Quick View
| Metric | Current Period | Previous-Year Period | YoY |
|---|---|---|---|
| Revenue | ¥2822.2B | ¥3070.0B | −8.1% |
| Operating Income | ¥60.6B | ¥76.3B | −20.6% |
| Ordinary Income | ¥64.6B | ¥56.2B | +14.9% |
| Net Income | ¥73.9B | ¥19.9B | +271.0% |
| ROE | 4.8% | 1.4% | - |
Executive Summary
Although revenue and operating income declined, net income increased sharply due to extraordinary gains, including gains on business transfers. The key feature of the results is the divergence between the decline in operating profitability and the sharp increase in net income. Revenue was ¥2,822.2B (down -8.1% YoY), while operating income was ¥60.6B (down -20.6%). Ordinary income increased to ¥64.6B (up +14.9%), supported by non-operating income such as foreign exchange gains and dividend income. However, net income attributable to owners of the parent of ¥73.9B (up +273.1%) was primarily driven by ¥51.2B in gains on business transfers and ¥20.0B in gains on sales of investment securities, as well as ¥71.2B in extraordinary gains, and does not reflect the underlying operating performance.
Factors Affecting Performance
【Revenue】Revenue was ¥2,822.2B, down 8.1% YoY. The primary factor was the loss of large-scale projects related to the new banknote transition in Enterprise Solutions, resulting in a 21% YoY decline in segment revenue. Meanwhile, Public Solutions revenue increased 22% YoY, supported by solid demand related to firefighting, disaster prevention, and roads, partially offsetting the overall revenue decline.
【Profit and Loss】Operating income was ¥60.6B (down -20.6% YoY), and the operating margin contracted to 2.1%. Reduced absorption of cost of sales and SG&A expenses resulted in a decline in operating income exceeding the rate of revenue decline. Ordinary income turned to growth at ¥64.6B (up +14.9% YoY), supported by non-operating income, including foreign exchange gains of ¥10.7B and dividend income of ¥10.3B. However, the largest contributors to net income were extraordinary gains, mainly gains on business transfers and sales of investment securities. The difference between ordinary income and net income is therefore explained by these temporary factors. In conclusion, the company experienced declining revenue and operating income, alongside an increase in net income driven by extraordinary gains, representing an unusual pattern that corresponds to neither revenue growth with profit growth nor revenue growth with profit decline.
Segment Analysis
The core business is Enterprise Solutions, which accounts for approximately 37% of revenue and generated operating income of ¥74B (down 37% YoY), maintaining a relatively high operating margin of 7.1% even after the loss of large-scale projects. Public Solutions accounted for approximately 30% of revenue but achieved rapid growth in operating income to ¥71B (up 163% YoY). Its operating margin of 8.3% was the highest among the segments and drove the upward revision to the full-year forecast. Component Products’ operating income fell to ¥3B (down 86% YoY), while EMS fell into the red with an operating loss of ¥3B. Deteriorating profitability in both segments contributed to the overall decline in operating income. There is a significant gap in profitability among the segments: Public Solutions and Enterprise Solutions support earnings, while Component Products and EMS weigh on them.
Key Financial Metrics
Profitability: ROE 4.8%, operating margin 2.1%
Cash flow quality: Operating CF / Net Income was -0.79x (no cash backing relative to net income), FCF -¥154.9B
Investment efficiency: Capital expenditures / depreciation and amortization was 0.58x (below depreciation and amortization, indicating an investment restraint phase)
Financial soundness: Equity Ratio 36.5%, current ratio 127.8%
Cash Flow Analysis
Operating CF was negative ¥57.9B, representing a level lacking cash backing relative to net income of ¥73.9B. The primary factor was a ¥167.2B increase in inventories, with inventory accumulation placing pressure on working capital. Investing CF was negative ¥97.0B, mainly due to capital expenditures of ¥65.6B. Financing CF was positive ¥54.1B, as a net increase in short-term borrowings offset repayments of long-term borrowings and dividend payments. FCF was negative ¥154.9B, indicating that investment and dividends could not be funded solely through internally generated funds. Cash generation therefore requires monitoring.
