Kitagawa Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥29.08B
• Operating Income: ¥1.37B
• Net Income: ¥368M
• EPS: ¥254.88

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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

Kitagawa Iron Works (63170) delivered a solid FY2026 Q2 with modest topline growth translating into outsized profit recovery. Revenue rose 2.3% YoY to ¥29.1bn, while operating income surged 241.6% YoY to ¥1.37bn, indicating substantial operating leverage through cost control and/or favorable mix. Gross margin was 13.6% and operating margin 4.7%, the latter rebounding meaningfully from a low base. Ordinary income reached ¥1.33bn, and net income climbed to ¥2.36bn (+535.9% YoY), implying significant non-operating or extraordinary tailwinds relative to core operations. The DuPont bridge shows ROE at 5.45%, driven by an 8.10% net profit margin, 0.363x asset turnover, and 1.85x financial leverage, indicating improving profitability on a moderate balance sheet. EBITDA was ¥2.82bn (9.7% margin), and interest coverage was healthy at 6.9x on ¥198m interest expense, reflecting an adequate buffer against financing costs. Cash conversion was sound with operating cash flow (OCF) of ¥2.46bn, equating to 1.05x net income, supporting the quality of earnings. Liquidity looks comfortable with a current ratio of 163% and quick ratio of 145%, supported by ¥16.1bn of working capital. Balance sheet strength is solid with liabilities at ¥40.3bn versus equity of ¥43.2bn; this implies an equity ratio around mid-50% on our calculation, although an equity ratio of 0.0% was shown as undisclosed in the source. Net income exceeded ordinary income by roughly ¥1.0bn, suggesting one-off gains and/or tax effects; reported effective tax rate shows 0.0% in the metric table, but a ¥0.4bn income tax expense is disclosed, so tax rate metrics should be treated cautiously. Dividend payments are currently not disclosed (DPS 0.00), with payout ratio reported at 0%; with positive OCF, the company has capacity but policy details are not provided. Inventory of ¥4.72bn relative to size suggests manageable working capital intensity, though we do not have turnover metrics. Free cash flow is not derivable due to undisclosed investing cash flows and capex breakdown. Overall, the quarter reflects improved margin execution and healthy cash conversion, with headline net income aided by non-core items. Data gaps remain (e.g., cash balance, capex, equity ratio, share count), so conclusions focus on disclosed non-zero metrics and internal consistency.

Profitability Analysis

ROE of 5.45% is decomposed into a net margin of 8.10%, asset turnover of 0.363x, and financial leverage of 1.85x. The primary driver of ROE uplift this quarter is margin recovery, as revenue growth (+2.3% YoY) significantly lagged operating income growth (+241.6% YoY). Operating margin was 4.7% (operating income ¥1.37bn on ¥29.08bn sales), a sharp improvement from the prior-year low base, implying better cost absorption and/or a richer product mix. Gross margin of 13.6% leaves a narrow spread to operating margin, indicating tight SG&A discipline in the period. EBITDA margin at 9.7% underscores improved operating efficiency and provides a cushion versus interest costs. Ordinary income (¥1.33bn) was below net income (¥2.36bn), pointing to non-operating/extraordinary items lifting bottom-line profitability; hence, the durability of the net margin may be lower than the operating margin trend suggests. Interest coverage is a comfortable 6.9x (operating income/interest expense), indicating manageable financing burden. Overall, operating leverage was favorable this quarter, but the quality of net margin is partly influenced by non-recurring items.

Growth Assessment

Revenue grew 2.3% YoY, a modest pace likely reflecting mixed end-market demand in industrial machinery and castings. Profit growth far outpaced sales due to cost actions and/or mix shift, with operating income up 241.6% YoY. The sustainability of margin gains will depend on maintaining pricing, cost pass-through, and stable utilization; the gap between ordinary income and net income signals that some bottom-line drivers may not repeat. With EBITDA at ¥2.82bn and positive OCF of ¥2.46bn, cash-backed profit quality is reasonable. Absent segment or order intake data, we assume growth is broad-based but modest, with cyclical exposure to capex cycles in automotive, general industry, and potentially construction machinery. Outlook hinges on backlog health, input cost stability (scrap/steel, energy), and FX impacts on exports/imports. Near-term, stable to slightly improving operating margins appear plausible if demand holds and cost control persists, but net income volatility may rise if extraordinary gains normalize.

