monitoring given ¥43.6 million in interest expense over the half-year. Operating cash flow was positive at ¥66.4 million despite a net loss, suggesting some working capital release and/or non-cash charges (D&A: ¥124.1 million). However, investing cash flow and cash/equivalents were not disclosed in the XBRL (displayed as 0), which limits free cash flow and liquidity depth assessment. Financing cash flow was an outflow of ¥207.3 million, implying net debt reduction and/or dividend/lease repayments (dividend per share reported as ¥0.00). The company maintained balance-sheet flexibility but faces margin pressure, evidenced by the drop in operating profit despite sales growth. Inventory of ¥2,160.8 million is sizable relative to H1 sales and should be watched for turnover and potential working capital swings. Overall, the quarter shows good demand but constrained earnings quality, with tighter interest coverage and a small net loss tempering the otherwise solid liquidity profile. Given disclosure gaps (e.g., cash, investing CF, share count), conclusions rely on the available non-zero items and standard interpretations, and additional detail from management would improve visibility.

Profitability Analysis

DuPont ROE decomposes to: Net Profit Margin -1.55% × Asset Turnover 0.357 × Financial Leverage 2.63 = ROE -1.46%. Gross margin was 26.3% (¥1,272.8m gross profit on ¥4,841.0m revenue), indicating the core product margin is acceptable for industrial machinery but below premium peers. Operating margin declined to 1.65% (¥80.0m OI), a sharp gap from gross margin, implying elevated SG&A, weaker project mix, or price-cost headwinds. Ordinary income margin was 0.45%, reflecting financial costs and non-operating items burdening earnings. EBITDA was ¥204.1m, for an EBITDA margin of 4.2%, highlighting modest operating cash earnings relative to sales. Interest coverage at ~1.8x (Operating income/Interest expense) is thin, leaving limited buffer against rate increases or further margin compression. The negative net margin despite positive operating income indicates additional headwinds below operating line and tax/one-off factors. Operating leverage appears unfavorable this period: revenue grew 9% YoY while operating income fell 32.2% YoY, implying fixed-cost absorption challenges and/or pricing pressure. Profitability quality is mixed: gross profit supports the franchise, but conversion to operating and net profit is weak this half.

Growth Assessment

Top-line growth of 9.0% YoY to ¥4.84bn suggests sustained demand in core drilling and related segments, potentially supported by domestic infrastructure and maintenance cycles. However, the deterioration in operating income (-32.2% YoY) points to margin compression, likely from higher input costs, mix shifts, or elevated SG&A (e.g., labor, logistics). Ordinary income at ¥22m and a net loss of ¥75m indicate that growth has not translated into bottom-line expansion. The sustainability of revenue growth will depend on order intake/backlog and pricing power; data were not provided in this disclosure. Gross margin at 26.3% offers some room to rebuild operating profit if SG&A normalization and/or pricing actions occur. Interest burden (¥43.6m) is meaningful relative to operating income, which could cap profit growth unless operating earnings recover. Near-term outlook hinges on executing higher-margin projects, controlling fixed costs, and improving utilization. With inventory at ~¥2.16bn, the company appears positioned to fulfill demand, but slower conversion could impede cash generation. Absent guidance and backlog data, we assume moderate demand persists but profitability recovery is the key swing factor for 2H.

Financial Health

Total assets were ¥13,542m, liabilities ¥8,595.8m, and equity ¥5,141m, implying an equity ratio around 38% (though the reported field shows 0.0% due to non-disclosure). Liquidity is solid with current assets of ¥8,919.9m versus current liabilities of ¥4,777.1m, yielding a current ratio of 186.7% and quick ratio of 141.5%. Working capital stands at ¥4,142.8m, providing an ample cushion for operations and project execution. Debt-to-equity is 1.67x, indicating a moderately leveraged balance sheet for a small industrial manufacturer. Interest expense of ¥43.6m against operating income of ¥80.0m results in thin coverage (~1.8x), highlighting sensitivity to interest rates and earnings volatility. While cash and equivalents were not disclosed (shown as 0), the overall current asset base suggests liquidity sources beyond cash (receivables, inventories). Financing cash outflow of ¥207.3m indicates deleveraging and/or service of obligations, which is constructive if sustained. Solvency appears adequate given the equity base, but maintaining covenant headroom likely requires improved operating profitability.

