EBARA CORPORATION FY2026 Q2 Earnings Report

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Executive Summary

This earnings report warrants monitoring from a profitability perspective, as profit growth was sluggish relative to revenue growth. Revenue increased to ¥4907.6B (+9.4% YoY), while Operating Income remained limited at ¥506.8B (+1.2%), resulting in an Operating Margin of 10.3%, down approximately 80bp from approximately 11.1% in the previous year. Net Income attributable to owners of the parent was ¥335.7B (+7.1% YoY), representing a higher growth rate than at the operating level; however, this was attributable to the impact of financial income and expenses and the tax burden, and does not indicate an improvement in operating earnings power. The primary drivers of revenue growth were the expansion of the Precision Machinery, Environmental, and Building Services segments, while cost absorption capacity remains a challenge on the earnings front.

Factors Affecting Earnings

【Revenue】Revenue increased 9.4% YoY to ¥4907.6B. By segment, Precision Machinery was the largest driver at ¥1836.9B (+22.0%), while Building Service and Industrial (¥1295.9B, +13.8%) and Environmental (¥479.3B, +13.9%) also contributed to revenue growth. In contrast, Energy declined to ¥967.0B (-11.3%), while Water and Infrastructure decreased slightly to ¥321.9B (-1.4%).

【Profit and Loss】Operating Income remained limited to ¥506.8B (+1.2% YoY), as increases in Cost of Sales of ¥3365.1B (Cost of Sales Ratio: 68.6%) and SG&A Expenses of ¥1039.5B (SG&A Ratio: 21.2%) weighed on profit growth. By segment, Precision Machinery drove overall earnings with a substantial increase in profit to ¥325.3B (+38.7%, Profit Margin: 17.7%), while Energy fell into the red at -¥7.9B (a deterioration of ¥107.1B from the previous year’s +¥107.1B), and other businesses posted a loss of -¥14.4B. Profit Before Tax was ¥497.6B, Net Income was ¥345.7B (+5.6%), and profit attributable to owners of the parent was ¥335.7B (+7.1%). Overall, the company achieved higher revenue and profit, but the growth in Operating Income fell substantially short of revenue growth, making margin dilution relative to revenue growth a notable feature of the results.

Segment Analysis

Precision Machinery was the largest source of earnings, generating more than half of total company profit with revenue of ¥1836.9B (37.4% composition ratio, +22.0%) and Operating Income of ¥325.3B (+38.7%, Profit Margin: 17.7%). The Environmental Business posted a substantial increase in profit to ¥67.0B (+51.2%) on revenue of ¥479.3B (+13.9%), improving its Profit Margin to 14.0%. Meanwhile, the Energy Business not only experienced a revenue decline to ¥967.0B (-11.3%), but also fell into an Operating Loss of ¥7.9B, becoming a factor depressing the company-wide Profit Margin. Water and Infrastructure was nearly flat at ¥321.9B (-1.4%) but maintained a high Profit Margin of 17.4%. The increasing earnings dependence on Precision Machinery, reflecting the change in segment composition, warrants attention.

Key Financial Indicators

【Profitability】The Operating Margin was 10.3%, Gross Profit Margin was 31.4%, and Net Income Attributable to Owners of the Parent Margin was 6.8%. All were favorable levels for a manufacturing company, although the Operating Margin declined approximately 80bp from approximately 11.1% in the previous year. The conversion rate from gross profit to Operating Income remained limited to approximately 32.9%, with the increase in SG&A Expenses depressing profitability.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥754.9B, approximately 2.25 times Net Income Attributable to Owners of the Parent of ¥335.7B, indicating favorable cash conversion. The Accrual Ratio was in negative territory, and the divergence between accounting profit and cash generation was small.【Investment Efficiency】ROE was 6.4% (6.2% annualized based on a DuPont decomposition), below the general benchmark of 8%. Total Asset Turnover was low, while Inventories (19.1% of total assets) and Trade Receivables (18.6% of total assets) indicate room for improvement in asset efficiency.【Financial Soundness】The Equity Ratio was 48.3%, while the Current Ratio remained healthy at approximately 180%, based on Current Assets of ¥7208.0B and Current Liabilities of approximately ¥3998.7B. The burden of interest-bearing debt was small, with Net Financial Expenses of ¥20.88B accounting for only 4.1% of Operating Income.