Financial Health

Total assets were ¥80.2bn against liabilities of ¥40.3bn and equity of ¥43.2bn, implying a liabilities-to-equity ratio of 0.93x and an equity ratio around the mid-50% range by our calculation (the reported equity ratio figure was undisclosed). Liquidity is solid with current ratio 163% and quick ratio 145%, supported by ¥16.1bn of working capital. Inventories totaled ¥4.72bn, representing a modest portion of current assets, which supports liquidity quality. Interest expense was ¥198m with a 6.9x coverage, indicating comfortable solvency under current earnings. The asset turnover of 0.363x is typical for a capital-intensive manufacturer; further improvement would support ROE without adding leverage. Overall capital structure appears balanced with moderate leverage and ample liquidity.

Cash Flow Quality

OCF of ¥2.46bn exceeded net income of ¥2.36bn (OCF/NI = 1.05), indicating reasonable earnings quality and limited accrual build in the period. EBITDA of ¥2.82bn versus OCF of ¥2.46bn suggests working capital movements and cash taxes/interest absorbed part of operating cash, which is normal seasonally. Capex is not disclosed; investing CF is shown as zero (unreported), so free cash flow cannot be reliably derived from the dataset. Depreciation and amortization of ¥1.45bn implies ongoing capital intensity; absent capex disclosure, we cannot assess maintenance versus growth capex coverage. Working capital appears supportive: inventories are ¥4.72bn and quick ratio is strong, but turnover metrics (days inventory, receivables) are not provided to judge cash conversion cycle dynamics. Overall, cash generation aligns with reported earnings, but the lack of investing detail limits FCF assessment.

Dividend Sustainability

Dividends per share are shown as 0.00 and payout ratio 0.0%, indicating no disclosed dividend in the period. With positive OCF and improved profitability, capacity to resume or increase dividends exists in principle, but sustainability assessment requires visibility into capex, investing needs, and policy. FCF coverage is shown as 0.00x due to unreported investing cash flows; thus, we cannot confirm dividend coverage on a free cash flow basis. Given net income outperformance versus ordinary income, reliance on one-off gains for payout decisions would be imprudent; a stable policy would likely track operating profit and OCF trends. Until capex and policy are disclosed, dividend outlook remains uncertain despite better earnings.

Risk Assessment

Business Risks:

• Cyclical demand in core end-markets (automotive, general industrial, construction machinery) affecting volumes and utilization
• Input cost volatility (steel/scrap, energy) potentially pressuring gross margins if not fully passed through
• FX fluctuations impacting export competitiveness and imported material costs
• Project timing and mix risk affecting margins and working capital
• Supply chain disruptions and logistics costs influencing delivery and inventory levels
• Customer concentration risk if large OEMs dominate orders

Financial Risks:

• Exposure to interest rate changes given interest expense of ¥198m, though coverage is currently healthy
• Potential normalization of extraordinary/non-operating gains that boosted net income, creating earnings volatility
• Limited disclosure on cash and capex impeding assessment of free cash flow and liquidity buffers
• Operating leverage risk if revenue softens, given capital intensity and fixed cost base
• Balance of short-term vs. long-term debt not disclosed, which affects refinancing and liquidity risk assessment

Key Concerns:

• Net income materially above ordinary income suggests non-recurring items; sustainability of bottom-line strength is uncertain
• Free cash flow cannot be assessed due to unreported investing cash flows and capex
• Equity ratio reported as 0.0% in the dataset (undisclosed); reliance on derived ratios is necessary
• Dividend policy and payout intentions are not disclosed despite improved earnings

Investment Implications

Key Takeaways:

• Strong operating recovery with operating income up 241.6% YoY on modest +2.3% revenue growth, evidencing operating leverage
• ROE at 5.45% driven predominantly by margin expansion; asset turnover and leverage are stable/moderate
• Healthy liquidity (current ratio 163%, quick 145%) and manageable leverage (liabilities/equity 0.93x)
• Earnings quality is reasonable (OCF/NI 1.05x), but bottom line benefited from non-core items
• Dividend status/policy unclear; FCF not measurable due to missing investing cash flow detail

Metrics to Watch:

• Order intake and backlog to gauge revenue visibility
• Gross and operating margins for pricing/cost pass-through and mix effects
• OCF conversion (OCF/NI) and working capital turns (inventory and receivable days)
• Capex and investing cash flows to assess FCF and capital allocation
• Interest coverage and debt maturity profile amid rate environment
• Extraordinary/non-operating items versus core operating profit to judge earnings quality
• FX exposure and raw material cost trends

Relative Positioning: Versus Japanese mid-cap machinery peers, Kitagawa Iron Works currently shows improving but still moderate profitability (GPM 13.6%, OPM 4.7%) and an ROE (5.45%) that trails typical sector mid-to-high single-digit levels; liquidity and leverage are conservative, supporting resilience, while near-term performance is enhanced by operating recovery rather than balance-sheet-driven returns.

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