RIVER ELETEC CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥2.86B
• Operating Income: ¥-169M
• Net Income: ¥-175M
• EPS: ¥-21.31

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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: FY2026 Q2 was weak on profitability with a clear operating loss, but liquidity remained solid and operating cash flow was positive. Revenue grew 4.3% YoY to 28.61, showing some top-line resilience in a soft electronics demand backdrop. Gross profit was 5.06, implying a 17.7% gross margin, while SG&A of 6.75 exceeded gross profit, driving operating income to -1.69. Ordinary income was -1.80 and net income -1.75 (EPS -21.31 JPY), underscoring broad-based margin pressure. Operating margin was approximately -5.9%, EBITDA was 1.34 (EBITDA margin 4.7%), and the net margin stood at -6.1%. Compared with revenue growth, cost discipline lagged: the SG&A-to-sales ratio was about 23.6%, and gross margin at 17.7% left little room for overhead absorption. Basis-point comparison versus prior periods is not available in the dataset, but the swing to an operating loss implies margin compression versus any breakeven or profitable baseline. Earnings quality was mixed: despite the loss, operating cash flow was positive at 3.93, aided by non-cash add-backs (depreciation 3.03) and likely working capital tailwinds; the OCF/Net Income ratio of -2.25 indicates large divergence. Liquidity is strong with cash and deposits of 27.52, current assets of 60.52, and a current ratio of 242.8%, mitigating near-term refinancing risk. Leverage is moderate on a balance-sheet basis (D/E 1.34x) but looks heavy on a cash earnings basis (Debt/EBITDA 22.8x) due to depressed EBITDA. Interest coverage based on operating income is weak (-5.85x), highlighting sensitivity if rates rise or if profitability fails to recover. Tax expense of 0.66 despite a loss resulted in a distorted effective tax rate (-60.7%), likely due to tax adjustments and valuation allowances under JGAAP. ROE is -4.0% per DuPont, driven primarily by a negative net margin and low asset turnover (0.282). On forward-looking implications, recovery hinges on rebuilding gross margin and trimming SG&A to restore operating leverage. Cash on hand provides a bridge to execute cost measures and navigate demand cycles, but sustained losses would strain debt service metrics. With ROIC at -3.6%, capital efficiency must improve to justify the invested base.

Profitability Analysis

DuPont decomposition: ROE (-4.0%) = Net Profit Margin (-6.1%) × Asset Turnover (0.282) × Financial Leverage (2.34x). The component exerting the largest negative impact is the net profit margin, as the company posted an operating loss with gross margin only 17.7% and SG&A exceeding gross profit. Business drivers: weak contribution spread between gross profit (5.06) and SG&A (6.75) left operating income at -1.69, while non-operating expenses (0.41) slightly exceeded non-operating income (0.30), and tax expense (0.66) further pressured the bottom line. Asset turnover at 0.282 indicates low utilization of a 101.36 asset base against half-year sales, consistent with a capital-intensive footprint and possibly subdued shipment velocity. Leverage at 2.34x magnifies the loss impact on equity without providing earnings uplift. Sustainability assessment: margin headwinds appear cyclical-operational rather than structural impairment, but until gross margin expands above SG&A intensity, profitability will remain negative; depreciation (3.03) suggests fixed cost stickiness near term. Concerning trends: SG&A ratio (~23.6%) is high relative to the 17.7% gross margin, implying negative operating leverage; with revenue up 4.3% YoY but no disclosed SG&A YoY, the current level still indicates overhead absorption challenges.

Growth Assessment

Revenue grew 4.3% YoY to 28.61, signaling some demand resilience. However, growth quality is weak given a negative operating margin (-5.9%) and net margin (-6.1%), indicating that incremental sales did not translate to profit due to cost of sales and overhead pressure. Gross margin at 17.7% is insufficient to cover SG&A of 6.75; mix or pricing likely constrained margin recovery. Non-operating line netted a small loss (0.30 income vs 0.41 expense), providing no buffer. Outlook hinges on improving gross margin via pricing, product mix, and yield gains, and lowering fixed costs to restore operating leverage. Near-term profit recovery will likely require both mix improvement and cost containment, as depreciation (3.03) suggests a relatively fixed cost base. With limited disclosure on order backlog or segment mix, revenue sustainability beyond Q2 cannot be firmly assessed; management focus should be on raising contribution margin and aligning SG&A with the current demand run-rate.

