Mitsubishi Electric Corporation FY2026 FY Earnings Report

Financial Highlights

• Net Sales: ¥5.89T
• Operating Income: ¥433.10B
• Net Income: ¥353.20B
• EPS: ¥198.31

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

Mitsubishi Electric delivered a solid FY2026 performance with broad-based top-line growth and margin improvement, underpinned by strong project and equipment demand in Infrastructure and stable profitability in Life. Revenue rose 6.8% to ¥5.895tn and operating income increased 10.5% to ¥433.1bn, lifting operating margin to 7.3%. Gross margin expanded to 32.1% from 30.6% (+150bps), while the SG&A ratio edged down to 23.6% from 23.8% (-20bps), resulting in operating margin expansion of roughly 20bps year over year. Ordinary income surged 65.0% to ¥461.0bn, driven by higher equity-method income (¥69.6bn) and lower finance costs. Net income attributable to owners increased 25.8% to ¥407.8bn, improving net margin to 6.9% (+105bps). Cash generation was strong: operating cash flow of ¥576.0bn exceeded net income (OCF/NI ~1.4x), supporting free cash flow of ¥231.6bn despite higher investment outlays. The balance sheet strengthened with total equity up to ¥4.63tn (equity ratio 60.9%), while interest-bearing debt remained modest (debt/EBITDA ~0.5x). Segment-wise, Infrastructure and Industry & Mobility achieved the strongest operating profit growth, with Infrastructure margin at 10.7% and Industry & Mobility at 7.9%; Life remained the largest profit contributor with margin at 7.5%. Comprehensive income expanded substantially to ¥783.4bn, aided by sizable pension remeasurement gains and FX translation tailwinds. Inventory days of 115 remain elevated, reflecting long-lead projects and demand normalization; working capital discipline will be a key focus into FY2027. The company executed shareholder returns via a dividend of ¥55/share (payout 29%) and buybacks (¥101bn), well covered by free cash flow. Guidance implies continued growth momentum in FY2027, with revenue targeting ¥6.2tn and profit attributable to owners of ¥475bn (EPS 231.01), supported by a healthy order environment and improved cost structure. Earnings quality is robust given positive cash conversion, limited impairments, and contained reliance on non-operating items relative to revenue. Equity-method contributions (¥69.6bn) enhanced ordinary income and remain an important profit pillar. Overall, execution quality improved, financial resilience is high, and capital allocation remains disciplined, while inventory normalization and project execution will determine upside to guidance.

Profitability Analysis

ROE decomposition (DuPont 3-factor): ROE ~8.8% = Net Profit Margin (6.9%) × Asset Turnover (0.801x) × Financial Leverage (1.59x). The most material YoY improvement came from Net Profit Margin, which expanded by approximately 105bps on operating leverage (gross margin +150bps, SG&A ratio -20bps) and stronger ordinary income (lower finance costs and higher equity-method income). The underlying business drivers were cost pass-through and mix benefits in Infrastructure, steady Life segment demand, and improved profitability in Industry & Mobility. The margin gains look largely sustainable given the breadth across segments and continued cost discipline, though the step-up in ordinary income from affiliates may normalize. Operating expense growth (SG&A +5.5%) was contained below revenue growth (+6.8%), indicating healthy operating leverage.

Growth Assessment

• Revenue grew 6.8% YoY to ¥5.895tn and operating profit increased 10.5% to ¥433.1bn, pointing to positive operating leverage.
• Gross profit expanded by ~¥214.9bn to ¥1.889tn; operating margin improved to 7.3% from 7.1%.
• Segment performance (external sales/OP, YoY): Life ¥2.287tn (+5.7%), OP ¥170.6bn (+8.4%), margin 7.5%; Industry & Mobility ¥1.655tn (+1.8%), OP ¥131.1bn (+58.7%), margin 7.9%; Infrastructure ¥1.451tn (+19.8%), OP ¥154.7bn (+72.9%), margin 10.7%; Semiconductor & Device ¥259bn (-0.4%), OP ¥47.5bn (+17.0%), margin 18.4%; Digital Innovation ¥85.3bn (+0.9%), OP ¥12.0bn (+9.8%), margin 14.0%.
• Core business: Life is the largest operating income contributor, followed closely by Infrastructure.
• Ordinary income benefited from equity-method income of ¥69.6bn and lower finance costs (¥6.9bn), supplementing operating growth.
• Geographic mix remained balanced with Japan at ~49.7% of sales and overseas at ~50.3%, providing diversified demand support.
• Outlook: Company targets FY2027 revenue of ¥6.2tn (+5.2% YoY) and profit attributable to owners of ¥475bn (+16.5%), implying continued margin progress on improved mix and cost structure; execution on inventory normalization and large project backlogs will be key to achieving targets.

Financial Health

• Liquidity: Current assets ¥4.03tn vs current liabilities ¥2.28tn implies a healthy current ratio (~1.77). Cash & equivalents at ¥732bn provide ample buffer.
• Solvency: Total liabilities ¥2.73tn, total equity ¥4.63tn (equity ratio 60.9%). Debt-to-equity 0.59x remains conservative. Interest coverage is very strong (EBIT/interest ~62x), and debt/EBITDA ~0.5x is investment-grade by wide margin.
• Maturity/mismatch: Short-term interest-bearing debt (~¥152bn) is well covered by cash (¥732bn) and receivables, limiting refinancing risk.
• Balance sheet changes of note: equity rose by ~¥553.6bn driven by earnings and OCI; treasury stock increased (buybacks ~¥101.4bn); contract assets (+¥114.4bn) and contract liabilities (+¥81.9bn) rose alongside project activity; other current financial liabilities increased by ~¥210.5bn; PPE expanded by ~¥119.7bn, and goodwill/intangibles increased by ~¥253.8bn, reflecting investment and portfolio actions.

