NAKAKITA SEISAKUSHO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥14.39B
• Operating Income: ¥822M
• Net Income: ¥891M
• EPS: ¥255.30

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Share Information

Dividend Information

Full Year Forecast

AI Financial Analysis

Executive Summary

Verdict: Solid topline and operating execution with conservative balance sheet, but cash flow conversion and capital efficiency remain clear weak spots this quarter. Revenue reached ¥143.9bn (10.0 billion = 1000 million; values here are in 100 million yen), delivering gross profit of ¥24.8bn and operating income of ¥8.2bn, implying gross margin of 17.2% and operating margin of 5.7%. Ordinary income was ¥11.9bn, aided by ¥4.35bn in non-operating income (notably dividend income ¥0.53bn and interest income ¥0.12bn), driving net income to ¥8.91bn (net margin 6.2%). EBITDA came in at ¥10.0bn, with effective tax rate of 25.0% and very strong reported interest coverage (EBIT/Interest ~44x; EBITDA/Interest ~53.6x). ROE is a modest 3.3% per DuPont, driven by net margin of 6.2%, low asset turnover of 0.379x, and low leverage of 1.41x. We cannot quantify YoY basis-point changes in margins due to missing prior-period disclosure; current levels sit below best-in-class manufacturing thresholds (OM 5.7% vs 8–15% ‘good’ benchmark). Earnings quality is a concern: OCF was ¥6.77bn versus NI of ¥8.91bn, implying OCF/NI of 0.76x (<0.8 alert), and free cash flow was negative at -¥8.05bn due to sizable investing outflows (capex detail unreported). Liquidity remains strong (current ratio 273%, quick ratio 254%) and capital structure conservative (D/E 0.41x, Debt/Capital 10.6%), with cash covering short-term loans by 3.17x. Debt mix shifted toward longer tenors: long-term loans rose to ¥15.9bn (+197% YoY) while short-term loans declined to ¥16.0bn (-33% YoY), partly mitigating refinancing risk despite a 50% short-term debt ratio within total debt. ROIC is 2.5% (<5% benchmark), signaling underwhelming capital efficiency relative to typical industrial cost of capital; improving asset turns and margin mix is essential. Equity base is robust (equity ¥269.8bn; BVPS ~¥7,729), and the dividend plan (¥100 DPS annualized; ~43% payout) is earnings-coverable but not covered by FCF this half, implying reliance on cash on hand in the near term. Non-operating income contributed meaningfully to bottom line, so sustaining core operating profit growth will be important to de-risk earnings. Inventory levels look lean (4.1% of assets), suggesting limited obsolescence risk but also a potential bottleneck if demand spikes; receivables (22% of assets) warrant collection discipline. With YoY data gaps (revenue and profits), trend assessment is limited; near-term focus should be on cash conversion, project delivery timing, and capex visibility. Overall, fundamentals are sound on liquidity and solvency, but improving cash conversion and ROIC are the key levers for value accretion.

Profitability Analysis

ROE of 3.3% decomposes into: Net Profit Margin 6.2% × Asset Turnover 0.379 × Financial Leverage 1.41x. The weakest component is asset turnover, indicating low revenue generation per unit of assets for a manufacturer. Operating efficiency is modest (operating margin 5.7%), with gross margin at 17.2%; the earnings mix is supported by non-operating income, which elevates ordinary income relative to operating income. The DuPont 5-factor further shows a normal tax burden (0.75), benign interest burden (>1 due to non-operating income effects and light interest expense), and an EBIT margin of 5.7%. Business drivers for the low asset turn likely include project-based delivery schedules, long production lead times, and a relatively asset-heavy base (PPE ~25.8% of assets). Sustainability: net margin in the mid-single digits is plausible to sustain if pricing and mix hold, but reliance on non-operating items may not be consistently repeatable. Watch for SG&A discipline: SG&A totals ¥16.6bn; without YoY revenue data, we cannot verify operating leverage, but any SG&A growth ahead of revenue would pressure margins. To lift ROE, management must improve asset turns (throughput, lead time reduction) and/or expand operating margin via mix/pricing and cost control.

Growth Assessment

Topline and profit growth cannot be benchmarked YoY due to missing prior-period figures; absolute profitability is acceptable at the net level but below ‘good’ thresholds at the operating level. Non-operating income (¥4.35bn) was a notable contributor to ordinary income, indicating part of earnings comes from financial assets and other income streams rather than core operations. EBITDA margin at 7.0% and EBIT margin at 5.7% suggest limited operating leverage this period; sustaining gross margin while optimizing SG&A is key to margin expansion. Without R&D disclosure, we cannot gauge technology/innovation investment intensity; for a manufacturer, capex commitments and new product pipeline clarity would improve growth visibility. Given inventory is low versus assets and receivables are sizable, future revenue recognition will likely track delivery and collection cycles; project timing could cause quarter-to-quarter volatility. Outlook dependences: order intake, backlog execution, pricing power against input costs, and FX exposure for export orders (not disclosed). Base case: steady mid-single digit net margin with upside from productivity initiatives; risk case: weaker cash conversion and mix headwinds erode operating margin.