Earnings Quality
Net income of ¥73.9B was only modestly above ordinary income of ¥64.6B, but the level of net income itself was heavily dependent on extraordinary gains, including gains on business transfers of ¥51.2B and gains on sales of investment securities of ¥20.0B. Excluding these gains, the underlying earnings level would be close to ordinary income. In addition, the fact that non-operating income, including foreign exchange gains and dividend income, lifted ordinary income has a one-time aspect. Operating CF was negative and below net income, requiring caution regarding earnings quality from an accrual perspective, namely the divergence between accrual and cash accounting.
Earnings Forecast and Guidance
Progress against the full-year forecast (revenue ¥4,300.0B, operating income ¥200.0B, ordinary income ¥200.0B) was 65.6% for revenue, 30.3% for operating income, and 32.3% for ordinary income, substantially below the standard 75% progress level. While the full-year revenue forecast was revised downward to reflect the loss of large-scale Enterprise Solutions projects, Public Solutions’ operating income was revised upward by +¥40B from the previous forecast, highlighting divergent performance across segments. Public Solutions’ annual revenue secured rate was 93% as of the end of January, providing a certain degree of visibility into the revenue outlook for the second half.
Shareholder Returns
The full-year dividend forecast was maintained at ¥50 per share, effectively maintaining the return policy compared with the previous-year dividend of ¥0 as disclosed. Based on forecast EPS of ¥219.05, the Payout Ratio is calculated at 22.8%. However, current-period operating CF and FCF were both negative, meaning that dividends are funded not by operating cash but by cash on hand and borrowings. As no share repurchases have been confirmed, shareholder returns are evaluated solely based on the Payout Ratio.
Catalysts
【Short Term】Whether the full-year earnings forecast can be achieved in Q4, particularly the accumulation of profits in both the Enterprise and Public Solutions segments.
【Long Term】Order trends for the next-generation Australian frigate program, expansion in Asia through the commencement of local ATM production in India, and the establishment of a new operating structure for the Component Products business through participation in Etria.
Industry Benchmark (Reference; Compiled by the Company)
Industry Benchmark (manufacturing)
Profitability and Returns
| Metric | Company | Median (IQR) | Delta |
|---|---|---|---|
| Operating Margin | 2.1% | 8.6% (4.3%–12.7%) | −6.4pt |
| Net Profit Margin | 2.6% | 6.4% (2.8%–10.3%) | −3.8pt |
Both the operating margin and net profit margin are substantially below the industry median, placing profitability at the lower end of the industry.
Growth and Capital Efficiency
| Metric | Company | Median (IQR) | Delta |
|---|---|---|---|
| Revenue Growth Rate (YoY) | −8.1% | 3.3% (-2.1%–8.9%) | −11.4pt |
The revenue growth rate is also substantially below the industry median, confirming through industry comparison that the company is in a revenue decline phase.
※Source: Compiled by the Company
Risk Factors
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Declining operating profitability: The operating margin of 2.1% is substantially below the industry median of 8.6%. Negative operating leverage is evident, with operating income declining more sharply (-20.6%) than revenue (-8.1%).
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Working capital tied up: Inventories increased by ¥167.2B, putting pressure on operating CF, which was negative ¥57.9B. Improving inventory turnover and the collection of trade receivables remains a challenge.
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Dependence on extraordinary gains: The primary driver of the sharp increase in net income was extraordinary gains from gains on business transfers and sales of investment securities, which are based on non-recurring temporary factors. Future attention will focus on improvements in recurring earnings capacity.
Key Earnings Takeaways
-
Ordinary income increased and net income rose sharply, while operating income declined. It is therefore necessary to distinguish the drivers of growth at each stage. The increase in net income was attributable to non-operating income and extraordinary gains.
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By segment, strong performance in Public Solutions supported overall results, while deteriorating profitability in Component Products and EMS contributed to the overall decline in operating income, widening the performance gap among segments.
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Full-year progress remaining in the 30% range on a profit basis may indicate an earnings plan weighted toward the second half. Indicators that provide visibility into progress, such as Public Solutions’ annual revenue secured rate of 93%, will serve as clues for monitoring future developments.
