DAIDO KOGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥29.19B
• Operating Income: ¥892M
• Net Income: ¥370M
• EPS: ¥44.02

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: A mixed FY2026 Q2—operating performance improved with margin expansion, but bottom-line contracted on higher below-the-line burden and cash conversion weakened. Revenue rose 1.6% YoY to 291.93, while operating income increased 17.6% YoY to 8.92, evidencing cost control and operating leverage. Operating margin improved to about 3.1%, up roughly 41 bps from an estimated ~2.6% a year ago, as operating profit grew faster than sales. Ordinary income grew 4.6% YoY to 8.77, implying a modest ordinary margin expansion of about 8 bps to ~3.0%. Net income fell 17.7% YoY to 4.46, dragging net margin to 1.5% (down ~36 bps YoY), primarily due to a heavier effective tax rate (37.4%) and non-operating drag. Gross profit was 56.81 with a gross margin of 19.5%, supporting the view that cost of goods pressure was contained. Non-operating income of 4.77 (notably 2.63 in dividend income and 0.21 in interest income) was offset by 4.93 in non-operating expenses, including 2.10 in interest expense, yielding a slight net non-operating loss. Cash generation lagged accounting earnings: operating cash flow was 3.01 versus net income of 4.46 (OCF/NI 0.67x), raising earnings quality concerns. Capital intensity remained meaningful with capex of 17.32 in the half, resulting in negative implied FCF of about -14.31. The balance sheet is liquid (current ratio 194%, quick ratio 164%) and leverage is moderate (D/E 1.12x), but interest coverage at 4.25x sits below the preferred 5x threshold. ROE is a low 1.2%, with ROIC at 1.2%, indicating subdued capital efficiency despite asset leverage of 2.12x. Working capital appears to have absorbed cash, consistent with lower OCF versus earnings. Dividend sustainability looks borderline on a half-year view: a calculated payout ratio of 61.2% is slightly above the 60% benchmark and not covered by FCF this period. Forward-looking, maintaining operating margin gains while normalizing cash conversion and moderating capex will be key to sustaining dividends and improving ROIC. Absent segment data, the quality of non-operating dividend income and tax normalization are the swing factors for the full-year bottom line.

Profitability Analysis

DuPont decomposition (FY2026 Q2, trailing half-year context): ROE ≈ Net Profit Margin (1.5%) × Asset Turnover (0.371) × Financial Leverage (2.12x) = 1.2%. The largest adverse change YoY was in Net Profit Margin, which compressed from an estimated ~1.9% to 1.5% despite better operating margin. Business drivers: operating profit improved on cost control/operating leverage (operating income +17.6% vs revenue +1.6%), but higher non-operating burden (interest expense 2.10, net non-op loss ~0.16) and an elevated effective tax rate (37.4%) reduced net margin. Asset Turnover appears low at 0.371 and likely changed less than margins; no evidence of major balance sheet resizing in the period. Financial Leverage at 2.12x is moderate and stable; leverage did not drive ROE change. Sustainability: operating margin gains look somewhat sustainable if COGS discipline holds; however, net margin recovery depends on interest burden relief, steadier non-operating items, and tax rate normalization—factors partially outside of core operations. Watch for concerning trends: SG&A of 47.88 against gross profit of 56.81 leaves a thin operating spread; while we lack SG&A YoY detail, the net non-operating drag and elevated tax rate are currently offsetting operating improvements.

Growth Assessment

Revenue growth was modest at +1.6% YoY, suggesting stable end-market demand but limited pricing/mix tailwind. Operating income rose +17.6% YoY, indicating improving operating leverage and cost execution. Ordinary income growth slowed to +4.6% YoY due to higher non-operating costs, notably interest. Net income declined -17.7% YoY, with the higher effective tax rate (37.4%) and net non-operating expense eclipsing operating gains. Gross margin sits at 19.5%, and operating margin about 3.1%, both consistent with a cost-sensitive industrial profile. Dividend income of 2.63 is meaningful relative to operating income, implying some dependence on financial income that may fluctuate with markets and investee payouts. Outlook hinges on: sustaining operating margin gains, managing interest expense, and stabilizing the tax rate; any demand softness or input cost volatility (steel, logistics) could quickly pressure the thin operating spread. Without segment data, we assume mid-single-digit full-year revenue potential with margin sensitivity to mix and costs.