Financial Health

Liquidity is strong: current ratio 273%, quick ratio 254%, and working capital ¥141.5bn. Solvency is conservative: D/E 0.41x, Debt/Capital 10.6%, and interest coverage very high (44–54x range), indicating low near-term covenant risk. No warning on current ratio (well above 1.0) and D/E (well below 2.0). Maturity structure: interest-bearing debt totals ¥31.9bn, split roughly evenly between short-term (¥16.0bn) and long-term (¥15.9bn); short-term debt ratio is 50.2%, but cash and deposits of ¥50.7bn (13.3% of assets) cover short-term loans by 3.17x, reducing refinancing stress. The YoY shift toward long-term loans (+197%) and reduction in short-term loans (-33%) improves tenor matching, albeit overall leverage remains low. Asset base quality appears solid: PPE 25.8% of assets and investment securities 8.7%; goodwill is small (0.9%) limiting impairment risk from M&A. Off-balance sheet obligations are not disclosed; absent detail, guarantees/leases may exist but cannot be quantified. Overall, balance sheet strength is a support for ongoing investments and dividend policy despite weaker cash conversion.

Notable B/S Changes

Long-term Loans: +10.53 (100M JPY) (+196.6%) - Debt tenor extension likely to stabilize funding and reduce rollover risk. Short-term Loans: -8.00 (100M JPY) (-33.3%) - Shift from short-term to long-term borrowings improves maturity profile despite a still-elevated short-term debt share.

Cash Flow Quality

OCF of ¥6.77bn vs NI ¥8.91bn yields OCF/NI 0.76x, below the 0.8 threshold and a quality concern for this period. Free cash flow was negative (-¥8.05bn), driven by investing CF of -¥14.82bn; without capex disclosure, we cannot split between maintenance/growth capex versus financial investments. Cash conversion (OCF/EBITDA) at 0.68x is slightly below the 0.7 concern threshold, indicating earnings not fully converting to cash—potentially due to working capital build or timing of collections. Receivables are sizable (¥83.6bn; 22% of assets), suggesting collection timing is a key driver; inventories are lean (¥15.6bn; 4.1% of assets), reducing obsolescence risk but potentially increasing reliance on suppliers and timely inflows. No clear signs of working capital manipulation are evident from available data, but we lack period-over-period deltas in AR/AP/inventory to confirm. Dividend and capex coverage from FCF is weak this half; near-term liquidity (cash on hand) bridges the gap, but sustained negative FCF would pressure balance sheet over time.

Dividend Sustainability

Interim and year-end DPS are each ¥50, implying ¥100 annualized; the calculated payout ratio is ~43%, comfortably within the <60% benchmark on an earnings basis. However, FCF coverage is -2.10x this half (negative), indicating the dividend is not covered by free cash flow for the period and is effectively funded by cash reserves and financing inflows. With cash/short-term debt at 3.17x and low leverage, near-term dividend continuity appears supported, but medium-term sustainability requires improved OCF and visibility on capex intensity. Policy outlook: with BVPS ~¥7,729 and conservative leverage, the company has room to maintain current DPS, yet any step-up would require demonstrable uplift in cash generation or reduced investment outflows.

Risk Assessment

Business risks include Project timing and delivery risk leading to quarter-to-quarter volatility in revenue and cash flows, Raw material and energy cost inflation pressuring gross margin in a 17% GM business, Supply chain and lead time constraints potentially affecting asset turns and on-time delivery, Quality/recall risk inherent to manufacturing of engineered products, Export and FX exposure risk (not disclosed), which can affect pricing and margins.

Financial risks include Cash flow conversion risk: OCF/NI at 0.76x and OCF/EBITDA at 0.68x below comfort levels, Capital efficiency risk: ROIC at 2.5% below 5% benchmark and likely below WACC, Refinancing mix risk: short-term debt ratio at ~50% of total debt (albeit mitigated by cash coverage), Earnings mix risk from non-operating income contributing materially to ordinary income, Potential valuation risk in investment securities (8.7% of assets) amid market volatility.

Key concerns include Sustained negative FCF if investing outflows persist without OCF uplift, Low asset turnover (0.379x) constraining ROE improvement, Limited YoY disclosure reduces visibility on structural vs one-off drivers.

Investment Implications

Key takeaways include Operating execution acceptable but below ‘good’ operating margin range; net margin supported by non-operating income, Liquidity and solvency are strong; balance sheet can support investment and dividends near term, Cash conversion below thresholds and negative FCF are central issues to monitor, ROIC at 2.5% signals need for better asset utilization and margin mix to create value over WACC, Debt tenor improved YoY with higher long-term loans, reducing rollover sensitivity.

Metrics to watch include Order intake and backlog conversion to improve asset turnover, Working capital trends: receivables collection and payables management (CCC), Capex plans vs depreciation to gauge growth vs maintenance spend, Core operating margin excluding non-operating items, OCF/NI and OCF/EBITDA to confirm earnings quality improvement, ROIC progression toward >5% and ideally >7–8% over time.

Regarding relative positioning, Within Japanese industrial manufacturers, the company presents a conservative balance sheet and acceptable net margin, but lags peers on operating margin and ROIC; improving cash conversion and asset turnover is needed to move toward top-quartile performance.