Theoretical Share Price (Reference Value)
| Scenario | Theoretical Share Price |
|---|---|
| bear (Bearish) | ¥1,900 |
| base (Base) | ¥1,953 |
| bull (Bullish) | ¥2,021 |
| Calculation Assumption | Value |
|---|---|
| Book Value per Share (BPS) | ¥1,762 |
| Adjusted Forecast EPS | ¥236.5 |
| Cost of Equity r | 9.77% (10-year government bond 2.77% + equity risk premium 6.00% + size premium 1.00%) |
| Residual Income Persistence Factor ω / Explicit Forecast Period | 0.62 / 5 years |
| Assumed Payout Ratio | 22.8% |
| Forecast EPS Confidence Adjustment | ×1.080 (based on the industry’s historical guidance achievement rate) |
| implied PBR / PER | 1.11x / 8.3x |
Sensitivity: ¥1,898–¥2,011 at ±1% for the cost of equity, and ¥1,949–¥1,960 at ±0.1 for ω.
Notes:
- Net assets as of the quarter-end are used (there is a time lag relative to the full-year forecast).
- Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.
(Calculation model: Residual Income Model (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee the future share price.)
This report is an earnings analysis document automatically generated through AI-based integrated analysis of XBRL earnings summary data and PDF earnings presentation materials. It does not recommend investment in any specific security. The industry benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.
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AI Financial Analysis
Executive Summary
OKI Electric’s FY2026 Q3 result was operationally weaker, while reported net income increased sharply on substantial extraordinary gains. Revenue declined 8.1% year on year to ¥282.2bn. Operating income fell 20.6% to ¥6.1bn, a steeper decline than sales and indicating reduced operating leverage at the gross-profit level. Gross profit declined to ¥69.4bn and the gross margin contracted by 79bp year on year to 24.6%, from 25.4%. The operating margin contracted by 34bp to 2.1%, from 2.5%, remaining materially below a 5% efficiency threshold. SG&A expenses declined 9.9% to ¥63.3bn, faster than the revenue decline, and the SG&A-to-sales ratio improved by approximately 45bp to 22.4%. This cost discipline was insufficient to offset the deterioration in the cost of sales ratio. Ordinary income nevertheless rose 14.9% to ¥6.5bn because non-operating income increased to ¥3.6bn, including ¥1.1bn of foreign-exchange gains, ¥1.0bn of dividend income and ¥0.9bn of interest income. Profit attributable to owners rose 273.3% to ¥7.4bn, but this was principally supported by a ¥7.1bn extraordinary-income contribution, including a ¥5.1bn gain on transfer of business and a ¥2.0bn gain on sales of investment securities. After ¥1.6bn of extraordinary losses, extraordinary items still added ¥5.6bn to profit before tax, making the reported 2.6% net margin less representative of underlying operating profitability. The effective tax rate was 38.6%, above a conventional Japanese corporate tax-rate range and a further drag on conversion from pre-tax profit to net income. Cash generation was weak: operating cash flow was negative ¥5.8bn despite ¥7.4bn of net income. Free cash flow was negative ¥15.5bn after ¥6.6bn of capital expenditure, and cash declined ¥9.2bn during the period to ¥27.1bn. The working-capital position is a central issue, with annualized DSO of 98 days, DIO of 103 days and a 125-day annualized cash conversion cycle. The balance sheet remains solvent, with a 127.8% current ratio and a 1.74x debt-to-equity ratio, but debt service and refinancing flexibility are constrained by 6.39x Debt/EBITDA, a 58.8% short-term debt share and cash equal to only 0.42x short-term loans. Full-year company guidance implies a pronounced Q4 recovery in operating earnings and profit attributable to owners. The key question into year-end is whether the company can restore operating-margin performance and convert profit into cash without further reliance on working-capital financing or asset-related gains.