Cash Flow Analysis

Operating Cash Flow (OCF) increased substantially by 38.0% YoY to ¥754.9B, calculated by deducting Corporate Income Taxes Paid of ¥226.6B and other items from subtotal OCF of ¥979.1B. From a working capital perspective, the decrease in Contract Assets of ¥233.9B and the decrease in Trade Receivables of ¥88.3B contributed to cash inflows, while Inventories increased by ¥95.0B and Trade Payables also decreased by ¥21.6B, with inventory accumulation partially offsetting the inflows. Following Capital Expenditures of ¥417.8B, Free Cash Flow was ¥307.6B, with OCF covering approximately 1.8 times Capital Expenditures. Cash Flow from Financing Activities was an outflow of ¥242.9B, primarily due to a net decrease in Short-Term Borrowings, dividend payments of ¥141.5B, and share repurchases of ¥57.5B. As a result, Cash and Cash Equivalents accumulated to ¥1530.2B at period-end, indicating continued financial management that secures liquidity while implementing investments and shareholder returns.

Earnings Quality

Current-period profit contains no disclosed extraordinary gains or losses and is centered on recurring business earnings. In non-operating activities, Financial Income of ¥11.8B was offset by Financial Expenses of ¥32.6B, resulting in Net Financial Expenses of ¥20.9B that weighed on Profit Before Tax; however, the impact was limited, amounting to only 4.1% of Operating Income. Equity in Earnings of Affiliates contributed ¥11.7B. OCF reached approximately 2.25 times Net Income Attributable to Owners of the Parent, indicating small Accruals and favorable cash-generating capacity underpinning earnings. However, OCF was boosted in part by temporary working capital cash inflows from decreases in Contract Assets and Trade Receivables, while the increase in Inventories had the opposite effect. Based on the relationship between earnings and cash, current-period profit can generally be assessed as high quality, although the sustainability of the working capital movements requires monitoring in subsequent periods.

Earnings Forecasts and Guidance

The full-year company forecast is Revenue of ¥10530B, Operating Income of ¥1250.0B (+9.8% YoY), and EPS of ¥217.93, and the forecast was revised in Q2. The Q2 cumulative progress rates were 46.6% for Revenue, 40.5% for Operating Income, and 33.7% for profit attributable to owners of the parent, all below the standard progress rate of 50%, with a particularly pronounced second-half concentration in earnings. To achieve the full-year forecast, the company must record Operating Income of ¥743.2B and profit attributable to owners of the parent of ¥659.3B in the second half. The full-year forecast Operating Margin of 11.9% assumes an improvement from 10.3% in the Q2 cumulative period. The plan appears to be premised on improved profitability and concentrated project progress in the second half.

Shareholder Returns

The Q2 dividend was ¥33.00 per share, equivalent to half of the full-year forecast dividend of ¥66.00, with no revision to the dividend forecast. The Payout Ratio was 45.0%, using Net Income of ¥345.7B as the denominator, satisfying the benchmark of less than 60%. Including share repurchases of ¥57.5B, the cash-based total shareholder return amount was ¥199.0B, resulting in a Total Return Ratio of approximately 59.3% against profit attributable to owners of the parent of ¥335.7B; this should be distinguished from the Payout Ratio. Both OCF of ¥754.9B and Free Cash Flow of ¥307.6B exceeded dividend payments of ¥141.5B, indicating ample resources for shareholder returns during the period.

Risk Factors

1. Inventory Holding Risk: Inventories totaled ¥2104.4B, accounting for 19.1% of total assets, and increased by ¥95.0B during the period. Annualized DIO was approximately 114 days, exceeding the manufacturing-sector cautionary level of 90 days, raising concerns about impairment losses and cash constraints if demand slows.

2. Trade Receivables Collection Risk: Accounts Receivable and Notes Receivable totaled ¥2050.6B, accounting for 18.6% of total assets, while annualized DSO was approximately 76 days, exceeding the cautionary level of 60 days. Although the decrease in receivables contributed to CF during the period, the balance itself remains substantial.

3. Profitability Deterioration Risk: While Revenue increased 9.4%, Operating Income increased only 1.2%, and the Operating Margin declined by approximately 80bp. Delays in cost absorption and price pass-through, including the Energy segment’s shift into the red, could affect profit progress in the second half.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s Operating Margin and Net Profit Margin both exceed the industry median, but compared with the upper bound of the IQR (23.7%, etc.), they are mid-range within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate was slightly below the industry median and was positioned around the industry average in terms of growth pace.

※Source: Compiled by the Company

Key Takeaways from the Results

1. The most notable point is that while Revenue increased 9.4% YoY, Operating Income increased only 1.2%, resulting in an approximately 80bp decline in the Operating Margin. This indicates a structure in which revenue growth has not been sufficiently converted into profit growth.

2. OCF reached approximately 2.25 times Net Income Attributable to Owners of the Parent, indicating favorable cash conversion. However, the ¥95.0B increase in Inventories and annualized DIO of approximately 114 days require monitoring from a working capital efficiency perspective.

