KATO WORKS CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥26.76B
• Operating Income: ¥-1.61B
• Net Income: ¥-4.98B
• 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

KATO WORKS Co., Ltd. (TSE: 6390) reported FY2026 Q2 consolidated results under JGAAP showing modest top-line growth but persistent operating losses and significant cash outflows. Revenue rose 1.0% YoY to ¥26.756bn, while gross profit was ¥4.627bn, translating to a gross margin of 17.3%. Operating income remained negative at -¥1.615bn, representing a 5.7% YoY improvement in the loss, indicating some cost discipline but not yet a return to profitability. Ordinary income was -¥1.520bn, suggesting slightly positive non-operating contributions versus operating results. Net income was -¥1.573bn (EPS -¥137.06), roughly flat YoY, pointing to limited earnings recovery in the period. DuPont metrics indicate a net margin of -5.88%, asset turnover of 0.279, and financial leverage of 2.27, yielding a calculated ROE of -3.73%. EBITDA was -¥957m and the EBITDA margin -3.6%, underscoring that losses persist even before depreciation. Interest expense totaled ¥210m, with EBIT-based interest coverage at -7.7x, highlighting strained coverage from operations. On the balance sheet, total assets were ¥95.897bn and equity ¥42.211bn; liabilities were ¥58.144bn, implying moderate leverage. Inventories were elevated at ¥45.272bn (56% of current assets), which is typical for capital goods but increases working capital intensity and cycle risk. Liquidity appears adequate with a current ratio of 197.6% and quick ratio of 86.2%, supported by sizeable working capital of ¥39.662bn. Operating cash flow was deeply negative at -¥6.741bn, materially worse than the accounting loss, driven likely by working capital build (particularly inventories and receivables). Financing cash flow was -¥6.021bn, implying outflows (e.g., debt repayment or shareholder returns), though the exact composition is not disclosed here. Reported DPS is ¥0.00 and payout ratio 0.0%, which aligns with negative earnings and OCF. Several items are unreported in this snapshot (e.g., equity ratio field, cash and equivalents, investing CF), so any cash position and FCF judgments are based on partial information. Overall, the company exhibits weak profitability, heavy cash consumption, and high working capital needs amid modest revenue growth, leaving the near-term outlook dependent on inventory normalization, cost control, and demand follow-through.

Profitability Analysis

ROE is -3.73% based on the provided DuPont decomposition: net margin -5.88%, asset turnover 0.279, and financial leverage 2.27. The negative net margin stems from an operating loss of -¥1.615bn on ¥26.756bn revenue, only partially offset by non-operating items that lifted ordinary income to -¥1.520bn. Gross margin of 17.3% indicates limited pricing power or elevated input costs for this period; with EBITDA margin at -3.6%, fixed cost absorption remains a headwind. The small YoY improvement in operating loss (5.7%) suggests incremental operating leverage is starting to work, but not sufficiently to offset cost pressure. Interest burden (¥210m) is meaningful relative to EBITDA, leading to an interest coverage of -7.7x, which constrains financial flexibility. The asset turnover of 0.279 is low for industrial equipment and reflects the large balance sheet footprint relative to current-period sales; working capital intensity, especially inventories (¥45.272bn), depresses turnover. Ordinary income being slightly better than operating income implies some non-operating support (e.g., FX, dividends, or other income), but this is not enough to change the loss profile. Effective tax rate is not meaningful given negative pre-tax income. Overall margin quality is weak, with losses at both EBIT and EBITDA levels, and operating leverage remains negative in the current demand environment.

Growth Assessment

Revenue growth of 1.0% YoY to ¥26.756bn is modest, suggesting stable but tepid end-demand in core markets. The operating loss improved by 5.7% YoY, indicating some cost containment or mix improvements, but the company has not yet reached break-even. Gross margin at 17.3% and EBITDA margin at -3.6% imply that incremental sales are not translating into positive operating cash generation, highlighting margin fragility. With asset turnover at 0.279 and high inventories, growth is being supported by working capital rather than by efficient conversion to sales. The stability in net loss (YoY +0.0%) signals limited improvement in underlying profit drivers. Outlook hinges on execution of inventory reduction, price/mix improvements, and cost-down initiatives; without these, growth is unlikely to translate into profit recovery. Given the capital goods profile, demand cyclicality (construction and infrastructure) remains a key variable. Absent details on order backlog or regional mix, sustainability of the 1% growth is uncertain. Near-term focus should be on converting backlog to revenue and improving factory utilization to drive operating leverage.