Financial Health

Liquidity is solid: current ratio 194% and quick ratio 164% exceed healthy thresholds; no warning on liquidity. No near-term maturity mismatch: current assets 368.74 comfortably exceed current liabilities 190.03; cash 66.16 covers short-term loans of 64.21. Solvency is acceptable: D/E 1.12x is within conservative range (<1.5x), though interest coverage at 4.25x is only moderate and should be watched in a rising rate or earnings dip scenario. Total liabilities are 415.23 against equity of 372.05; net debt implied at ~108–109 after cash suggests manageable leverage. No explicit off-balance sheet obligations were reported; absence of disclosure limits assessment of leases/guarantees.

Cash Flow Quality

OCF was 3.01 versus net income of 4.46, yielding an OCF/NI of 0.67x—below the 0.8 threshold and a quality flag. Implied free cash flow is approximately -14.31 (OCF 3.01 minus capex 17.32), indicating that internal cash generation did not cover investment needs this half. Financing CF was -4.29, including share repurchases of -2.09; dividend cash was not disclosed. Working capital likely consumed cash (receivables/inventory levels vs half-year sales) and contributed to weak OCF; precise drivers are not disclosed. No signs of aggressive working capital optimization are visible from disclosed balances, but the OCF shortfall vs NI warrants monitoring for potential collection delays or inventory build. Sustaining both capex and shareholder returns will likely require improved OCF in H2 or incremental financing.

Dividend Sustainability

The calculated payout ratio is 61.2%, slightly above the <60% comfort threshold, while FCF was negative this half (~-14.31), implying dividends (and buybacks of 2.09) were not covered by internally generated cash. With OCF/NI at 0.67x, earnings-to-cash conversion is currently insufficient to underpin distributions without balance sheet support. Liquidity is adequate and leverage moderate, so near-term payment capacity is intact; however, sustainability depends on H2 cash recovery, capex cadence, and stabilization of the effective tax rate. Policy outlook: absent disclosure of a formal payout policy for FY2026, we assume management aims to maintain dividends, but flexibility may be needed if cash conversion does not improve.

Risk Assessment

Business Risks:

• Demand cyclicality in industrial/automotive chain markets impacting volumes and pricing
• Raw material price volatility (steel and related inputs) compressing gross margins
• Operational leverage with thin operating margin (~3.1%) amplifies downside in a downturn
• Dependence on dividend income (2.63 in non-operating) introduces variability in profit

Financial Risks:

• Earnings quality risk: OCF/NI at 0.67x and negative implied FCF
• Interest rate and refinancing risk with interest expense of 2.10 and coverage at 4.25x
• Tax rate volatility (effective tax rate 37.4%) depressing net margin
• Working capital swings (receivables/inventories) potentially constraining cash

Key Concerns:

• ROIC at 1.2% is well below the 5% warning threshold, indicating weak capital efficiency
• Net margin compression YoY despite operating improvement due to below-the-line items
• Balance of non-operating income and expenses nearly neutral, limiting buffer for shocks
• Dividend sustainability mildly stretched given current cash generation

Investment Implications

Key Takeaways:

• Core operations improved: operating income +17.6% on +1.6% sales with ~41 bps operating margin expansion
• Bottom line declined (-17.7%) on higher tax and non-operating burden; net margin down ~36 bps
• Cash conversion is weak (OCF/NI 0.67x) and FCF negative (~-14.31) due to capex and working capital
• Balance sheet liquidity is strong (CR 194%, QR 164%) and leverage moderate (D/E 1.12x), but interest coverage only 4.25x
• ROE 1.2% and ROIC 1.2% highlight subdued returns; capital efficiency needs improvement

Metrics to Watch:

• Operating margin trajectory versus raw material and energy costs
• OCF/NI ratio and working capital turns (AR and inventory days)
• Capex run-rate versus growth/maintenance needs and FCF recovery in H2
• Interest expense trend and interest coverage
• Effective tax rate normalization and its impact on net margin
• Non-operating dividend income stability

Relative Positioning: Within Japanese industrial components/manufacturing peers, Daido Kogyo exhibits modest margins and moderate leverage with solid liquidity but subpar capital efficiency (ROIC/ROE). Near-term operating execution is improving, yet cash generation and below-the-line headwinds place it behind peers that deliver stronger OCF conversion and >5–8% ROIC.

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