Foster Electric Company,Limited FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥66.65B
• Operating Income: ¥4.33B
• Net Income: ¥3.32B
• EPS: ¥117.34

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 operating performance with margin expansion, but ordinary income fell on non-operating headwinds and cash flow quality is below ideal. Revenue was essentially flat at 666.54, up just 0.1% YoY, while operating income rose 19.5% to 43.27, indicating effective cost control and/or mix improvement. Gross profit was 121.38, yielding an 18.2% gross margin, and SG&A of 78.10 supported operating leverage. Operating margin improved to 6.5%, up meaningfully versus last year. Ordinary income declined 6.0% YoY to 38.63 due to a negative non-operating balance (non-operating expenses of 7.69 exceeded non-operating income of 3.04), muting the operating upside. Net income increased 10.9% to 26.20, with a net margin of 3.9%, supported by a 22.1% effective tax rate. We estimate operating margin expansion of roughly 106 bps YoY (6.49% vs ~5.43% a year ago). Net margin likely expanded by around 39 bps YoY (3.93% vs ~3.54%), while ordinary income margin compressed by about 38 bps due to non-operating drag. Cash generation lagged earnings: operating cash flow was 20.25 versus net income of 26.20 (OCF/NI 0.77x), triggering an earnings quality flag. The balance sheet is strong with a current ratio of 252%, equity ratio approximated at ~65.6% (699.83/1,066.18), and low leverage (D/E 0.52x), mitigating solvency risk. Interest coverage is robust at 23.9x, and liquidity is ample with cash and deposits of 204.43 versus short-term loans of 53.48. ROE remains modest at 3.7%, constrained by a moderate net margin and conservative leverage. ROIC is reported at 6.0%, below the typical 7–8% target for value creation, suggesting further efficiency and profitability improvements are needed. Non-operating items—particularly interest and other expenses—were a clear headwind this quarter despite stable FX/interest income contributions. Capex of 21.84 nearly matched OCF, implying limited internally funded free cash in the period. Forward-looking, sustaining operating margin gains while reducing non-operating drag and improving cash conversion will be key to lifting ROE and ROIC toward targets. Overall, the quarter shows improving core profitability, resilient net income, but ordinary income softness and cash conversion require monitoring.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.7% = Net Profit Margin 3.9% × Asset Turnover 0.625 × Financial Leverage 1.52x. The most notable change versus last year appears in the margin component: operating margin rose meaningfully (approx. +106 bps), leading to a modest net margin uplift (+39 bps) despite ordinary income pressure. Business drivers likely include better product mix and SG&A discipline (SG&A at 78.10 grew slower than operating income, indicating positive operating leverage) and stable revenue. Non-operating expenses (7.69) outpaced non-operating income (3.04), compressing ordinary income margin (-38 bps YoY) and partially offsetting operating margin gains. Financial leverage remains conservative (D/E 0.52x; equity ratio ~66%), so leverage did not amplify ROE materially, and leverage changes are not the driver. Asset turnover at 0.625 is moderate for the business; with revenue flat and assets sizable (1,066.18), turnover is not a current tailwind. Sustainability: The operating margin improvement appears tied to controllable factors (cost discipline/mix) and could be sustainable if volumes or mix hold; however, persistent non-operating drag (interest/other) may continue to weigh on ordinary income. Watch for any SG&A growth exceeding revenue growth in coming quarters; at present, operating income growth (+19.5%) far outpaced revenue (+0.1%), signaling favorable operating leverage rather than overhead creep.

Growth Assessment

Revenue growth was flat (+0.1% YoY) at 666.54, indicating stable demand overall. Operating income grew +19.5% to 43.27, evidencing margin-led growth rather than top-line expansion. Gross margin stands at 18.2%; combined with SG&A restraint (78.10), this delivered an operating margin of 6.5%. Ordinary income declined 6.0% YoY to 38.63 due to a higher non-operating burden, underscoring sensitivity to financial and other non-core items. Net income rose 10.9% to 26.20, supported by a manageable tax rate (22.1%) and good interest coverage. EBITDA of 59.27 implies an EBITDA margin of 8.9%, supporting the notion of underlying profitability improvements. With ROIC at 6.0%, incremental gains in asset efficiency or additional margin expansion are needed to exceed the 7–8% value creation benchmark. Outlook hinges on sustaining the current product mix and cost structure, while mitigating non-operating expenses; given flat revenue, further profit growth likely requires continued mix/pricing and cost optimization or a pickup in volumes.

