Quick View
| Metric | Current Period | Same Period Previous Year | YoY |
|---|---|---|---|
| Revenue | ¥1565.5B | ¥1444.2B | +8.4% |
| Operating Income | ¥325.0B | ¥342.1B | −5.0% |
| Profit Before Tax | ¥352.9B | ¥374.7B | −5.8% |
| Net Income | ¥248.1B | ¥275.8B | −10.0% |
| ROE | 6.6% | 7.5% | - |
Executive Summary
The key point of this earnings period is that the Company recorded higher revenue but lower earnings as profit margins declined. Revenue was ¥1565.5B (+8.4% YoY), Operating Income was ¥325.0B (△5.0% YoY), and Net Income was ¥248.1B (△10.0% YoY). The Operating Income margin declined to 20.8% from 23.7% in the same period of the previous year, indicating that revenue growth has not translated into earnings growth.
Factors Driving Performance Changes
【Revenue】Revenue was ¥1565.5B, representing an +8.4% YoY increase. Although the top line expanded due to growing demand, profitability did not improve accordingly, as discussed below.
【Profit and Loss】Operating Income was ¥325.0B, down △5.0% YoY, while Net Income was ¥248.1B, down △10.0% YoY. Although the gross margin remained high at 42.4%, the SG&A expense ratio increased to 21.5%, causing the Operating Income margin to decline by approximately 2.9pt from 23.7% in the previous year to 20.8%. Profit Before Tax of ¥352.9B exceeded Operating Income by ¥27.9B because financial income of ¥29.5B exceeded financial expenses of ¥1.6B; this was attributable to non-operating factors. In conclusion, the Company recorded higher revenue but lower earnings.
Key Financial Indicators
【Profitability】The Operating Income margin of 20.8%, Net Income margin of 15.8%, and gross margin of 42.4% were all at high levels; however, each declined by approximately 2.9pt and approximately 3.2pt, respectively, compared with the same period of the previous year, indicating a deteriorating trend in profitability.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥332.7B, or 1.34 times Net Income of ¥248.1B, indicating strong cash conversion. However, the increase in trade receivables reduced OCF by ¥76.1B, while annualized DSO was 88 days, DIO was 85 days, and CCC was 125 days, all exceeding generally cautious levels.【Investment Efficiency】ROE was only 6.6%, decomposed into a Net Income margin of 15.8% × total asset turnover of 0.37x × financial leverage of 1.13x. Low total asset turnover was the primary factor suppressing ROE, while abundant cash and financial assets (a combined ¥1436.8B, approximately 34% of total assets) reduced capital efficiency.【Financial Soundness】The Equity Ratio was 88.3%, the debt-to-equity ratio was 0.13x, and the current ratio was approximately 831%, indicating an extremely stable financial foundation.
Cash Flow Analysis
Although OCF declined by △19.0% YoY to ¥332.7B, it remained 1.34 times Net Income of ¥248.1B, indicating that cash conversion itself was strong. The decline was primarily attributable to an increase in trade receivables, which resulted in a ¥76.1B cash outflow, compounded by an inventory increase, which resulted in an ¥11.5B outflow; this was partially offset by an increase in trade payables of ¥22.1B. Investing Cash Flow was △¥29.1B, as the ¥162.0B in capital expenditures was offset by proceeds from the sale of investment securities and other items. Financing Cash Flow was △¥322.6B, with dividend payments of ¥164.9B and share repurchases of ¥150.2B constituting the primary cash outflows. Free Cash Flow (OCF + Investing Cash Flow) was ¥303.6B, while dividends and share repurchases combined amounted to ¥315.1B, slightly exceeding FCF. Supported by cash and cash equivalents of ¥863.4B and a strong financial foundation, the impact on short-term liquidity remains limited.
Quality of Earnings
Profit Before Tax of ¥352.9B exceeded Operating Income of ¥325.0B by ¥27.9B. This was attributable to net financial income, as financial income of ¥29.5B exceeded financial expenses of ¥1.6B, and should therefore be evaluated separately from recurring profit reflecting the earning power of the core business. The effective tax rate was approximately 29.7%, calculated as income taxes of ¥104.8B ÷ Profit Before Tax of ¥352.9B, and was not an especially abnormal level. Impairment losses of ¥5.7B amounted to only approximately 2.3% of Net Income and were not large enough to materially distort the current-period earnings level. As OCF was 1.34 times Net Income, there was no excessive reliance on accrual-based earnings; however, the deterioration in working capital resulting from the increase in trade receivables warrants monitoring from an accruals perspective. Comprehensive Income was ¥388.2B, exceeding Net Income of ¥248.1B by ¥140.1B, primarily due to foreign currency translation adjustments of ¥120.3B. This divergence resulted from foreign exchange fluctuations rather than the earning power of the core business, and care should be taken not to confuse the increase in Comprehensive Income with an improvement in the core business.