Notable B/S Changes

Goodwill and intangible assets: +¥253.8bn (+115%) - Reflects acquisitions and increased intangible investments; monitor integration and future amortization/impairment risk. Retirement benefit assets: +¥300.2bn (+45%) - Driven by strong remeasurement gains; introduces potential volatility if market conditions reverse. Property, plant and equipment: +¥119.7bn (+12%) - Indicates capacity and modernization investments; supports medium-term growth. Contract assets: +¥114.4bn (+33%) - Higher project activity and milestone work-in-progress; elevates cash collection timing risk. Other current financial liabilities: +¥210.5bn (+136%) - Higher short-term financial obligations; requires monitoring for funding and hedging dynamics. Treasury stock: -¥99.3bn (more negative, -138%) - Execution of buybacks enhances capital efficiency; modestly reduces equity base. Total equity: +¥553.6bn (+13.6%) - Accumulated earnings and large OCI gains strengthen solvency. Current liabilities: +¥434.5bn (+23.5%) - Reflects growth in payables, accrued expenses, tax payables, and contract liabilities tied to higher activity.

Cash Flow Quality

• OCF ¥576.0bn vs net income attributable to owners ¥407.8bn yields OCF/NI ~1.41x, indicating high-quality earnings.
• Free cash flow ¥231.6bn after stepped-up investing CF (¥-344.4bn), including acquisitions (¥-158.1bn) and higher intangible/PPE outlays, still supports shareholder returns and growth capex.
• Working capital: inventory increased modestly and contract assets rose notably; despite this, overall OCF was strong, aided by higher other current liabilities.
• Cash conversion: OCF/EBITDA approximates ~0.86x (EBITDA ~¥667bn), acceptable for a project- and equipment-heavy portfolio.
• No signs of working capital manipulation are evident given positive OCF despite growth investments and project advances.

Dividend Sustainability

• DPS totaled ¥55 (interim ¥25, year-end ¥30), implying a payout ratio of ~28.5% on FY2026 EPS of ¥198.31.
• FCF coverage is robust at ~2.0x; dividends (¥~114bn) plus buybacks (¥~101bn) are comfortably funded by FCF and balance sheet strength.
• With debt/EBITDA ~0.5x and an equity ratio of ~61%, the company retains flexibility to sustain dividends alongside measured buybacks while funding growth capex and bolt-on M&A.
• Policy outlook: With FY2027 guidance pointing to EPS growth, dividend capacity appears to improve, assuming continued cash conversion and stable capex.

Risk Assessment

Business risks include High inventory days (115) indicate slower turnover and elevated working capital tied to long-lead projects, raising obsolescence and margin risk if demand softens., Large project execution risk: higher contract assets (+¥114.4bn) and contract liabilities (+¥81.9bn) increase milestone and delivery timing sensitivity., Commodity and input cost fluctuations can pressure gross margin despite recent improvements., FX exposure with ~50% overseas sales introduces translation and transaction volatility., Semiconductor & Device cyclicality could compress margins despite current 18.4% segment margin., Pension asset volatility: large positive remeasurement in OCI this year may reverse with market moves..

Financial risks include Rise in other current financial liabilities (+~¥210.5bn) increases short-term funding and working capital management complexity., M&A integration risk from higher intangibles (+¥253.8bn) if synergies underdeliver., Contract asset growth elevates cash collection timing risk if customer acceptance is delayed..

Key concerns include ⚠️ HIGH_INVENTORY_DAYS: DIO at 115 days (>90 and >60) suggests excess inventory build; in context of project-heavy businesses this can occur during ramp, but it is above healthy manufacturing benchmarks and requires active reduction to prevent margin drag., Execution on Infrastructure backlogs must translate into cash to avoid extended cash conversion cycles., Sustaining ordinary income tailwinds (equity-method gains, low finance costs) may be harder if macro slows or rates rise..

Investment Implications

Key takeaways include Broad-based growth with operating margin expansion to 7.3% and net margin to 6.9%., Strong earnings quality: OCF/NI ~1.41x and FCF ¥231.6bn despite higher investment., Balance sheet resilience: equity ratio 60.9%, debt/EBITDA ~0.5x, interest coverage ~62x., Segments: Infrastructure and Life are key profit engines; Industry & Mobility recovery boosted OP growth., Inventory days remain elevated at 115; normalization is a central catalyst for further ROE uplift., FY2027 guidance (sales ¥6.2tn, owners’ NI ¥475bn) implies continued momentum and room for disciplined shareholder returns..

Metrics to watch include Inventory DIO and cash conversion cycle trajectory, Contract assets/liabilities balance and milestone cash collections, Segment margins in Infrastructure and Industry & Mobility, Equity-method income run-rate and commodity/FX sensitivities, Capex and acquisition spend vs OCF (cash conversion >0.9x target), Total return ratio vs FCF sustainability.

Regarding relative positioning, Within Japanese diversified industrials, Mitsubishi Electric exhibits stronger balance sheet quality and improving margin trajectory, with earnings quality above peers due to robust OCF. Key differentiators are Infrastructure margin expansion and disciplined capital allocation; watch inventory normalization and project execution to close the ROE gap toward double digits.