TOMOE ENGINEERING CO.,LTD.(TOMOE KOGYO CO.,LTD.) (6309) FY2026 Q1

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Executive Summary

In Q1 of the fiscal year ending October 2026, revenue increased while profit declined, with deteriorating profitability in the core Chemical Industrial Products Sales Business being the primary factor pressuring earnings. Revenue was ¥153.3B (+1.6% YoY), Operating Income was ¥16.7B (-6.8%), Ordinary Income was ¥16.9B (-6.5%), and Net Income was ¥11.1B (-10.3%). Despite a slight increase in revenue, the Operating Income margin declined to 10.9%, approximately 1pt below the estimated 11.9% in the same period of the previous year.

Factors Affecting Performance

【Revenue】Revenue of ¥153.3B increased +1.6% YoY. By segment, the Machinery Manufacturing and Sales Business led growth with revenue of ¥45.1B (+5.6%), while the Chemical Industrial Products Sales Business, which accounted for 70.6% of the revenue mix, remained almost flat at ¥108.2B (+0.1%).

【Profit and Loss】Operating Income was ¥16.7B (-6.8%), with a gross margin of 26.9% and an SG&A ratio of 16.0%. The primary reason for the decline in profit was the substantial decrease in segment profit in the Chemical Industrial Products Sales Business to ¥8.1B (-12.9%), with its profit margin declining to 7.5% from the estimated 8.6% in the same period of the previous year. The Machinery Manufacturing and Sales Business recorded segment profit of ¥8.6B, remaining flat, while maintaining a high profit margin of 19.0%. Ordinary Income was ¥16.9B (-6.5%), with the impact of non-operating income and expenses being minimal. Net Income was ¥11.1B (-10.3%), and the effective tax rate of 33.9% reduced Net Income by more than the growth in Profit Before Tax. Overall, revenue increased while profit declined, primarily due to deteriorating profitability in the core business.

Segment Analysis

The Chemical Industrial Products Sales Business recorded revenue of ¥108.2B (+0.1%), segment profit of ¥8.1B (-12.9%), and a profit margin of 7.5%. Despite accounting for 48.7% of consolidated Operating Income, the segment is on a declining earnings trend. The Machinery Manufacturing and Sales Business recorded revenue of ¥45.1B (+5.6%), segment profit of ¥8.6B (+0.0%), and maintained a profit margin of 19.0%, demonstrating profitability 11.5pt higher than that of the Chemical Industrial Products Sales Business. The decline in the overall Operating Income margin was attributable to deteriorating profitability in the larger Chemical Industrial Products Sales Business.

Key Financial Indicators

【Profitability】The Company maintained a certain level of earnings power, with an Operating Income margin of 10.9%, Net Income margin of 7.2%, and gross margin of 26.9%; however, all indicators are trending downward YoY.【Cash Quality】Accounts receivable of ¥150.8B and electronically recorded monetary claims of ¥49.4B account for a significant portion of assets, making the collection speed of trade receivables an issue in terms of working capital efficiency.【Investment Efficiency】ROE was 2.6% and total asset turnover was 0.282, both low levels, indicating room to improve capital efficiency. An Equity Ratio of 77.6% and financial leverage of 1.29x indicate a conservative capital structure.【Financial Soundness】The current ratio of 370.1%, quick ratio of 308.4%, and debt-to-equity ratio of 0.29x indicate high levels of both short-term liquidity and financial stability.

Cash Flow Analysis

As figures from the cash flow statement have not been disclosed, cash trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥90.5B, down from ¥133.7B in the same period of the previous year, while accounts receivable of ¥150.8B and electronically recorded monetary claims of ¥49.4B accounted for a significant portion of assets. The accounts receivable collection period (annualized) was 90 days, and the cash conversion cycle (annualized) was 138 days; both exceeded generally accepted benchmarks, suggesting a structure in which working capital remains tied up in the business for an extended period. Inventories were ¥65.6B, mainly consisting of finished goods, and supply-demand trends in the Chemical Industrial Products Sales Business may affect inventory levels. While ample cash and a high Equity Ratio support financial flexibility, the speed of trade receivables collection and the reduction of working capital are structural issues that will determine future cash generation capacity.

