MORIO DENKI CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥3.65B
• Operating Income: ¥86M
• Net Income: ¥69M
• Earnings per Unit (EPU): ¥51.54

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution 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: Soft quarter with revenue decline and operating margin compression, but cash flow was robust and liquidity remains strong. Revenue fell 9.7% YoY to 36.54, with gross profit of 6.42 and SG&A of 5.56 yielding operating income of 0.86 (-22.6% YoY). Ordinary income was 0.94 (-14.9% YoY), supported modestly by non-operating income of 0.21 (mainly dividend income of 0.13), while non-operating expenses were 0.13 (interest expense 0.11). Net income declined 9.1% YoY to 0.68, translating to an NPM of about 1.9% and EPS of 51.54 JPY. Gross margin printed at 17.6% and operating margin at roughly 2.35%; based on YoY changes, operating margin compressed by an estimated ~40 bps YoY (from ~2.75% to ~2.35%). Net margin appears roughly flat YoY given net income fell in line with revenue, but precise basis-point change cannot be confirmed due to limited prior-period detail. Earnings quality was strong with OCF of 4.06, implying OCF/NI of 5.98x and indicative of healthy collections and non-cash expense support (D&A of 1.05). Implied free cash flow was approximately 3.30 (OCF 4.06 minus capex 0.76), covering modest shareholder returns and offering balance sheet flexibility. The balance sheet is solid: current ratio 210%, quick ratio 202%, and D/E at 0.56x, with cash and deposits of 7.03 against short-term loans of 6.24. Interest coverage at 7.92x remains comfortably above common thresholds. However, capital efficiency is weak: ROE is only 1.3% and ROIC is flagged at 1.1%, indicating value creation remains below cost of capital. Profit mix is heavily reliant on a thin operating margin profile; SG&A absorbed 87% of gross profit, leaving little operating leverage. Financing cash outflows of -5.21 included share repurchases (-0.41) and likely debt service; dividends were unreported but the calculated payout ratio of 125.7% suggests potential pressure if maintained. With revenue softness and margin compression, short-term earnings momentum is muted, but strong liquidity and cash generation provide time to execute margin and efficiency initiatives. Near-term focus should be on stabilizing top line, improving gross-to-operating conversion, and lifting ROIC above a 5% minimum threshold. Absent a pickup in demand or cost pass-through, sustained profit growth will be difficult, though the company is not constrained financially. Overall, fundamentally stable finances with weak profitability metrics and a need to enhance operating efficiency and capital returns.

Profitability Analysis

ROE decomposition: ROE (1.3%) = Net Profit Margin (1.9%) × Asset Turnover (0.440) × Financial Leverage (1.56x). The primary drag is low margin and low asset turnover; leverage is modest and not a driver. The component that changed most versus revenue appears to be margin (operating income fell -22.6% vs revenue -9.7%), implying operating margin compression of ~40 bps YoY to ~2.35%. Business drivers likely include softer volumes and/or pricing pressure that could not be fully offset by cost controls, while SG&A (5.56) consumed 87% of gross profit (6.42), leaving little room for operating leverage. Non-operating items were nearly net-neutral (0.21 income vs 0.13 expense) and did not mask core performance trends. Sustainability: the margin compression may be cyclical if driven by demand softness and mix; however, structurally high SG&A intensity relative to gross profit suggests limited operating leverage unless gross margin improves. Watch for SG&A growth relative to revenue; with revenue down 9.7% YoY, SG&A did not flex sufficiently, pointing to fixed-cost rigidity. With asset turnover at 0.44, better utilization (inventory turns, project execution timing) is needed to support ROE without resorting to leverage.

Growth Assessment

Top-line declined 9.7% YoY to 36.54, indicating end-market softness or shipment timing effects. Operating income fell faster (-22.6% YoY) than revenue, confirming negative operating leverage this quarter. Ordinary income (-14.9%) outperformed operating income due to non-operating contributions (dividends 0.13) and manageable interest costs (0.11). Net income contracted 9.1% YoY to 0.68, roughly in line with revenue, suggesting non-operating and tax effects partially cushioned operating weakness. Gross margin at 17.6% and operating margin at 2.35% are thin, leaving limited buffer against further revenue pressure. EBITDA was 1.91 (5.2% margin), indicating low cash earnings intensity. Given the low ROIC (1.1%), incremental growth without margin improvement risks diluting returns. Outlook hinges on demand recovery and execution on cost pass-through and mix upgrades; absent that, earnings growth will be challenging. Positive sign: OCF strength suggests revenue is converting to cash, providing resources to invest in productivity improvements.