Profitability Analysis
The reported annualized DuPont ROE is 6.4%, comprising a 2.6% net profit margin, 0.898x asset turnover and 2.74x financial leverage. The principal weakness in this decomposition is profitability rather than asset utilization: the 2.6% net margin is low and was materially supported by non-recurring extraordinary gains. Financial leverage meaningfully amplifies the reported return on equity, so the 6.4% annualized ROE should not be interpreted as evidence of a strong unlevered earnings base. The operating margin fell 34bp year on year to 2.1%, while gross margin fell 79bp to 24.6%, showing that the underlying pressure originated primarily in gross-profit conversion. SG&A fell 9.9% year on year, exceeding the 8.1% sales decline, and reduced the SG&A ratio to 22.4% from 22.9%; therefore, overhead control partially mitigated but did not reverse gross-margin pressure. EBITDA was ¥17.3bn and the EBITDA margin was 6.1%, which provides a more useful measure of recurring earnings capacity than the net margin in this period. EBIT margin of 2.1% is below the 5% operating-efficiency benchmark and implies limited capacity to absorb revenue volatility, input-cost increases or adverse project mix. The five-factor DuPont interest burden was 1.984 because pre-tax income exceeded EBIT through non-operating and extraordinary gains; it does not indicate that debt costs are immaterial. Interest expense was ¥1.4bn, equivalent to 23.5% of operating income, although EBITDA interest coverage remained 12.12x. The annualized ROIC of 2.1% is also low, indicating that the capital base is currently producing limited operating return. Sustainability of the Q3 reported net-income improvement is weak because ¥5.6bn of net extraordinary gains represented the majority of the ¥7.4bn profit attributable to owners.
Growth Assessment
Revenue contraction of 8.1% to ¥282.2bn and a 20.6% decline in operating income to ¥6.1bn point to a weak underlying Q3 cumulative growth profile. The company’s full-year forecast calls for revenue of ¥430.0bn, down 5.0% year on year, operating income of ¥20.0bn, up 7.4%, ordinary income of ¥20.0bn, up 19.0%, and profit attributable to owners of ¥19.0bn. Q3 cumulative revenue represents 65.6% of the full-year sales forecast, 9.4 percentage points below the standard 75% Q3 progress rate. Operating-income progress is only 30.3% of guidance, 44.7 percentage points below the standard progress rate. Ordinary-income progress is 32.3% of guidance, also well below a typical Q3 run rate. Profit attributable to owners is 38.8% of guidance despite extraordinary gains in the reported period. Reaching guidance therefore requires approximately ¥147.8bn of Q4 sales, ¥13.9bn of operating income and ¥11.6bn of profit attributable to owners. The implied Q4 operating margin is approximately 9.4%, far above the 2.1% cumulative Q3 margin, making the forecast dependent on a substantial improvement in volume, mix, project timing and/or profitability. Manufacturing working capital also warrants attention: raw materials were ¥28.8bn, work in process ¥24.0bn and finished goods ¥27.1bn. Finished goods increased 47.0% year on year and work in process increased 58.5%, while raw materials declined 8.4%; this mix shift indicates capital is increasingly tied up in production and completed inventory. A 103-day annualized DIO and 98-day annualized DSO increase the risk that revenue conversion and cash realization lag accounting recognition. CapEx was ¥6.6bn, equal to 0.58x depreciation and amortization, which signals investment below the depreciation charge and may constrain replacement investment or growth capacity if maintained.
Financial Health
Liquidity is adequate on a narrow balance-sheet basis but is exposed to the large reliance on short-term borrowings. The current ratio was 127.8% and the quick ratio was also 127.8%, both above 1.0x; consequently, current assets exceed current liabilities and there is no immediate current-ratio warning. Working capital was ¥49.7bn. However, short-term loans increased 56.9% year on year to ¥64.9bn and accounted for 58.8% of ¥110.4bn of interest-bearing debt. Cash and deposits declined 26.4% year on year to ¥27.1bn, leaving cash/short-term debt at only 0.42x and creating a material refinancing-risk exposure. This mismatch is particularly relevant because operating cash flow was negative and the company relied on ¥20.7bn of net short-term borrowing during the period. Debt-to-equity was 1.74x, below the explicit 2.0x aggressive-leverage threshold but elevated for a business generating a 2.1% EBIT margin. Debt/capital was 41.9%, moderately above the 40% investment-grade reference point. Debt/EBITDA of 6.39x is high and indicates substantial leverage relative to recurring cash earnings capacity. EBITDA interest coverage of 12.12x is presently sound, while EBIT-based interest coverage of 4.25x is more modest and below the 5x strong-coverage reference. Investment securities increased ¥15.1bn, or 39.4% year on year, to ¥53.5bn and represented 12.8% of total assets; this portfolio provides potential financial flexibility but also introduces valuation sensitivity. Net defined benefit liabilities were ¥24.5bn, a significant non-current obligation equivalent to 16.1% of total equity. Non-current provisions were ¥0.9bn. Total equity increased to ¥152.9bn from ¥145.7bn, supported by retained earnings and positive valuation differences on securities, but the capital base remains exposed to market-value movements given ¥12.5bn of valuation differences on securities.
