DKK Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥14.91B
• Operating Income: ¥11M
• Net Income: ¥141M
• EPS: ¥16.07

Income Statement

Balance Sheet

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: A mixed quarter with solid top-line growth but razor-thin operating profit, reliance on one-off gains to lift pre-tax profit, and very weak interest coverage despite a strong balance sheet. Revenue grew 13.8% YoY to 149.14, while gross profit was 30.87, yielding a gross margin of 20.7%. SG&A almost fully absorbed gross profit at 30.76, leaving operating income at just 0.11 (down 25.2% YoY) and an operating margin of 0.07%. Non-operating items were a net drag (1.43 income vs 2.15 expense), resulting in ordinary income of -0.61. Profit before tax reached 1.73, implying roughly 2.34 of extraordinary gains under JGAAP to overcome ordinary loss. Net income was 1.43 (net margin ~1.0%), down 22.8% YoY, while total comprehensive income was -2.84, indicating about -4.27 of negative other comprehensive income (likely valuation losses on securities). Interest coverage was only 0.27x (operating income 0.11 vs interest expense 0.41), highlighting earnings fragility. Liquidity is very strong: current ratio 304%, cash and deposits 144.49, and net cash of about 95 (cash 144.49 less total loans 49.29). Capital structure is conservative: liabilities-to-equity near 0.42x and equity ratio estimated at ~70.6% (353.31/500.34). DuPont shows a low ROE of 0.4%, driven by thin net margin (1.0%) and modest asset turnover (0.298), with low leverage (1.42x). Operating leverage was unfavorable as SG&A growth outpaced operating profit, compressing operating margin by roughly 4 basis points YoY (to ~7 bps). Earnings quality is questionable given dependence on extraordinary gains and negative comprehensive income. Cash flow data are unreported, preventing confirmation of earnings conversion into cash and dividend coverage. Forward-looking, the company must tighten cost discipline and improve project execution to restore operating margin and interest coverage; otherwise, any dividend policy tied to current earnings (calculated payout ratio 610%) risks appearing unsustainable. Near term, the strong net cash and liquidity provide resilience, but restoring recurring profitability is the key swing factor for the second half.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (~1.0%) × Asset Turnover (0.298) × Financial Leverage (1.42x) = ROE ~0.4%. The most material drag is the net margin, which is suppressed by SG&A nearly equaling gross profit and by net non-operating expenses exceeding non-operating income. Business drivers: revenue expansion (+13.8% YoY) did not translate to operating leverage due to cost pressure and spending, leaving operating income at 0.11 and ordinary income negative (-0.61). The uptick in PBT was supported by extraordinary gains (~2.34), which are non-recurring and do not improve core profitability. Asset turnover at 0.298 reflects a capital-intensive or cash-rich balance sheet (cash 144.49; total assets 500.34), limiting efficiency benefits to ROE. Sustainability: margin weakness looks structural near term unless SG&A is recalibrated or gross margin improves; extraordinary gains are one-time and should not be extrapolated. Concerning trends include: SG&A-to-sales at ~20.6% nearly matching gross margin (20.7%), operating margin compressed by ~4 bps YoY (to ~7 bps), and interest coverage at 0.27x below safe thresholds, indicating that even modest rate or expense increases can pressure profits.

Growth Assessment

Revenue growth of 13.8% YoY is healthy and suggests demand resilience, but conversion to profit is weak with operating income down 25.2% YoY. Gross margin at 20.7% is adequate, yet insufficient given SG&A at 20.6% of sales, resulting in minimal operating leverage. Ordinary income turned negative due to higher non-operating expenses than income, underscoring limited benefit from financial items. Net margin of ~1.0% and negative total comprehensive income (-2.84) point to fragile bottom-line quality and market-related valuation headwinds. Extraordinary gains (~2.34) drove positive PBT and net income; this is unlikely to repeat consistently. Outlook hinges on cost containment, mix improvement (higher-margin projects/products), and stabilizing non-operating items. Without SG&A control or gross margin lift, sustaining profit growth will be difficult despite sales momentum.