Quality of Earnings

Profit for the quarter was primarily derived from recurring operating activities. Extraordinary loss of ¥0.1B (loss on disposal of fixed assets) was limited to a modest level equivalent to 0.6% of Net Income, indicating limited impact from temporary factors. Non-operating income of ¥0.3B mainly consisted of dividend income of ¥0.3B, and non-operating income amounted to only 0.2% of revenue, indicating a small contribution from sources outside the core business. Against Profit Before Tax of ¥16.8B, Net Income was ¥11.1B, with the effective tax rate of 33.9% (tax burden coefficient 0.661) compressing Net Income. Comprehensive Income was ¥14.9B, exceeding Net Income of ¥11.1B by ¥3.8B, as valuation-related changes such as foreign currency translation adjustments of ¥2.4B and valuation differences on securities of ¥2.2B increased equity. This divergence was primarily attributable to valuation-related changes and should be distinguished from Net Income, which represents the underlying earning power of the business.

Earnings Forecast and Guidance

Progress toward the full-year earnings forecast was 24.3% for revenue (¥632.0B plan), 29.1% for Operating Income (¥57.5B plan), 29.2% for Ordinary Income (¥57.7B plan), and 26.4% for Net Income (¥42.0B plan). Profit progress exceeded the standard 25%, indicating a certain degree of buffer against the full-year plan as of Q1. However, Operating Income declined -6.8% YoY in the quarter, and achieving the full-year plan of +7.4% growth in Operating Income will require a recovery in profit margins, particularly in the core Chemical Industrial Products Sales Business, through the second half of the fiscal year. No revisions to the earnings forecast had been made as of the end of the quarter.

Shareholder Returns

The full-year dividend forecast is ¥72.00 per share. Based on the full-year EPS forecast of ¥142.77, the projected Payout Ratio is 50.4%, a level below the generally accepted sustainability benchmark. The annual dividend for the previous fiscal year (fiscal year ending October 2025), adjusted for the impact of the 1-for-3 stock split in May 2025, was ¥60.33, making the current-year forecast of ¥72.00 an approximately 19.3% increase on a split-adjusted basis. The conservative financial structure, comprising an Equity Ratio of 77.6% and a debt-to-equity ratio of 0.29x, supports the stability of dividend funding. No revisions to the dividend forecast had been made as of the end of the quarter. Achieving the planned dividend increase will depend on attaining the full-year Net Income plan of ¥42.0B, particularly through a recovery in the profitability of the core business.

Risk Factors

1. Deteriorating profitability in the core business: Segment profit in the Chemical Industrial Products Sales Business, which accounts for 70.6% of the revenue mix, declined -12.9% YoY, and its profit margin fell to 7.5%. Demand and pricing trends in this division will have a significant impact on the achievement of the Company-wide full-year earnings growth plan.

2. Declining working capital efficiency: The accounts receivable collection period (annualized) of 90 days and the cash conversion cycle (annualized) of 138 days both exceed generally accepted cautionary levels. Funds tied up in trade receivables and inventories may lead to additional working capital requirements during periods of revenue expansion.

3. Low capital efficiency: ROE of 2.6% and total asset turnover of 0.282 are low, indicating significant room to improve capital efficiency despite ample liquidity and a conservative financial structure. The tax burden coefficient of 0.661 (effective tax rate of 33.9%) is also a factor suppressing the Net Income margin.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Profitability exceeds the industry median, with both the Operating Income margin and Net Income margin at levels superior to the manufacturing industry average.

Growth and Capital Efficiency

The Revenue growth rate is below the industry median, indicating relatively weaker growth.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The Operating Income margin of 10.9% and Net Income margin of 7.2% are above the industry median; however, both declined by approximately 1pt YoY, warranting attention as a deteriorating profitability trend.

2. The decline in the profit margin of the Chemical Industrial Products Sales Business, which accounts for 70.6% of the revenue mix, to 7.5% was the primary cause of the Company-wide earnings decline. The profitability gap between this business and the highly profitable Machinery Manufacturing and Sales Business, with a profit margin of 19.0%, has widened.