Notable B/S Changes
Short-term loans: +¥23.5bn (+56.9%) to ¥64.9bn - financing reliance increased materially and heightens refinancing exposure given cash of ¥27.1bn. Investment securities: +¥15.1bn (+39.4%) to ¥53.5bn - increases asset value and potential liquidity reserves, but also raises equity and valuation sensitivity. Cash and deposits: -¥9.8bn (-26.4%) to ¥27.1bn - liquidity buffer declined amid negative operating and investing cash flow. Work in process: +¥8.8bn (+58.5%) to ¥24.0bn - indicates more capital tied up in production, contributing to working-capital and execution risk. Finished goods: +¥8.7bn (+47.0%) to ¥27.1bn - elevates inventory carrying, realization and potential obsolescence risk. Long-term loans: -¥11.9bn (-19.2%) to ¥45.5bn - debt maturity has shifted toward short-term funding rather than reflecting a proportionate overall deleveraging.
Cash Flow Quality
Cash-flow quality was weak in FY2026 Q3. Operating cash flow was negative ¥5.8bn against net income of ¥7.4bn, producing an OCF/net-income ratio of negative 0.79x, well below the 0.8x quality-warning threshold. Cash conversion, measured as OCF/EBITDA, was negative 0.34x despite EBITDA of ¥17.3bn. The divergence reflects the limited cash realization of reported earnings and the large contribution of extraordinary gains, which do not necessarily generate recurring operating cash flow. Inventory increased by ¥16.7bn during the period, a substantial use of cash. Receivables contributed a ¥7.4bn cash inflow, but this did not offset inventory investment and other operating cash outflows. The 125-day annualized cash conversion cycle, comprising 98 annualized receivable days and 103 annualized inventory days, is a material working-capital efficiency concern for a manufacturer. The increase in finished goods and work in process supports the risk that inventory management and production timing are contributing to cash strain. Investing cash flow was negative ¥9.7bn, including ¥6.6bn of PPE purchases and ¥4.6bn of intangible-asset purchases. Free cash flow was negative ¥15.5bn, demonstrating that internally generated cash did not fund the period’s investment program. Financing cash flow of ¥5.4bn partly offset these outflows, led by ¥20.7bn of net short-term loan increases, while long-term loan repayments were ¥9.1bn and cash dividends paid were ¥3.9bn. CapEx/depreciation was 0.58x, below the 0.7x underinvestment warning level; the ratio improves near-term cash conservation but may defer replacement or modernization requirements. The 3.1% accruals ratio is within the favorable sub-5% benchmark, but this does not offset the adverse actual cash conversion in the period.
Dividend Sustainability
The full-year dividend forecast is ¥50 per share, with no Q2 interim dividend paid. Based on forecast EPS of ¥219.05, the prospective dividend payout ratio is approximately 22.8%, which is conservative on an earnings basis. The forecast dividend obligation is approximately ¥4.3bn based on 86.7 million average shares. Cash-flow coverage is less comfortable than the payout ratio suggests because free cash flow was negative ¥15.5bn through Q3 and operating cash flow was negative ¥5.8bn. Cash dividends paid during the period were ¥3.9bn, while financing needs were met partly through additional short-term borrowing. Therefore, continuation of the full-year ¥50 dividend depends on a substantial Q4 operating-cash-flow improvement and/or availability of external funding rather than on Q3 cumulative free cash flow. The low stated payout ratio offers accounting earnings headroom, but dividend sustainability should be assessed against cash conversion, debt reduction needs and the pace of working-capital normalization. No share repurchase is indicated by the reported treasury-stock movement, so the analysis uses dividend payout rather than total return ratio.