3. The Q2 cumulative progress rates against the full-year forecast were 40.5% for Operating Income and 33.7% for profit attributable to owners of the parent, below standard progress levels, resulting in an earnings structure highly dependent on an improvement in profitability in the second half.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,514–¥1,605 at Cost of Equity ±1%; ¥1,548–¥1,574 at ω±0.1.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).

(Valuation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / Mechanically calculated value based solely on 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 future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release 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 discretion and responsibility, after consulting a professional advisor as necessary.

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AI Financial Analysis

Executive Summary

Ebara delivered solid top-line and attributable-profit growth in FY2026 Q2, but operating-profit conversion weakened as costs rose faster than sales. Revenue increased 9.4% year on year to ¥490.8bn. Operating income rose only 1.2% to ¥50.7bn, materially lagging revenue growth. Profit attributable to owners increased 7.1% to ¥33.6bn, equivalent to basic EPS of ¥73.54. Gross profit increased 6.4% to ¥154.2bn, but the gross margin declined 88bp year on year to 31.4%. SG&A expense grew 8.9% to ¥103.9bn, broadly in line with sales growth but faster than gross profit growth. Consequently, the operating margin compressed 82bp to 10.3%, while the net margin declined 14bp to 6.8%. The operating margin remains within the good 8-15% benchmark range, although the direction of travel warrants attention. Profit before tax grew 7.9%, faster than operating income, supported by a substantially lower finance-cost burden than in the prior-year period. Finance costs declined to ¥3.3bn from ¥5.6bn, improving the interest burden to 0.982x. Operating cash flow was very strong at ¥75.5bn, representing 2.25x attributable net income. Free cash flow was ¥30.8bn after ¥41.8bn of capital expenditure, showing that internal cash generation funded both investment and shareholder distributions during the half year. Inventory increased by ¥9.5bn and remains elevated at 114 annualized days, while receivable days of 76 also exceed the warning level. These working-capital metrics are the principal near-term execution concern despite favorable reported cash conversion. Management has revised its full-year forecast, but Q2 progress is 46.6% for revenue, 40.5% for operating income and 33.7% for attributable profit versus a normal 50% half-year run rate. The revised guidance therefore embeds a pronounced second-half recovery, particularly in profitability, and investors should focus on margin recovery, inventory normalization and conversion of the order and project pipeline into earnings.

Profitability Analysis

The reported annualized DuPont ROE is 12.3%, decomposed into a 6.8% net profit margin, 0.891x asset turnover and 2.03x financial leverage. This places ROE in the good 10-15% range, but it is supported materially by leverage rather than an exceptional net margin. Margin was the component under greatest operational pressure: gross margin fell 88bp to 31.4% and EBIT margin declined 82bp to 10.3%. Revenue growth of 9.4% did not translate proportionately into operating income growth of 1.2%, indicating negative operating leverage in the half year. Cost of sales increased 10.8%, exceeding revenue growth and driving the gross-margin compression. SG&A rose 8.9%, slower than revenue but faster than gross profit, which further constrained operating-profit growth. The tax burden was 0.675, corresponding to a 30.5% effective tax rate, and modestly reduces conversion from pretax to net earnings. The interest burden of 0.982x is strong, as profit before tax remained close to EBIT despite net finance costs. Equity-method investment income was ¥1.2bn, small relative to attributable profit and not a major determinant of group earnings. The limited gap between EBIT of ¥50.7bn and pretax profit of ¥49.8bn indicates that below-operating items did not materially distort earnings. The sustainability of the 12.3% annualized ROE depends primarily on restoring gross-margin and SG&A absorption rather than increasing financial leverage.

Growth Assessment

The revenue increase to ¥490.8bn demonstrates continued demand momentum across the group’s industrial equipment and project-related activities. However, operating income growth of only 1.2% versus 9.4% revenue growth indicates that current growth is lower quality than pure sales growth would imply. Attributable profit growth of 7.1% exceeded operating-income growth, aided by lower finance costs rather than improved core margin conversion. The full-year forecast calls for revenue of ¥1,053.0bn, operating income of ¥125.0bn and attributable profit of ¥99.5bn. Q2 revenue progress is 46.6%, only 3.4 percentage points below the standard 50% pace and broadly consistent with a moderate second-half weighting. Operating-income progress is 40.5%, 9.5 percentage points below the standard pace, requiring improved margin conversion in H2. Attributable-profit progress is 33.7%, 16.3 percentage points below the standard pace, a material deviation that requires a significantly stronger second half. Forecast operating margin is 11.9%, above the Q2 cumulative 10.3% margin, implying roughly 160bp of full-year margin improvement from the first-half level. The forecast therefore relies on favorable mix, cost absorption, pricing, project execution, or a combination of these factors. Capital expenditure of ¥41.8bn, equal to 8.5% of Q2 cumulative revenue, is slightly above the typical 3-8% manufacturing range and supports capacity, productivity or strategic investment. The investment pace is constructive for future growth, but raises the importance of achieving expected returns and maintaining inventory discipline.