3. Despite a strong financial foundation, including a current ratio of 370.1% and an Equity Ratio of 77.6%, the 90-day accounts receivable collection period and 138-day CCC indicate working capital retention. This is consistent with the low total asset turnover of 0.282 and ROE of 2.6%, and represents a structural challenge in terms of capital efficiency.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,432–¥1,514 at ±1% Cost of Equity, and ¥1,472–¥1,473 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• As Net Assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting a professional where necessary.

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AI Financial Analysis

Executive Summary

FY2026 Q1 was a mixed start: revenue grew modestly, but profit declined as gross-margin pressure and higher SG&A outweighed sales growth. Revenue increased 1.6% YoY to ¥15.33bn. Operating income declined 6.8% YoY to ¥1.67bn. Ordinary income fell 6.5% to ¥1.69bn. Net income attributable to owners decreased 10.3% to ¥1.11bn, equivalent to EPS of ¥37.61. Gross profit was broadly flat at ¥4.13bn despite the revenue increase. Consequently, gross margin contracted by 58bp YoY to 26.9% from 27.5%. SG&A expenses rose 4.3% YoY to ¥2.46bn, materially faster than revenue growth. Operating margin therefore compressed by 98bp YoY to 10.9% from 11.9%. The machinery manufacturing and sales segment maintained segment profit at ¥858m while increasing sales 5.6%, demonstrating resilience in the higher-margin business. Chemical industrial-products sales were flat, while segment profit declined 12.9% to ¥814m, accounting for the consolidated operating-profit shortfall. The machinery segment was the core business by operating-income contribution, with a 19.0% segment margin versus 7.5% for chemical industrial-products sales. Non-operating income was limited to ¥33m, including ¥26m of dividend income, so ordinary earnings remained closely aligned with operating earnings. A ¥7m loss on disposal of fixed assets was immaterial relative to net income. Q1 operating-income progress reached 29.1% of the ¥5.75bn full-year forecast, 4.1 percentage points ahead of the standard 25% seasonal benchmark. Revenue progress was 24.3% against the ¥63.20bn forecast, close to the standard first-quarter run rate. The company has retained its full-year forecast, which implies that the 9.1% full-year operating margin is below the Q1 margin; nevertheless, the Q1 margin deterioration makes recovery in chemical profitability an important determinant of delivery.

Profitability Analysis

The reported annualized ROE is 10.5%, a good level under the stated benchmark, and is generated through a 7.2% net profit margin, 1.127x annualized asset turnover, and modest 1.29x financial leverage. The main adverse operating change was margin rather than leverage: the operating margin declined 98bp YoY to 10.9%, while the gross margin fell 58bp to 26.9%. Gross profit was ¥4.13bn, slightly below the prior-year ¥4.15bn despite higher revenue, indicating that cost of sales increased faster than sales. SG&A rose by ¥102m, or 4.3% YoY, versus 1.6% revenue growth, creating negative operating leverage. The chemical industrial-products segment explains most of this pressure: segment profit fell ¥121m while its revenue increased only ¥8m. By contrast, machinery manufacturing and sales expanded revenue by ¥238m and held segment profit at ¥858m; its 19.0% margin materially exceeds the chemical segment's 7.5% margin. The five-factor DuPont tax burden was 0.661, corresponding to a 33.9% effective tax rate, which reduced conversion of pre-tax income into net income. The interest burden of 1.004 indicates that financing costs are not constraining earnings. Net margin declined by 96bp YoY to 7.2% from 8.2%, reflecting the lower operating result and a slightly higher tax burden. The small ¥7m fixed-asset disposal loss has no material bearing on underlying profitability. Sustained recovery depends principally on restoring chemical segment margin and containing SG&A growth relative to revenue.