Financial Health

Total assets are ¥95.897bn, liabilities ¥58.144bn, and equity ¥42.211bn. While the reported equity ratio field is unreported, the implied equity ratio based on the provided balances is approximately 44% (equity/assets), indicating a moderate capital base. Current assets of ¥80.292bn versus current liabilities of ¥40.630bn yield a current ratio of 197.6%, suggesting adequate short-term liquidity. The quick ratio of 86.2% reflects the large inventory component (¥45.272bn) in current assets, increasing reliance on inventory monetization for liquidity. Debt-to-equity is 1.38x (as provided), pointing to a meaningful but not excessive leverage level for capital goods; however, negative EBIT produces weak interest coverage. Working capital is sizeable at ¥39.662bn, which supports liquidity but ties up cash. Financing CF of -¥6.021bn implies repayments or outflows; without the cash balance disclosure, the headroom for further outflows is unclear. Overall solvency appears acceptable on a balance sheet basis, but cash generation weakness elevates liquidity risk if negative OCF persists.

Cash Flow Quality

Operating cash flow was -¥6.741bn versus net income of -¥1.573bn, yielding an OCF/Net Income ratio of 4.29 (negative-to-negative), which indicates cash burn materially exceeding the accounting loss. This points to unfavorable working capital movements, likely inventory build and/or receivables growth, consistent with the high inventory balance of ¥45.272bn. Depreciation of ¥658m against an EBITDA of -¥957m shows that non-cash charges are not the main driver of the loss; operational cash burn is the issue. Investing cash flow is shown as 0, which we treat as unreported; thus, Free Cash Flow is not reliably determinable from this snapshot (the provided FCF figure of 0 appears to reflect the missing investing data rather than economic reality). Financing CF of -¥6.021bn suggests debt reduction or other outflows, exacerbating cash drain alongside negative OCF. The earnings quality is weak, with profits not converting to cash and working capital intensifying cash needs. Sustained negative OCF would necessitate either inventory normalization, stronger collections, cost reductions, or external funding.

Dividend Sustainability

Reported DPS is ¥0.00 with a payout ratio of 0.0%. Given net loss (-¥1.573bn) and deeply negative OCF (-¥6.741bn), the present capacity to distribute cash is constrained. With investing CF unreported, comprehensive FCF coverage cannot be assessed; however, based on available OCF, coverage of any dividend would be inadequate. Balance sheet equity (~44% implied equity ratio) offers some buffer, but cash distributions would compete with the need to fund working capital and operations. Absent a return to positive OCF and earnings, dividend sustainability appears weak in the near term. Policy outlook likely prioritizes balance sheet stability and liquidity over distributions.

Risk Assessment

Business Risks:

• Demand cyclicality in construction and infrastructure end markets affecting order intake and utilization
• Pricing pressure and input cost volatility compressing gross margins (17.3% this period)
• High working capital intensity with inventories at ¥45.272bn increasing obsolescence and markdown risk
• Execution risk on cost reductions and operational efficiency needed to reach break-even
• Supply chain and logistics constraints potentially impacting deliveries and cash collection

Financial Risks:

• Negative operating cash flow of -¥6.741bn stressing liquidity if prolonged
• Weak interest coverage (-7.7x) limiting financial flexibility amid ¥210m interest expense
• Potential need for external financing if inventory monetization and OCF do not improve
• Exposure to FX and non-operating items influencing ordinary income versus operating income
• Unreported cash balance and investing CF obscuring true cash runway

Key Concerns:

• Persistent operating losses (-¥1.615bn) and EBITDA negative (-¥957m)
• OCF materially worse than net income, indicating poor cash conversion
• Large inventory position relative to sales and current assets
• Financing outflows (-¥6.021bn) amid operational cash burn
• Limited visibility on FCF and liquidity headroom due to unreported cash and investing CF

Investment Implications

Key Takeaways:

• Top-line grew 1.0% YoY to ¥26.756bn, but profitability remains negative at all levels
• Gross margin 17.3% and EBITDA margin -3.6% signal weak margin quality
• Operating loss improved 5.7% YoY yet interest coverage remains deeply negative (-7.7x)
• Working capital heavy model with inventories at ¥45.272bn depresses asset turnover (0.279)
• Operating cash burn of -¥6.741bn is the primary near-term pressure point
• Balance sheet leverage moderate (implied equity ratio ~44%, D/E 1.38x), but cash flow limits flexibility
• Dividend currently at ¥0.00, consistent with losses and negative OCF

Metrics to Watch:

• Order intake and backlog conversion to support revenue and utilization
• Inventory turnover and days-on-hand to gauge working capital release
• Gross margin trajectory and price/cost spread
• EBITDA and break-even progress (operating leverage)
• Operating cash flow and FCF once investing cash flows are disclosed
• Interest coverage and net debt trajectory (including financing cash flows)

Relative Positioning: Within Japan’s construction machinery and lifting equipment peers, KATO WORKS appears to exhibit weaker profitability and cash conversion versus stronger, scale peers, with higher working capital intensity and lower asset turnover; balance sheet leverage is moderate but operational cash burn currently differentiates it negatively.

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