Financial Health

Liquidity is strong: current assets 60.52 vs current liabilities 24.93 imply a current ratio of 242.8% and quick ratio of 233.4%. No warning trigger on current ratio (<1.0) or D/E (>2.0); D/E is 1.34x. Cash and deposits (27.52) comfortably exceed short-term loans (3.30) and accounts payable (2.01), lowering short-term liquidity risk. Total liabilities are 58.05, including long-term loans of 27.34; maturity profile shows more noncurrent than current debt, which reduces immediate rollover pressure. However, interest coverage is weak (-5.85x on EBIT basis), raising medium-term serviceability concerns if losses persist. Maturity mismatch risk appears moderate: robust cash and current assets cover near-term obligations, but sustained negative EBIT would erode flexibility over time. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF was 3.93 versus net income of -1.75, yielding OCF/NI of -2.25 (<0.8 threshold), which flags significant divergence but in this case reflects add-backs (depreciation 3.03) and likely working capital release rather than aggressive accruals. Estimated FCF (analyst-estimated) of approximately 1.46 = OCF 3.93 minus capex 2.47 indicates the company generated cash after investments this period despite the accounting loss. This FCF is potentially not sustainable if EBITDA remains depressed and working capital normalizes (i.e., the OCF benefited from non-recurring WC movements). Signs of manipulation are not evident from the limited data; however, a low inventory level (2.34) relative to receivables (11.14) may indicate cautious production or demand softness; AR collection risk should be monitored though liquidity buffers are strong. Financing CF was -3.91, suggesting net debt reduction or interest/dividend outflows; with interest expense at 0.29, the remainder likely reflects principal repayment. Overall earnings-to-cash conversion is aided by non-cash charges, but quality is vulnerable if operating losses continue.

Dividend Sustainability

Dividend data were not disclosed; payout ratios are not reliably calculable for a loss-making period. With net income negative and estimated positive FCF of ~1.46 this quarter, any dividend would rely on cash flow rather than earnings. Given interest coverage weakness and a ROIC of -3.6%, a conservative stance on shareholder returns would be prudent until operating profit normalizes. Without explicit policy guidance or annual DPS, we cannot assess adherence to a payout policy; FCF coverage of hypothetical dividends cannot be verified. Balance sheet liquidity (cash 27.52) provides capacity, but sustainability depends on restoring positive operating margins.

Risk Assessment

Business Risks:

• Low gross margin (17.7%) and SG&A exceeding gross profit, leading to negative operating leverage
• Demand and pricing pressure in electronic components suppressing contribution margin
• Asset intensity and depreciation (3.03) limiting near-term cost flexibility
• Execution risk in cost reduction and yield improvement to restore margins

Financial Risks:

• Weak interest coverage (-5.85x) despite moderate D/E of 1.34x
• High Debt/EBITDA (22.8x) due to depressed EBITDA
• Tax expense despite losses (effective tax rate -60.7%) creating bottom-line volatility
• Potential working capital normalization reducing OCF after a supportive quarter

Key Concerns:

• ROE -4.0% and ROIC -3.6% indicate sub-par returns on capital
• Ordinary loss (-1.80) with limited non-operating support
• Sensitivity to any increase in interest rates given weak operating earnings
• Limited disclosure granularity (R&D, SG&A breakdown, investing CF) hampers visibility

Investment Implications

Key Takeaways:

• Top-line grew 4.3% YoY to 28.61, but profitability deteriorated to an operating loss of -1.69
• Gross margin (17.7%) insufficient to cover SG&A (6.75), resulting in negative operating leverage
• OCF positive at 3.93, aided by 3.03 depreciation; estimated FCF ~1.46 after 2.47 capex
• Liquidity solid (current ratio 242.8%, cash 27.52), mitigating near-term refinancing risk
• Debt manageable by balance sheet (D/E 1.34x) but stretched by earnings (Debt/EBITDA 22.8x)
• ROE -4.0% driven by negative margin and low asset turnover (0.282); leverage amplifies losses

Metrics to Watch:

• Gross margin trajectory and product mix/pricing actions
• SG&A run-rate versus revenue to gauge operating leverage inflection
• Order intake and backlog (not disclosed) as leading indicators of utilization
• Working capital movements (AR, inventory, AP) and OCF sustainability
• EBITDA and interest coverage recovery vs debt service needs
• Capex discipline relative to cash generation

Relative Positioning: Versus domestic electronic component peers, the company shows weaker near-term profitability (negative operating margin) and inferior capital efficiency (ROIC -3.6%), while maintaining above-average liquidity. Balance-sheet leverage is moderate, but earnings-based leverage is elevated due to depressed EBITDA, placing it behind better-margin peers until cost and margin recovery materialize.

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