Growth Assessment

Consolidated revenue growth of 1.6% was modest and concentrated in machinery manufacturing and sales, where revenue rose 5.6% YoY to ¥4.51bn. Chemical industrial-products sales increased only 0.1% YoY to ¥10.82bn, although the segment remains the largest by revenue at 70.6% of consolidated sales. Machinery's stable ¥858m segment profit indicates that the sales increase did not yet translate into incremental segment earnings, but it preserved a strong margin profile. Chemical segment profit fell from ¥935m to ¥814m, reducing its margin from 8.6% to 7.5%. The full-year plan calls for revenue growth of 6.5% and operating-income growth of 7.4%, requiring acceleration from the Q1 revenue run rate and a reversal of the Q1 profit decline. Q1 revenue progress of 24.3% is only 0.7 percentage points below a standard 25% first-quarter pace, so the sales target remains broadly aligned with the annual plan. Operating-income progress of 29.1% is ahead of the standard pace, providing an initial cushion despite the YoY decline. The forecast's operating margin of 9.1% is 1.8 percentage points below Q1's 10.9%, indicating that management's plan does not require maintaining the Q1 margin throughout the year. Income quality is supported by the close relationship between operating income of ¥1.67bn and ordinary income of ¥1.69bn, with non-operating income representing only 0.2% of revenue.

Financial Health

The balance sheet is conservatively capitalized, with total equity of ¥42.25bn representing 77.6% of total assets. The current ratio of 370.1% and quick ratio of 308.4% indicate substantial short-term liquidity. Current assets of ¥39.33bn exceeded current liabilities of ¥10.63bn by ¥28.71bn. Cash and deposits were ¥9.05bn, equal to 16.6% of total assets, while receivables were ¥15.08bn and inventories were ¥6.56bn. The debt-to-equity ratio of 0.29x is well below the 2.0x warning threshold, and no maturity mismatch is apparent given the large current-asset surplus. Noncurrent liabilities were limited to ¥1.55bn, compared with ¥15.10bn of noncurrent assets. Total liabilities declined by ¥1.47bn YoY to ¥12.18bn, while current liabilities declined by ¥2.07bn to ¥10.63bn. Cash and deposits declined ¥4.32bn YoY, or 32.3%, to ¥9.05bn; this remains ample relative to current liabilities but reduces the immediate cash buffer. Treasury stock increased in carrying-cost terms from ¥0.03bn to ¥9.03bn, contributing to the ¥4.86bn YoY decline in total equity to ¥42.25bn. The treasury-share position represents 558,134 shares, or approximately 1.9% of issued shares. Deferred tax liabilities of ¥1.44bn and contract liabilities of ¥1.19bn are notable liability components but remain readily covered by liquidity.

Notable B/S Changes

Cash and deposits: -¥4.32bn (-32.3% YoY) to ¥9.05bn — liquidity remains strong, but the reduced cash buffer increases the importance of working-capital discipline. Treasury stock: -¥9.00bn YoY to -¥9.03bn — a substantial increase in treasury-share carrying cost that reduced reported equity and is material for capital-allocation monitoring. Electronically recorded monetary claims: +¥0.94bn (+23.6% YoY) to ¥4.94bn — adds to the receivable base and reinforces the importance of collection-cycle monitoring. Deferred tax liabilities: +¥0.58bn (+67.9% YoY) to ¥1.44bn — a notable noncurrent-liability increase, though modest relative to the ¥42.25bn equity base. Investment securities: +¥0.32bn (+14.4% YoY) to ¥2.52bn — valuation and investment exposure increased, alongside positive securities valuation-related OCI.

Cash Flow Quality

Cash and deposits stood at ¥9.05bn at the quarter end, while working capital was ¥28.71bn. Receivables totaled ¥15.08bn and electronically recorded monetary claims were ¥4.94bn, underscoring the importance of timely customer collections. The quality alert for annualized DSO of 90 days indicates a collection cycle above the 60-day warning level. This is a material working-capital risk because a high receivable balance can absorb liquidity even when reported profits remain positive. The annualized cash conversion cycle of 138 days also exceeds the 120-day warning threshold. The long cycle is particularly relevant to the chemical industrial-products business, which accounts for the majority of consolidated revenue and has experienced weaker segment profitability. Inventories were ¥6.56bn, equal to 12.1% of total assets, and should be monitored alongside receivable collection trends. Accounts payable were ¥4.14bn and electronically recorded obligations were ¥1.90bn, providing some supplier-financing support. The earnings profile itself is operationally recurring: ordinary income was only ¥15m above operating income, and the fixed-asset disposal loss was only ¥7m.