Financial Health

Liquidity is strong: current ratio 303.8% and quick ratio 303.8% (no inventories disclosed), with working capital of 234.58. There is no warning on current ratio (<1.0) or D/E (>2.0). Capital structure is conservative: liabilities-to-equity about 0.42x; estimated equity ratio ~70.6% (353.31/500.34). The company holds net cash of ~95 (cash 144.49 minus total loans 49.29). Maturity mismatch risk appears low: short-term loans are 44 vs cash 144.49 and current assets 349.70 against current liabilities 115.12. Interest burden is a concern relative to earnings capacity, as interest expense (0.41) exceeds operating income (0.11), but absolute leverage is not high. No off-balance sheet obligations are reported in the provided data.

Cash Flow Quality

Operating, investing, and financing cash flows are unreported, so OCF/Net Income and FCF cannot be assessed. Given the earnings mix (ordinary loss offset by extraordinary gains) and negative comprehensive income, earnings quality flags are warranted until OCF is confirmed. Working capital movements cannot be evaluated due to missing inventories, payables, and OCF details, limiting the ability to identify any timing-related profit support. Cash balance is robust relative to debt, which mitigates short-term liquidity risk even if OCF is volatile. With FCF unknown, sustainability of any dividend and capex program cannot be validated at this stage.

Dividend Sustainability

Dividend details are unreported; the calculated payout ratio is shown at 609.8%, which appears unsustainably high on current earnings. This may reflect a period effect (low interim earnings inflating the ratio) or reliance on historical/forecast dividends not disclosed here. Without OCF and capex, FCF coverage cannot be evaluated. Balance sheet strength (net cash ~95 and high equity ratio) offers flexibility, but recurring cash generation needs to improve to justify high payouts. Policy outlook likely depends on second-half operating recovery and visibility on non-recurring gains not repeating.

Risk Assessment

Business Risks:

• Margin compression risk: SG&A (20.6% of sales) nearly equals gross margin (20.7%), leaving minimal operating profit buffer.
• Project execution and cost overrun risk, given low operating margin (0.07%).
• Dependence on extraordinary gains to achieve positive PBT in the period, implying non-recurring profit mix.
• Industry demand cyclicality (telecom infrastructure / industrial equipment) and timing of customer capex.
• Input cost volatility (e.g., steel, zinc, logistics) that can erode gross margin.

Financial Risks:

• Debt service coverage risk: interest coverage at 0.27x is well below the 2x warning threshold.
• Earnings sensitivity to non-operating items; net non-operating expense exceeded non-operating income.
• Valuation risk on investment securities; negative comprehensive income (-2.84) suggests market-driven OCI losses.
• Potential interest rate risk on short-term borrowings (44) if floating-rate.

Key Concerns:

• Ordinary loss (-0.61) despite higher revenue, highlighting weak core profitability.
• Reliance on extraordinary gains (~2.34) to support net income.
• Data gaps on cash flows and SG&A composition hinder assessment of structural vs temporary cost pressures.

Investment Implications

Key Takeaways:

• Top-line growth strong (+13.8% YoY) but operating profit remained near breakeven (0.11).
• Ordinary loss and very low interest coverage (0.27x) underscore weak earnings resilience.
• Net income (1.43) benefited from non-recurring gains; comprehensive income negative (-2.84).
• Balance sheet is robust with net cash (~95) and high equity ratio (~70.6%).
• ROE at 0.4% reflects margin-driven underperformance; ROIC flagged at 0.0% in the dataset.

Metrics to Watch:

• Operating margin progression and SG&A-to-sales ratio in 2H.
• Order intake/backlog and gross margin mix by project/product.
• Ordinary income recovery (non-operating expenses vs income) and any recurrence of extraordinary items.
• OCF conversion and FCF after capex to validate dividend capacity.
• Interest coverage improvement and any change in short-term borrowing levels.
• OCI drivers (securities valuation) and sensitivity to market conditions.

Relative Positioning: Compared to peers with mid-single-digit operating margins and stable interest coverage, the company currently lags on profitability and earnings quality but stands out positively on liquidity and net cash, offering balance sheet resilience while it works to restore recurring margins.

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