KATO WORKS CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥26.76B
• Operating Income: ¥-1.61B
• Net Income: ¥-1.58B
• EPS: ¥-137.06

Income Statement

Balance Sheet

Cash Flow Statement

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

FY2026 Q2 was a weak quarter operationally for Kato Works, with modest topline growth but continued losses at every profit line. Revenue grew 1.0% YoY to 267.6, but cost pressures kept gross profit to 23.7 and drove an operating loss of 16.2 (operating income improved 5.7% YoY but remained negative). Gross margin stands at 8.9%, operating margin at -6.0%, ordinary margin at -5.7%, and net margin at -5.9%; YoY basis-point changes are not computable from disclosed data. Ordinary loss widened YoY by 16.5% despite non-operating income of 7.8 being nearly offset by non-operating expenses of 6.9, indicating limited cushion from below-the-line items. Net loss was 15.7, translating to basic EPS of -137.06 yen and calculated ROE of -3.7%. Cash generation was a relative bright spot: operating cash flow was positive at 26.4, outpacing the net loss, likely reflecting favorable working capital movements. However, interest coverage is deeply negative (-4.81x), indicating ongoing pressure from loss-making operations relative to financing costs. Liquidity is mixed: current ratio is healthy at 190.6%, but the quick ratio of 82.6% signals dependency on inventory liquidation to meet short-term obligations. The balance sheet carries meaningful short-term borrowings (195.7) and long-term loans (146.7), with D/E of 1.27x—within conservative bounds but leaving limited room should losses persist. Inventories remain elevated at 416.2, a key swing factor for both margins and cash conversion. ROIC at -2.5% is well below the 5% warning threshold, underscoring subpar capital efficiency. Financing cash flow was an outflow of 46.7, including 5.15 of share repurchases, pointing to some continued shareholder returns despite losses. Capex was modest at 3.25, suggesting tight capital discipline or delayed investment. Earnings quality flags trigger mechanically (OCF/NI = -1.68x), though in context, positive OCF alongside a net loss actually indicates supportive cash conversion this half. Forward-looking, the company needs margin repair (pricing, mix, manufacturing efficiency) and inventory normalization to sustain cash generation, improve coverage metrics, and return to profitability.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (-5.9%) × Asset Turnover (0.279x) × Financial Leverage (2.27x) = ROE (-3.7%). The principal drag is the negative net margin, overwhelming modest asset turnover and moderate leverage. Gross margin is 8.9%, but SG&A of 39.85 against gross profit of 23.70 yields a sizable operating gap, implying insufficient scale and/or adverse mix and cost inflation. Non-operating income (7.82) nearly offsets non-operating expenses (6.88), but not enough to change the loss trajectory at the ordinary level. Compared to revenue growth (+1.0% YoY), ordinary income declined (-16.5% YoY), indicating negative operating leverage. With limited disclosure on SG&A components, we cannot isolate specific cost lines, but the aggregate suggests fixed-cost absorption challenges. The deterioration in ordinary profit vs. slight improvement in operating loss implies increased non-operating headwinds (e.g., interest costs at 3.36) or less favorable below-the-line contributions. Sustainability: absent pricing power or cost downs, the current net margin is not sustainable; improvement requires mix upgrades and factory utilization gains. Watch for SG&A growth relative to revenue; any SG&A growth exceeding sales would be a concern given the thin gross margin.

Growth Assessment

Revenue rose 1.0% YoY to 267.6, indicating flat-to-slight growth. Profitability did not keep pace: operating loss remains large at 16.2 despite a 5.7% YoY improvement, and ordinary loss worsened 16.5% YoY. Non-operating items provided limited relief, with a small net non-operating loss due to interest burden. EBITDA is negative at -7.78, suggesting insufficient earnings capacity before depreciation to cover financing needs. The small capex (3.25) indicates constrained growth investment or intentional capital discipline. Outlook hinges on backlog execution, pricing, and cost normalization (steel and components), but with current gross margin at 8.9%, there is insufficient buffer without improved scale and mix. Currency moves can impact imported components and export competitiveness; disclosure is limited, but sensitivity is material for heavy machinery exporters. Near-term growth sustainability is modest; focus should be on inventory turnover improvements and factory load to regain operating leverage.

