NIKKO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥21.12B
• Operating Income: ¥768M
• Net Income: ¥879M
• EPS: ¥18.04

Income Statement

Balance Sheet

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

Nikko Co., Ltd. (TSE: 63060) reported FY2026 Q2 (cumulative) results showing topline softness and pronounced operating leverage. Revenue declined 6.7% YoY to ¥21.1bn, while operating income fell 40.0% YoY to ¥0.77bn, compressing the operating margin to 3.6%. Gross profit of ¥6.68bn implies a solid gross margin of 31.6%, but SG&A and other operating items weighed on operating profit, highlighting negative operating leverage as volumes softened. Ordinary income of ¥0.91bn exceeded operating income, indicating positive non-operating contributions (e.g., financial income or equity-method gains) offsetting interest expense of ¥47m. Net income came in at ¥0.69bn (-21.2% YoY), for a net margin of 3.29% and EPS of ¥18.04. The DuPont bridge indicates ROE of 1.95%, driven by modest net margin (3.29%), low asset turnover (0.336x), and moderate financial leverage (1.77x). Balance sheet strength appears solid: total assets of ¥62.8bn and total equity of ¥35.5bn imply an equity ratio around 56.6% (versus the unreported 0.0% placeholder), with current ratio 186.5% and quick ratio 180.8%. Working capital is ample at ¥18.6bn, and interest coverage remains comfortable at 16.3x, suggesting low short-term financial risk. Reported cash flow items are unreported (shown as zero), limiting assessment of earnings-to-cash conversion and free cash flow. The tax line (¥604m) appears high relative to ordinary income, implying either sizable below-the-line positives or timing/definition differences under JGAAP; this creates uncertainty around the effective tax rate on a cumulative basis. Inventory of ¥1.22bn is small relative to revenue, consistent with project-based or engineered-to-order characteristics, but it also means cash conversion hinges more on receivables and contract assets/liabilities (not disclosed here). Dividend data are unreported (DPS and payout shown as 0), so we cannot assess current policy or coverage. Overall, profitability softened due to operating deleverage despite resilient gross margins, balance sheet liquidity is strong, and financial risk is moderate; however, the lack of cash flow disclosure constrains conviction on earnings quality and dividend sustainability.

Profitability Analysis

ROE decomposition: Net margin 3.29% × asset turnover 0.336 × financial leverage 1.77 = ~1.95% ROE (consistent with reported DuPont). The margin mix indicates: gross margin 31.6% (¥6.68bn/¥21.12bn), operating margin 3.6% (¥0.77bn/¥21.12bn), ordinary margin 4.3% (¥0.91bn/¥21.12bn), and net margin 3.29%. The sharp YoY decline in operating income (-40%) versus a 6.7% revenue drop signals negative operating leverage, likely from higher fixed-cost absorption and/or elevated SG&A relative to sales. The spread between gross margin (31.6%) and operating margin (3.6%) implies a sizeable SG&A and other operating cost burden (~28ppt of sales), which widened YoY given profit compression. Ordinary profit exceeding operating profit suggests supportive non-operating income (e.g., FX or investment income); interest expense of ¥47m is modest with coverage of 16.3x. Margin quality: gross margin remains healthy for an industrial/project business, but operating margin sensitivity to volume and mix is high, indicating profitability is exposed to order timing and pricing discipline. Given the project nature, quarterly margin volatility is likely; sustained improvement requires tighter cost control and stable backlog execution.

Growth Assessment

Revenue declined 6.7% YoY to ¥21.1bn, implying softer demand or project timing shifts in the first half. Profit contraction was steeper: operating income fell 40.0% YoY, reflecting cost rigidity and potentially adverse mix. Net income decreased 21.2% YoY, cushioned by non-operating items relative to operating trend. Without backlog and order intake data, visibility on second-half recovery is limited; however, the ordinary margin (4.3%) suggests some financial or non-operating tailwinds. Gross margin at 31.6% underscores inherent value-add, but operating performance depends on scaling SG&A over revenue and maintaining pricing. Near-term outlook hinges on order inflows in infrastructure/plant markets, execution of existing projects, and potential normalization of input costs. If revenues stabilize or recover in H2, operating leverage could aid profitability; conversely, further volume softness would pressure margins. FX and export mix (if material) could be incremental factors for H2. Overall, growth sustainability is uncertain near term due to limited disclosures on backlog and book-to-bill.