Cash Flow Quality

Operating cash flow was positive at ¥66.4m despite a net loss of ¥75.0m, yielding an OCF/Net Income ratio of -0.89 (positive OCF against negative NI), which suggests working capital release and non-cash D&A (¥124.1m) supported cash generation. EBITDA of ¥204.1m indicates underlying cash earnings capacity, but conversion to OCF was modest, likely reflecting changes in receivables/payables/inventories. Investing cash flow was not disclosed (shown as 0), so capital expenditure levels are unclear and free cash flow cannot be reliably derived; the displayed “FCF: 0” should be treated as undisclosed rather than zero. Financing cash flow was an outflow of ¥207.3m, consistent with debt service or repayment. Inventory of ¥2,160.8m is significant relative to H1 sales; improving turnover would help reduce working capital intensity and bolster OCF. Overall earnings quality is mixed: accounting earnings were negative, yet cash from operations was positive, indicating some resilience but also reliance on working capital movements. Greater disclosure on cash, capex, and order advances would enhance assessment of cash flow durability.

Dividend Sustainability

The company reported DPS of ¥0.00 for the period, with a payout ratio of 0.0%, consistent with a net loss. With OCF positive but modest and investing CF undisclosed, robust free cash flow coverage cannot be confirmed for distributions. Given thin interest coverage and the need to reinforce profitability, maintaining a conservative dividend stance appears prudent. The absence of disclosed cash and capex data limits visibility on distributable capacity; policy likely prioritizes balance sheet stability and growth investments over near-term payouts. Sustainability of any future dividends will hinge on restoring operating margins and demonstrating consistent positive free cash flow after working capital and capex.

Risk Assessment

Business Risks:

• Cyclical demand in construction, civil engineering, and resource-related drilling markets
• Input cost inflation and pricing pressure compressing margins
• Project mix volatility impacting gross-to-operating profit conversion
• Execution risk on large orders and after-sales/service profitability
• Supply chain constraints affecting delivery schedules and costs
• Export exposure and FX fluctuations impacting pricing and costs

Financial Risks:

• Thin interest coverage (~1.8x) and sensitivity to rate increases
• Working capital intensity with sizable inventories (¥2.16bn) affecting OCF
• Potential covenant pressure if operating income weakens further
• Limited disclosure on cash position and capex obscures liquidity and FCF visibility
• Negative net income despite positive OCF indicates reliance on working capital timing

Key Concerns:

• Operating margin compression despite 9% revenue growth
• Ordinary income near breakeven and net loss in the half
• Moderate leverage (D/E 1.67x) combined with low coverage
• Undisclosed cash and investing cash flows constrain assessment of FCF and liquidity depth

Investment Implications

Key Takeaways:

• Revenue growth is intact (+9% YoY), but earnings leverage is negative this half
• Gross margin (26.3%) is reasonable, yet SG&A/other costs reduced operating margin to 1.65%
• Interest burden (¥43.6m) materially weighs on ordinary income; coverage ~1.8x
• Liquidity appears solid (current ratio 186.7%, quick 141.5%), with implied equity ratio ~38%
• Positive OCF (¥66.4m) versus net loss suggests working capital/non-cash support, but cash and capex are undisclosed
• Financing CF outflow (-¥207.3m) points to deleveraging or obligation servicing

Metrics to Watch:

• Order intake and backlog conversion to revenue
• Gross margin and SG&A ratio trends (operating margin recovery)
• Inventory turnover and receivables collection (OCF durability)
• Interest coverage and net financial expenses
• Capex levels and disclosed free cash flow
• Equity ratio and net debt trajectory
• Pricing actions versus input cost inflation

Relative Positioning: Within Japan’s small/mid-cap industrial machinery cohort, Koken exhibits decent topline momentum but weaker profitability and thinner interest coverage than higher-margin peers; liquidity is adequate, and the balance sheet is moderately leveraged, leaving execution on margin recovery as the key differentiator for the next half.

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