TERASAKI ELECTRIC CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥29.16B
• Operating Income: ¥2.67B
• Net Income: ¥1.93B
• EPS: ¥148.09

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

Verdict: Solid Q2 FY2026 with double-digit profit growth, margin expansion, and healthy liquidity, though capital efficiency (ROIC) remains a weak spot. Revenue rose 8.3% YoY to 291.55 (100M JPY), with gross profit of 81.06 and operating income up 18.9% YoY to 26.69. Ordinary income increased 26.2% to 28.30, and net income advanced 22.3% to 19.29, implying stronger operating leverage than topline growth. Operating margin improved to 9.15%, while net margin reached 6.62%, indicating cost discipline and a favorable mix. Based on back-calculation, operating margin expanded by roughly 81 bps YoY (from about 8.34% to 9.15%). Net margin expanded by approximately 76 bps YoY (from about 5.86% to 6.62%). Gross margin stands at 27.8%, suggesting better cost pass-through and/or improved project mix. Earnings quality is acceptable: OCF of 19.73 slightly exceeded net income (OCF/NI of 1.02x), indicating cash earnings broadly in line with accounting earnings. The balance sheet is robust with equity of 539.42 and total assets of 782.76, implying an equity ratio around 69% and financial leverage of 1.45x. Liquidity is ample (current ratio 282.5%, quick ratio 240.0%) supported by cash and deposits of 179.66. Interest coverage is very strong at 54.86x with modest interest-bearing debt (short-term 4.30; long-term 12.79). Despite these positives, ROIC is reported at 4.8%, below the 5% warning threshold, flagging underutilized capital or low-return assets/projects. Free cash flow is positive on our estimate (OCF 19.73 minus capex 8.21 = ~11.52), supporting dividends (calculated payout ratio 27%). Non-operating items (2.10 income vs 0.49 expense) helped ordinary income but are not the main earnings driver. Forward-looking, margin discipline and working capital management will be key to sustain higher profitability amid demand normalization. Monitoring conversion of receivables (142.78) and inventories (81.02) will be important for sustaining FCF. Overall, the quarter demonstrates healthy execution with improved profitability and strong financial footing, but a clear focus on capital efficiency uplift is needed.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.6% = Net Profit Margin (6.6%) × Asset Turnover (0.372) × Financial Leverage (1.45x). The most material driver of the YoY improvement appears to be Net Profit Margin, which expanded by ~76 bps based on revenue and net income growth differentials; asset turnover likely improved only modestly given similar asset base and mid-single-digit revenue growth. Business rationale: improved operating leverage from SG&A discipline relative to revenue (+8.3% revenue vs +18.9% operating income) and better gross margin dynamics (27.8%) suggest mix improvement and cost pass-through. Non-operating tailwinds (net +1.61) modestly aided ordinary income but are not the core driver. Sustainability: margin gains look partly sustainable if pricing power and cost control persist; however, project timing and input costs could reintroduce volatility. Watch for SG&A growth outpacing revenue in subsequent quarters; in this quarter, the operating leverage was positive. Asset turnover at 0.372 indicates a capital-heavy base relative to sales, aligning with the low ROIC; improving asset utilization (faster project turnover, leaner inventory) is needed to lift ROE.

Growth Assessment

Topline growth of 8.3% YoY to 291.55 was healthy, with outsized operating income growth of 18.9% indicating operating leverage. Ordinary income grew 26.2% and net income 22.3%, reflecting both core margin expansion and small non-operating gains. Back-calculated operating margin rose ~81 bps YoY to 9.15%; net margin rose ~76 bps to 6.62%. Growth quality appears solid: revenue expansion with margin uplift and OCF broadly matching NI suggests underlying demand and disciplined cost control. Sustainability hinges on order intake stability and execution; the receivables (142.78) and inventory (81.02) levels indicate working capital intensity, which can dampen future OCF if conversion slows. No equity-method contributions are disclosed; growth is principally organic/operational. Outlook: maintaining high-20s gross margin while improving asset utilization could support mid-to-high single-digit revenue growth translating to double-digit profit growth. Risks include input cost volatility, project timing, and FX on imported components.

Financial Health

Liquidity is strong: current ratio 282.5% and quick ratio 240.0%, with cash and deposits of 179.66 versus current liabilities of 190.50. No warning on liquidity (Current Ratio well > 1.0). Solvency is conservative: total liabilities 243.33 vs equity 539.42 (equity ratio ~68.9%), and D/E of 0.45x. Interest-bearing debt is modest (ST 4.30; LT 12.79) against robust cash, implying net cash. Interest coverage is 54.86x, indicating low refinancing risk. Maturity mismatch risk appears low: current assets (538.21) comfortably exceed current liabilities (190.50), and cash alone nearly covers all short-term obligations including accounts payable of 50.02. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF of 19.73 slightly exceeds net income of 19.29 (OCF/NI 1.02x), clearing the 0.8x threshold and indicating acceptable earnings quality, though cushion is modest. Estimated FCF is positive at ~11.52 (OCF 19.73 minus capex 8.21), supporting both investment and shareholder returns. With revenue growth and higher margins, working capital needs may rise; the sizable receivables and inventories suggest careful monitoring of cash conversion. No explicit signs of working capital manipulation are evident from disclosed figures, but the tight OCF/NI spread warrants tracking collection cycles and inventory turns. Financing CF of -8.61 indicates net outflows (likely debt service/dividends), manageable given cash reserves.

Dividend Sustainability

The calculated payout ratio is 27.0%, comfortably below the 60% benchmark and consistent with a conservative policy. Using the payout ratio and NI, implied dividends for the period are roughly 5.21 (100M JPY), which are covered ~2.2x by our estimated FCF of ~11.52. Balance sheet strength (net cash position, high equity ratio) further supports dividend continuity. Lack of reported DPS and total dividends is a limitation, but coverage metrics based on available data suggest sustainability. Future dividend capacity will depend on sustaining OCF above capex and improving ROIC.

Risk Assessment

Business Risks:

• Project execution and timing risk affecting revenue recognition and margins
• Input cost and component procurement volatility impacting gross margin
• Demand cyclicality in end-markets for industrial/electrical equipment
• FX exposure on imported components and export sales (pricing and cost pass-through)

Financial Risks:

• Low capital efficiency with ROIC at 4.8% (<5% threshold)
• Working capital intensity (high receivables and inventories) could constrain OCF
• Potential reliance on modest non-operating gains to bolster ordinary income

Key Concerns:

• ROIC below 5% despite strong balance sheet, indicating underutilized assets
• OCF/NI only slightly above 1.0x, leaving limited cushion if working capital stretches
• Need for sustained margin discipline to maintain expanded operating margin

Investment Implications

Key Takeaways:

• Profits outpaced revenue with operating margin expansion of ~81 bps YoY
• Earnings quality is adequate (OCF/NI 1.02x) and FCF positive despite capex
• Balance sheet and liquidity are very strong; net cash and high equity ratio mitigate downside
• Capital efficiency is the main weakness (ROIC 4.8%), capping medium-term ROE
• Non-operating items provided a small tailwind but core operations drove the quarter

Metrics to Watch:

• Order intake and backlog to gauge revenue sustainability
• Gross and operating margin trajectory versus input cost trends
• Receivables days and inventory turns to protect OCF
• ROIC progression toward >7% medium-term
• Capex discipline and its linkage to incremental ROIC

Relative Positioning: Within Japan small/mid-cap industrial-electrical peers, the company shows stronger liquidity and leverage metrics, solid margin trajectory, and robust interest coverage, but trails leading peers on capital efficiency (ROIC) and asset turnover.

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