Financial Health

Liquidity: Current ratio is 190.6% (healthy), but quick ratio at 82.6% is below the 100% benchmark, indicating reliance on inventory to cover near-term obligations. Working capital is strong at 349.3, driven by inventories (416.2) and receivables (190.6). Solvency and capital structure: D/E is 1.27x (within the <1.5x conservative benchmark). Total liabilities are 536.9 vs. equity 422.1. Interest-bearing debt concentration: short-term loans 195.7 and long-term loans 146.7 indicate a meaningful short-term funding need relative to cash (123.5), implying some maturity mismatch risk mitigated by receivables and inventories. Interest coverage is weak at -4.81x due to operating losses. No explicit off-balance sheet obligations were disclosed in the provided data. Explicit warnings: Current Ratio >1.0 (no warning); D/E <2.0 (no warning).

Cash Flow Quality

OCF was +26.35 versus net income of -15.73, yielding an OCF/NI ratio of -1.68x (the metric flags a quality issue mechanically; however, positive OCF alongside a net loss suggests supportive cash conversion this period, likely from working capital). Free cash flow cannot be fully computed due to unreported investing CF; using capex as a proxy, operating CF exceeds capex by ~29.6, indicating room to fund maintenance investment and some shareholder returns in the half. Financing CF was -46.71, including share repurchases of -5.15; debt movements are not fully detailed. Potential working capital manipulation signs are not evident from the limited data, but the high inventory balance (416.2) is a key variable; sustained OCF will depend on inventory normalization and receivable collections. Depreciation (8.37) provides non-cash support to OCF, but EBITDA is negative, so future OCF resilience requires operating profit recovery, not just working capital release.

Dividend Sustainability

Dividend amounts are unreported; the calculated payout ratio (-52.3%) is not meaningful due to negative earnings. With positive OCF and modest capex, near-term capacity to fund dividends exists in cash terms, but sustainability hinges on restoring profitability and stabilizing interest coverage. Absent official guidance or payout policy disclosure in this dataset, we assume a conservative stance is warranted until operating income turns positive. FCF coverage is not computable due to missing investing CF, though OCF exceeded capex this half. Share repurchases of 5.15 despite losses suggest willingness to return capital; continuity depends on maintaining positive OCF and access to funding.

Risk Assessment

Business Risks:

• Low gross margin (8.9%) and negative operating margin (-6.0%) expose results to modest cost or pricing shocks.
• High inventory (416.2) risks valuation write-downs and ties up cash if demand softens.
• Execution risk in cost-downs and factory utilization needed to achieve operating leverage.
• Supply chain and input cost volatility (steel, components) impacting COGS and lead times.
• Export and FX exposure affecting pricing and margins (data not disclosed but typical for heavy machinery).

Financial Risks:

• Weak interest coverage (-4.81x) amid continued operating losses.
• Short-term loans (195.7) exceed cash (123.5), creating refinancing and rollover risk if credit conditions tighten.
• Quick ratio below 1.0 (82.6%), indicating reliance on inventory conversion for liquidity.
• ROIC of -2.5% points to capital efficiency shortfall relative to cost of capital.

Key Concerns:

• Ordinary income deterioration (-16.5% YoY) despite slight operating improvement, implying rising below-the-line headwinds.
• Sustained negative EBITDA (-7.78) undermines internal funding capacity absent working capital release.
• Limited disclosure on SG&A components and investing cash flows constrains visibility into cost structure and reinvestment needs.

Investment Implications

Key Takeaways:

• Topline was stable (+1.0% YoY), but profitability remains negative at all levels.
• Cash generation outpaced earnings (OCF 26.35 vs NI -15.73), likely driven by working capital.
• Liquidity is adequate on a current basis, but sub-1.0 quick ratio and large short-term borrowings elevate near-term risk.
• Interest burden is heavy relative to earnings capacity; improving operating profit is critical.
• ROE (-3.7%) and ROIC (-2.5%) underscore the need for margin repair and asset turns improvement.

Metrics to Watch:

• Order intake and backlog (to gauge scale/utilization and pricing power).
• Gross margin trajectory and bps changes vs prior periods.
• Inventory turnover days and receivable collection (DSI, DSO).
• Operating income and EBITDA turning positive; interest coverage >2x.
• Debt mix and short-term loan rollover; cash balance vs ST debt.
• Capex vs depreciation (maintenance vs growth).

Relative Positioning: Within Japanese construction machinery/industrial equipment peers, Kato appears weaker on margin profile and coverage metrics, with higher reliance on working capital for cash generation and below-benchmark ROIC; a turnaround hinges on cost discipline, better mix, and scale recovery.

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