Financial Health

Liquidity is strong: current ratio 186.5%, quick ratio 180.8%, and working capital ¥18.6bn support operational flexibility. Balance sheet solvency appears sound: total equity ¥35.5bn versus assets ¥62.8bn implies an equity ratio around 56.6% (calculated), despite the reported 0.0% placeholder. Debt-to-equity is reported at 0.82x, but the breakdown of interest-bearing debt is not disclosed here; nonetheless, interest burden is low (¥47m), and coverage is 16.3x. The asset base relative to revenue (asset turnover 0.336x) indicates a capital-intensive/project-driven model, which can tie up capital in receivables and contract assets; limited detail on these accounts constrains further analysis. Overall solvency risk is low, and liquidity buffers can absorb project timing variability.

Cash Flow Quality

Cash flow data are unreported this quarter (OSCF/FCF shown as 0 placeholders), preventing direct assessment of earnings-to-cash conversion and free cash flow. Working capital context: inventories are modest at ¥1.22bn, suggesting limited stock holding; cash conversion likely hinges on receivables and contract assets/liabilities, which are not disclosed in detail. With net income at ¥0.69bn and depreciation unreported, we cannot triangulate EBITDA or operating cash flow. Interest coverage (16.3x) and strong liquidity (current ratio 186.5%) mitigate near-term cash strain, but project businesses can face lumpiness in cash collection; monitoring OCF relative to net income and changes in receivables/advances will be key once disclosed.

Dividend Sustainability

Dividend metrics are unreported (DPS and payout shown as 0 placeholders), so we cannot infer current policy or coverage. Given net income of ¥0.69bn in H1 and strong balance sheet liquidity, the capacity to pay dividends may exist, but sustainability depends on full-year earnings, operating cash flow, and capital needs. Without OCF/FCF data and share count, payout ratio and FCF coverage cannot be reliably calculated. Historically, industrials align dividends with multi-year earnings stability; near-term contraction in operating profit argues for a cautious stance until cash generation and H2 outlook are clearer.

Risk Assessment

Business Risks:

• Cyclical demand in infrastructure/construction and private CAPEX affecting order intake and revenue timing
• Project execution risk leading to margin volatility (cost overruns, delivery delays)
• Pricing pressure and mix shifts impacting gross and operating margins
• Supply chain and input cost fluctuations (e.g., steel, components) affecting cost of sales
• FX exposure on exports or imported components influencing margins and non-operating income
• Customer concentration or large-project dependence increasing revenue volatility

Financial Risks:

• Earnings sensitivity to volume causing negative operating leverage
• Working capital swings in receivables/contract assets potentially straining operating cash flow
• Limited visibility on interest-bearing debt composition despite acceptable interest expense
• Tax expense volatility relative to pre-tax metrics under JGAAP reporting

Key Concerns:

• Operating profit down 40% YoY on modest revenue decline, highlighting cost rigidity
• Insufficient disclosure on cash flows (OCF/FCF) to confirm earnings quality
• Apparent high tax expense versus ordinary income, creating uncertainty around normalized effective tax rate
• Low asset turnover (0.336x) restrains ROE alongside modest leverage

Investment Implications

Key Takeaways:

• Top-line declined 6.7% YoY and operating income fell 40.0% YoY; operating leverage is unfavorable in H1
• Gross margin remains solid at 31.6%, but SG&A intensity compressed operating margins to 3.6%
• Ordinary income exceeds operating income, aided by non-operating items; interest burden is modest (¥47m)
• Balance sheet is robust with an estimated equity ratio ~56.6% and strong liquidity (current ratio 186.5%)
• Cash flow disclosure is missing; earnings quality and FCF cannot be validated this quarter
• ROE of 1.95% reflects modest margins, low asset turnover, and moderate leverage

Metrics to Watch:

• Order backlog and book-to-bill to gauge H2 revenue visibility
• Operating margin and SG&A-to-sales ratio for cost discipline
• Gross margin trend and pricing versus input costs
• Operating cash flow, FCF, and working capital movements (receivables, advances, contract assets/liabilities)
• Interest-bearing debt level and maturity profile; continued interest coverage strength
• Effective tax rate normalization and reconciliation between ordinary and net income
• Asset turnover and capital efficiency (capex and depreciation when disclosed)

Relative Positioning: Within Japanese industrial/project-engineering peers, the company exhibits solid gross margins and a conservative balance sheet, but weaker H1 operating leverage and low asset turnover suppress interim ROE; near-term positioning depends on order recovery and execution in H2 relative to peers managing similar project timing headwinds.

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