Financial Health

Liquidity is sound. Current assets of ¥720.8bn exceed implied current liabilities of ¥399.9bn, producing a current ratio of approximately 1.80x, comfortably above the 1.0x warning threshold. Cash and cash equivalents total ¥153.0bn, while trade receivables are ¥205.1bn. Total equity increased 4.2% year on year to ¥543.8bn, and the equity ratio improved to 48.3% from 47.0%. Total liabilities were ¥558.2bn, equivalent to 1.03x equity. This liabilities-to-equity measure is moderate and well below the 2.0x aggressive-leverage warning threshold, although it should not be interpreted as interest-bearing debt-to-equity. Financing cash flow was negative ¥24.3bn, principally reflecting net short-term borrowing reduction of ¥41.9bn, dividends, buybacks and long-term debt repayments, partly offset by borrowing proceeds. This pattern indicates balance-sheet cash deployment and debt reduction rather than dependence on incremental external financing. Contract liabilities of ¥86.6bn provide a source of operating funding and are consistent with advance payments in project-oriented operations. Treasury stock decreased in absolute value from negative ¥20.3bn to negative ¥6.9bn, a ¥13.5bn or 66.2% reduction, primarily consistent with ¥17.5bn of treasury-share disposals despite ¥5.7bn of repurchases. The resulting treasury-share movement supports equity capital flexibility, but future capital allocation should be assessed alongside operating-investment needs.

Notable B/S Changes

Treasury stock: improved by ¥13.5bn (+66.2%, from negative ¥20.3bn to negative ¥6.9bn) — primarily consistent with disposal of treasury shares exceeding current-period repurchases, increasing capital-allocation flexibility. Property, plant and equipment: +¥18.7bn (+7.3%) to ¥276.8bn — ongoing fixed-asset investment is consistent with the ¥41.8bn capex program and increases the importance of utilization and return discipline. Goodwill and intangible assets: +¥6.1bn (+9.9%) to ¥67.6bn — the increase is not large relative to equity, but future performance should support the carrying value.

Cash Flow Quality

Cash-flow quality was strong in the reported half year. Operating cash flow of ¥75.5bn exceeded attributable net income of ¥33.6bn by 2.25x, well above the 1.0x high-quality benchmark and not indicative of an accrual-led earnings profile. The accruals ratio was negative 3.8%, also supporting cash-backed earnings. Free cash flow was positive ¥30.8bn after capital expenditure of ¥41.8bn. Operating cash flow benefited from a ¥23.4bn reduction in contract assets and an ¥8.8bn reduction in receivables, which more than offset a ¥9.5bn inventory cash outflow and a ¥2.2bn payables outflow. This indicates effective cash collection and project-billing conversion during the period. The quality of cash flow should nevertheless be monitored because the balance-sheet inventory balance increased to ¥210.4bn and is equivalent to 114 annualized days. The 114-day DIO alert is concerning because elevated inventory can reflect long production cycles, project timing, supply-chain buffers or slower demand conversion; in capital equipment manufacturing some longer cycles are normal, but the level exceeds both the 90-day warning threshold and the 60-day efficiency benchmark. The impact is potential future working-capital absorption, obsolescence exposure and pressure on free-cash-flow conversion if inventory does not turn into deliveries. Receivable days of 76, another quality alert, exceed the 60-day warning level; this indicates slower cash collection relative to manufacturing benchmarks and raises counterparty and project-acceptance risk. The impact is that a reversal of the current receivables cash inflow could reduce operating cash flow even if reported earnings remain positive. Payables declined by ¥2.2bn, so cash conversion was not achieved by extending supplier payment terms.