Financial Health

Liquidity is strong: current ratio 251.6% and quick ratio 251.6% comfortably exceed benchmarks. No warnings for Current Ratio <1.0 or D/E >2.0 (D/E is 0.52x). Working capital is ample at 499.46. Cash and deposits (204.43) plus accounts receivable (303.59) cover current liabilities (329.53) and short-term loans (53.48) by a wide margin, implying low maturity mismatch risk. Total liabilities are 366.35 against total equity of 699.83, yielding an equity ratio of approximately 65.6%, indicative of a conservative balance sheet. Long-term loans are modest at 13.50; refinancing risk appears low. Interest coverage ratio is strong at 23.91x, suggesting capacity to absorb rate increases. No off-balance sheet obligations were reported in the provided data.

Cash Flow Quality

OCF was 20.25 versus net income of 26.20, resulting in OCF/NI of 0.77x, below the 0.8 threshold and flagging an earnings quality concern. While depreciation and amortization totaled 16.00, working capital dynamics likely consumed cash (inventories unreported), contributing to the gap between OCF and earnings. Capex was 21.84; using OCF − Capex as a proxy, FCF was approximately -1.59 for the period, implying capex was not fully funded by internal cash generation this half. Financing cash flow was -11.93, indicating net cash outflows to debt service and/or shareholder returns; dividends and buybacks were unreported. Sustainability: To support dividends and capex from internal funds, cash conversion needs to improve (target OCF/NI ≥ 1.0) or investment spend needs to be phased with cash generation. No explicit signs of working capital manipulation can be concluded from the limited data, but the OCF shortfall warrants monitoring.

Dividend Sustainability

The calculated payout ratio is 57.3%, near the upper bound of a typical sustainability threshold (<60%). DPS itself is unreported; using EPS of 117.34 JPY and a 57.3% payout implies a rough DPS of ~67 JPY for the period (estimation, subject to confirmation and usual annual vs interim timing). Based on average shares of 22.33 million, this would suggest implied cash dividends around 15億円; with OCF of 20.25億円 and capex of 21.84億円, internal free cash was slightly negative this half, implying dividends plus capex were not fully covered by FCF. The strong balance sheet and liquidity provide flexibility to maintain dividends through working capital normalization or modest financing, but sustained payout at ~57% would require improved cash conversion or higher earnings. Policy outlook cannot be inferred from the data provided; monitor guidance and capital allocation commentary.

Risk Assessment

Business Risks:

• Revenue stagnation risk: flat YoY growth (+0.1%) suggests limited end-demand momentum.
• Product mix and pricing risk: operating margin gains depend on maintaining favorable mix and cost structure.
• Consumer electronics demand cyclicality affecting audio components volumes and ASPs.
• Supply chain and manufacturing execution risk (lead times, input costs).
• FX volatility risk impacting export competitiveness and translation of overseas subsidiaries.

Financial Risks:

• Earnings quality risk: OCF/NI at 0.77x indicates weaker cash conversion.
• Non-operating headwinds: net non-operating expense (4.65) weighed on ordinary income.
• Interest rate risk, albeit mitigated by strong coverage (23.9x) and modest debt levels.
• Working capital volatility risk (inventories unreported), potentially impacting OCF.
• Potential capex funding pressure if OCF remains below investment needs.

Key Concerns:

• ROIC at 6.0% remains below the 7–8% benchmark, suggesting value creation below target.
• Ordinary income decline (-6.0% YoY) despite stronger operations highlights sensitivity to non-core items.
• Limited disclosure on investing cash flows, inventories, and dividends constrains full assessment.

Investment Implications

Key Takeaways:

• Core operating profitability improved meaningfully, with operating income up 19.5% on flat sales.
• Ordinary income fell due to higher non-operating expenses, partially offsetting operational gains.
• Cash conversion lagged (OCF/NI 0.77x); FCF (OCF − Capex) was slightly negative this half.
• Balance sheet is strong with high liquidity (current ratio 252%) and conservative leverage (D/E 0.52x).
• ROE is low at 3.7%, constrained by modest margins and conservative leverage; ROIC at 6.0% remains sub-target.

Metrics to Watch:

• OCF/Net Income ratio (target ≥ 1.0) and working capital trends (especially inventories and receivables).
• Non-operating expense trajectory (interest and other) and its impact on ordinary income.
• Operating margin sustainability versus input costs and product mix.
• Capex levels relative to OCF and direction of ROIC.
• Revenue momentum in core end-markets and FX impacts on margins.

Relative Positioning: Within Japan electronics component peers, Foster shows stronger liquidity and low leverage, with improving operating margins but below-target ROIC and modest ROE; near-term upside depends on sustaining margin improvements and normalizing cash conversion while containing non-operating drag.

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