Dividend Sustainability

The full-year dividend forecast is ¥72.00 per share, with no revision announced. Based on forecast EPS of ¥142.77, the implied dividend payout ratio is approximately 50.4%. This is below the 60% sustainability benchmark and leaves a reasonable earnings retention buffer. Using 29.95m issued shares, the indicated annual cash dividend is approximately ¥2.16bn before considering treasury-share treatment. The ¥9.03bn treasury-stock balance is material relative to forecast net income of ¥4.20bn and should be considered separately from dividends when assessing total shareholder distributions. On a simple balance-sheet basis, cash and deposits of ¥9.05bn exceed the indicative annual dividend requirement. Retained earnings of ¥37.20bn also provide substantial accumulated capital support. The sustainability of shareholder distributions will nevertheless remain linked to delivery of the full-year earnings plan and management of the elevated working-capital cycle.

Risk Assessment

Business risks include Chemical industrial-products profitability weakened materially: segment profit declined 12.9% YoY to ¥814m despite broadly flat sales, exposing consolidated earnings to margin pressure in the largest revenue segment., Annualized DSO of 90 days exceeds the 60-day warning threshold, increasing exposure to delayed customer collections and potential working-capital absorption., The annualized cash conversion cycle of 138 days exceeds the 120-day warning threshold, raising the funding requirement for inventory and receivables during periods of growth., Manufacturing and chemical-product activities remain exposed to input-cost movements, supply-chain disruption, product-quality requirements, and demand cyclicality., FX losses of ¥9m were limited in Q1, but foreign-currency movements can affect procurement costs and overseas commercial activity..

Financial risks include Cash and deposits declined 32.3% YoY to ¥9.05bn, reducing the cash buffer even though liquidity ratios remain very strong., Treasury stock increased to ¥9.03bn from ¥0.03bn YoY, representing a significant capital-allocation movement and contributing to lower reported equity., Receivables and electronic monetary claims together totaled ¥20.02bn, a large concentration of operating assets requiring close collection discipline..

Key concerns include Likelihood: medium; impact: high — whether chemical segment margin can recover sufficiently to support the full-year operating-income growth forecast., Likelihood: medium; impact: medium — whether the 138-day annualized cash conversion cycle improves as revenue expands., Likelihood: medium; impact: medium — the pace of treasury-share accumulation relative to earnings, liquidity, and future shareholder-return capacity., Likelihood: low to medium; impact: medium — a sustained decline in cash balances if working capital remains elevated..

Investment Implications

Key takeaways include Q1 revenue increased 1.6%, but operating income and net income declined 6.8% and 10.3%, respectively., The machinery segment is the core business by operating-income contribution, producing ¥858m of segment profit and a 19.0% margin., Chemical industrial-products remains the principal revenue base but delivered a 12.9% decline in segment profit and a 110bp margin contraction., Annualized ROE of 10.5% is supported by strong operating profitability and low financial leverage rather than aggressive balance-sheet gearing., Liquidity is exceptionally strong, but collection efficiency and the 138-day annualized cash conversion cycle warrant close attention., The unchanged annual plan remains achievable on Q1 progress metrics, though it requires improved YoY earnings momentum during the remainder of the year..

Metrics to watch include Chemical industrial-products segment margin and operating profit, Machinery manufacturing and sales order and revenue conversion, Annualized DSO, especially against the 60-day warning threshold, Annualized cash conversion cycle against the 120-day warning threshold, Cash and deposits following the ¥4.32bn YoY decline, Treasury-stock balance and total shareholder-return ratio, Progress against the ¥63.20bn revenue, ¥5.75bn operating-income, and ¥4.20bn net-income forecasts.

Regarding relative positioning, The company combines a solid annualized ROE of 10.5%, a good 10.9% operating margin, and a conservative capital structure with a 0.29x debt-to-equity ratio. Its principal relative strength is the high-margin machinery segment, while its key relative weakness is operating working-capital efficiency, as reflected in the 90-day annualized DSO and 138-day annualized cash conversion cycle.