Financial Health

Liquidity is strong: current ratio 210.1% and quick ratio 202.2% are comfortably above benchmarks; no warning on current ratio. Solvency is conservative with D/E at 0.56x and interest coverage at 7.92x, well within healthy ranges. Short-term maturity risk appears manageable: short-term loans of 6.24 are covered by cash of 7.03 and further supported by receivables (9.67). Total liabilities are 29.83 versus equity of 53.31, indicating a solid capital base. There are no disclosed off-balance-sheet obligations in the provided data. Asset composition includes investment securities of 16.09, which may provide additional liquidity if tradable. No red flags on leverage or liquidity; the main issue is low return on capital rather than balance sheet strain.

Cash Flow Quality

OCF of 4.06 versus net income of 0.68 yields OCF/NI of 5.98x, indicating high-quality earnings supported by non-cash items and/or favorable working capital movements. Free cash flow is implied at approximately 3.30 (OCF 4.06 minus capex 0.76), despite investing cash flow details being unreported; this indicates capacity to self-fund operations and modest shareholder returns. Working capital signs are generally healthy given strong OCF; without period-to-period deltas on AR, AP, and inventories, potential timing benefits cannot be fully assessed, but there is no clear sign of manipulation. Interest expense (0.11) is well covered by EBITDA (1.91) and OCF. Sustainability: if revenue pressure persists, maintaining OCF at this level may require continued tight working capital discipline; nonetheless, the current conversion looks robust.

Dividend Sustainability

The calculated payout ratio is 125.7%, which would be above the <60% benchmark and a warning if accurate. However, dividends paid and DPS are unreported, so this ratio likely reflects an estimate rather than actual paid amounts; treat with caution. With implied FCF of ~3.30, the company has room to fund dividends and buybacks in the near term, but sustaining an above-earnings payout as profits decline is risky. Financing CF was -5.21, including share repurchases of -0.41; cash still covers short-term debt, but continued high distributions could pressure flexibility if earnings do not recover. Policy outlook: expect management to prioritize balance sheet strength; a normalized payout aligned with earnings and cash generation would be prudent given low ROIC and thin margins.

Risk Assessment

Business Risks:

• Revenue decline of 9.7% YoY suggests demand softness or shipment timing risk
• Thin operating margin (~2.35%) amplifies earnings sensitivity to volume and price
• SG&A rigidity (87% of gross profit) limits operating leverage
• Low ROIC (1.1%) indicates value creation below cost of capital
• Dependence on non-operating income (dividends 0.13) to support ordinary income

Financial Risks:

• Potential dividend policy misalignment (calculated payout 125.7%) if maintained
• Exposure to interest rate increases given short-term loans of 6.24, albeit currently covered by cash
• Capital allocation risk: continued buybacks/dividends despite low ROIC could erode balance sheet over time

Key Concerns:

• Sustained margin pressure and negative operating leverage
• Inability to lift asset turnover from 0.44, constraining ROE
• Execution risk in cost pass-through and mix improvement initiatives
• Data limitations on investing cash flows and dividend payments create uncertainty on true FCF coverage

Investment Implications

Key Takeaways:

• Earnings softer with revenue -9.7% YoY and operating income -22.6% YoY; operating margin compressed ~40 bps to ~2.35%
• Cash flow quality is strong (OCF/NI 5.98x) with implied FCF ~3.30, underpinning liquidity
• Balance sheet is solid (current ratio 210%, D/E 0.56x, interest coverage 7.92x)
• Capital efficiency is weak (ROE 1.3%, ROIC 1.1%), highlighting a need for margin and turnover improvements
• Dividend sustainability is uncertain given a calculated payout of 125.7% and unreported dividend cash outflows

Metrics to Watch:

• Order backlog and book-to-bill to gauge revenue trajectory
• Gross and operating margin progression (bps) and SG&A as a % of sales
• OCF/NI and working capital days (DSO/DPO/DIO) to validate cash conversion
• ROIC uplift toward >5% and ultimately >7–8%
• Capex discipline and returns on incremental investments
• Debt mix and cost of debt amid rate environment
• Actual DPS/dividend cash outflow vs earnings and FCF

Relative Positioning: Within small-cap industrial electronics/controls peers, the company exhibits superior liquidity and modest leverage but lags on profitability and capital efficiency. Its cash generation this quarter is a relative strength, yet low margins and ROIC place it below peers focused on higher value-added niches or those with stronger pricing power.

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