Dividend Sustainability

The Q2 dividend is ¥33.00 per share, compared with ¥28.00 in the prior-year period. The calculated dividend payout ratio is 45.0%, below the 60% sustainability benchmark. Free cash flow covers dividends by 2.04x, indicating ample reported-period cash support for the dividend. Dividends paid were ¥14.2bn and share repurchases were ¥5.7bn. Including repurchases, total shareholder distributions were ¥19.9bn, equivalent to an estimated total return ratio of approximately 59.3% of attributable net income. Free cash flow covered dividends plus repurchases by approximately 1.55x. The full-year DPS forecast is ¥66.00, equal to the Q2 interim DPS plus an implied ¥33.00 year-end dividend, indicating a stable second-half payment assumption. Based on forecast EPS of ¥217.93, the implied full-year dividend payout ratio is approximately 30.3%, providing substantial room for capital expenditure and balance-sheet flexibility. Dividend sustainability is therefore supported by positive free cash flow, a moderate payout ratio and an improved equity ratio. The principal variables to monitor are whether the elevated inventory position absorbs cash in H2 and whether the forecast margin recovery is realized.

Risk Assessment

Business risks include High priority — Inventory management: annualized DIO of 114 days exceeds the 90-day warning threshold and the 60-day manufacturing benchmark. The root cause may include long-cycle production, project staging or inventory buffers, but the balance increased by ¥12.7bn year on year. The potential impact is inventory write-down risk, lower production flexibility and a future drag on operating cash flow if conversion to customer deliveries slows., High priority — Collection and project-execution risk: annualized DSO of 76 days exceeds the 60-day warning threshold. This can be typical to an extent in engineered-equipment and project businesses with milestone billing and customer acceptance procedures, but it remains above efficient manufacturing norms. The impact is increased working-capital volatility and greater sensitivity to customer acceptance, project delays and counterparty credit conditions., High priority — Margin recovery risk: gross margin declined 88bp and operating margin declined 82bp despite 9.4% revenue growth. The full-year operating-income forecast requires a meaningful H2 margin improvement. Failure to recover cost absorption, procurement costs, pricing or product mix would put the earnings forecast at risk., Medium priority — Manufacturing input and supply-chain risk: the group remains exposed to component availability, raw-material and energy-cost volatility, as well as foreign-exchange movements through global procurement and overseas sales. These factors can impair gross-margin recovery and disrupt project schedules., Medium priority — Capital-investment execution: capital expenditure of ¥41.8bn is 8.5% of first-half revenue. Higher investment can strengthen capacity and productivity, but carries utilization and return-on-invested-capital risk if demand or project conversion is weaker than expected..

Financial risks include Medium priority — Working-capital cash-flow reversal: strong operating cash flow was aided by ¥23.4bn of contract-asset reduction and ¥8.8bn of receivables reduction. If these timing benefits reverse while inventory remains elevated, free cash flow could be less robust than the first-half outcome., Low priority — Financing cost exposure: finance costs were ¥3.3bn and the interest burden was a strong 0.982x. Financing risk is currently contained, but interest-rate and refinancing conditions remain relevant given the scale of liabilities., Low priority — Shareholder-distribution flexibility: dividends and repurchases totaled ¥19.9bn and were covered by free cash flow. Sustained buybacks should remain calibrated to capex requirements and working-capital needs..

Key concerns include The 114-day DIO quality alert is material: it is above both cited inventory warning thresholds, and normalization is important for validating free-cash-flow durability., The 76-day DSO quality alert is material: collection discipline and contract-asset conversion need to remain strong to protect cash generation., Guidance execution risk is elevated because Q2 attributable-profit progress of 33.7% is 16.3 percentage points below the standard 50% half-year run rate., Operating leverage was unfavorable in H1, with sales up 9.4% but operating income up only 1.2%..

Investment Implications

Key takeaways include Revenue momentum remained positive at 9.4% year on year, while operating-margin compression limited the conversion into operating-profit growth., Annualized ROE of 12.3% is respectable, supported by a good 6.8% net margin, 0.891x asset turnover and 2.03x financial leverage., Cash generation was a clear strength: OCF was ¥75.5bn, FCF was ¥30.8bn and OCF/attributable net income was 2.25x., The balance sheet is liquid, with an approximately 1.80x current ratio and a 48.3% equity ratio., The key debate is whether H2 can deliver the forecast margin expansion while reducing elevated inventory and maintaining receivables conversion..

Metrics to watch include Gross margin and operating margin relative to the Q2 levels of 31.4% and 10.3%, Progress against full-year operating-income and attributable-profit forecasts, Inventory balance and annualized DIO from 114 days, Receivables, contract assets and annualized DSO from 76 days, Operating cash flow and free cash flow after the current elevated capex pace, Capital allocation between dividends, buybacks, debt reduction and operating investment.

Regarding relative positioning, Ebara combines good annualized ROE, solid liquidity and strong first-half cash conversion with a mid-range 10.3% operating margin. Its relative operating profile is constrained by margin compression and working-capital metrics that are weaker than standard manufacturing efficiency benchmarks, making execution in the forecast-weighted second half the central differentiator.