Risk Assessment
Business risks include Operating profitability risk: the 2.1% EBIT margin and 24.6% gross margin indicate limited cushion against lower sales, unfavorable project mix, procurement-cost inflation or pricing pressure., Execution and demand risk: revenue declined 8.1% year on year, while the full-year plan requires an implied Q4 operating margin of approximately 9.4%., Manufacturing working-capital risk: annualized DSO of 98 days, annualized DIO of 103 days and a 125-day annualized cash conversion cycle indicate slow conversion of production and sales into cash., Inventory realization risk: work in process rose 58.5% and finished goods rose 47.0% year on year, increasing exposure to delivery delays, project acceptance timing, obsolescence and margin pressure., Foreign-exchange risk: ¥1.1bn of foreign-exchange gains supported ordinary income, making period earnings partly sensitive to currency movements., Investment-portfolio valuation risk: investment securities of ¥53.5bn and ¥12.5bn of valuation differences on securities create sensitivity of equity and comprehensive income to market movements..
Financial risks include High leverage risk: Debt/EBITDA of 6.39x exceeds the 4.0x high-leverage benchmark, while annualized ROIC is only 2.1%., Refinancing risk: ¥64.9bn of short-term loans represent 58.8% of interest-bearing debt, substantially above the 40% short-term debt reference level., Liquidity stress: cash/short-term debt is 0.42x, below the 0.5x warning level, after cash and deposits declined 26.4% year on year., Cash-flow risk: OCF/net income of negative 0.79x and negative ¥15.5bn free cash flow indicate that earnings and investment needs are not currently self-funded., Pension obligation risk: the ¥24.5bn net defined benefit liability is a meaningful fixed obligation relative to the ¥152.9bn equity base..
Key concerns include The most significant issue is earnings quality: ¥5.6bn of net extraordinary gains explain much of ¥7.4bn of profit attributable to owners, whereas operating income was only ¥6.1bn and declined year on year., The combination of negative operating cash flow, inventory growth and short-term debt expansion indicates dependence on balance-sheet funding while working capital remains elevated., Underinvestment risk is present because CapEx/depreciation is 0.58x; sustained spending below depreciation can weaken production capability, asset replacement and technology competitiveness., Although current and quick ratios exceed 1.0x and D/E is below 2.0x, these conventional liquidity measures do not fully mitigate the refinancing exposure created by the short debt maturity profile and low cash coverage., Forecast credibility depends on an unusually strong Q4 recovery in both operating profit and cash generation..
Investment Implications
Key takeaways include Reported net-income growth was strong, but it was primarily driven by business-transfer and securities-sale gains rather than by recurring operations., Gross-margin compression was the main source of operating deterioration; SG&A discipline provided partial offset., The balance sheet has positive working capital and current assets exceed current liabilities, but high Debt/EBITDA and a short-term borrowing concentration elevate financial sensitivity., Cash conversion and working-capital efficiency are the near-term determinants of financial flexibility., The full-year earnings framework requires a material Q4 acceleration, especially in operating income..
Metrics to watch include Q4 revenue and operating margin versus the implied approximately 9.4% Q4 operating margin required to achieve guidance, Operating cash flow and free cash flow, particularly OCF/net income and OCF/EBITDA conversion, Inventory balances, annualized DIO and the mix of work in process versus finished goods, Annualized DSO and cash conversion cycle, Short-term loan balance, cash/short-term debt and Debt/EBITDA, Recurring operating income excluding foreign-exchange effects and extraordinary gains, CapEx/depreciation and spending on production, software and technology assets.
Regarding relative positioning, The company combines a low 2.1% EBIT margin and 2.1% annualized ROIC with leverage of 6.39x Debt/EBITDA, placing operating efficiency and financial flexibility below stronger manufacturing-sector profiles. Its 127.8% current and quick ratios and 12.12x EBITDA interest coverage provide near-term support, but the 58.8% short-term debt ratio, 0.42x cash/short-term debt and negative cash conversion materially weaken that support.