Earnings Forecast and Guidance
The Q3 cumulative progress rates against the Full-Year forecast (Revenue of ¥2050.0B, Operating Income of ¥410.0B, and EPS of ¥911.47) were 76.4% for Revenue, 79.3% for Operating Income, and 81.4% for Net Income, all exceeding the 75% benchmark based on the simple passage of three quarters. However, the Full-Year forecast assumes a △3.9% YoY decline in Operating Income, and the Operating Income required in Q4 is approximately ¥85.0B, implying an Operating Income margin of approximately 17.5%, below the 20.8% recorded for the Q3 cumulative period. The Company’s plan incorporates deterioration in profitability toward Q4, and the progress exceeding the benchmark through Q3 does not immediately indicate upside potential for the Full-Year results.
Shareholder Returns
The interim dividend was ¥245.00 per share, while the Full-Year dividend forecast is ¥490.00, implying that the year-end dividend is expected to be the same as the interim dividend. The forecast Payout Ratio against the Full-Year EPS forecast of ¥911.47 is approximately 53.8%. In addition to cumulative dividend payments of ¥164.9B during the current period, the Company carried out share repurchases of ¥150.2B, bringing cumulative total returns to ¥315.1B. This represents a Total Return Ratio of approximately 127.0% relative to current-period Net Income of ¥248.1B and approximately 103.8% relative to FCF of ¥303.6B, meaning that shareholder returns exceeded current-period cash flow. Although short-term execution feasibility is secured by the strong financial foundation, including an Equity Ratio of 88.3% and cash and cash equivalents of ¥863.4B, the Payout Ratio and Total Return Ratio must be evaluated separately and clearly distinguished.
Risk Factors
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Deterioration in working capital efficiency: Annualized DSO was 88 days, DIO was 85 days, and CCC was 125 days, all exceeding generally cautious levels (DSO above 60 days, DIO above 60 days, and CCC above 120 days). The lengthening collection period for trade receivables of ¥501.6B and the accumulation of inventories of ¥278.9B could increase the risk of valuation losses during demand fluctuations and constrain future cash-generation capacity.
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Declining profit margins despite revenue growth: While Revenue increased +8.4% YoY, Operating Income declined △5.0% and the Operating Income margin fell by approximately 2.9pt. If the Company continues to be unable to absorb increases in costs such as raw materials and labor through revenue growth, improvement in SG&A expenses and the cost structure will be necessary to transition to higher revenue and higher earnings.
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Capital efficiency and sustainability of shareholder returns: Annualized ROE was 6.6%, with capital efficiency constrained by abundant cash and financial assets, which represented approximately 34% of total assets. In addition, total returns of ¥315.1B, comprising dividends and share repurchases, exceeded FCF of ¥303.6B. Continued monitoring is necessary regarding the prioritization of return funding and growth investment if working capital continues to deteriorate.
Industry Benchmark (Reference; Compiled by the Company)
Industry Benchmark (manufacturing)
Profitability and Returns
| Metric | Company | Median (IQR) | Delta |
|---|---|---|---|
| Operating Income margin | 20.8% | 8.6% (4.3%–12.7%) | +12.2pt |
| Net Income margin | 15.8% | 6.4% (2.8%–10.3%) | +9.4pt |
The Company’s Operating Income margin and Net Income margin both significantly exceeded the industry median, placing its profitability in the upper tier of the industry.
Growth and Capital Efficiency
| Metric | Company | Median (IQR) | Delta |
|---|---|---|---|
| Revenue growth rate (YoY) | 8.4% | 3.3% (-2.1%–8.9%) | +5.1pt |
The Revenue growth rate also exceeded the industry median, placing the Company in the upper tier of the industry in terms of growth.
※Source: Compiled by the Company
Key Points from the Earnings Results
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While Revenue increased +8.4% YoY, the Operating Income margin declined by approximately 2.9pt, resulting in higher revenue but lower earnings. The gross margin was maintained at 42.4%, making SG&A expense control a structural factor that will determine future trends in profit margins.
-
Annualized DSO of 88 days, DIO of 85 days, and CCC of 125 days all exceeded generally accepted efficiency benchmarks. Although OCF was 1.34 times Net Income and cash conversion itself was strong, the accumulation of working capital is a key point highlighted by the earnings data.
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Cumulative total returns of ¥315.1B, comprising dividends and share repurchases, exceeded current-period FCF of ¥303.6B. A notable feature is that these returns were implemented under a strong financial foundation with an Equity Ratio of 88.3%.
Theoretical Share Price (Reference Value)
| Scenario | Theoretical Share Price |
|---|---|
| bear (bearish) | ¥11,022 |
| base (base case) | ¥11,222 |
| bull (bullish) | ¥11,474 |
| Valuation Assumption | Value |
|---|---|
| Book value per share (BPS) | ¥11,433 |
| Adjusted forecast EPS | ¥984.1 |
| Cost of equity r | 9.27% (10-year government bond 2.77% + equity risk premium 6.00% + size premium 0.50%) |
| Residual income persistence coefficient ω / explicit forecast period | 0.62 / 5 years |
| Assumed Payout Ratio | 53.8% |
| Forecast EPS confidence adjustment | ×1.080 (based on the track record of guidance achievement in the same industry) |
| implied PBR / PER | 0.98x / 11.4x |
Sensitivity: ¥10,917–¥11,541 at ±1% for the cost of equity, and ¥11,215–¥11,226 at ±0.1 for ω.
Notes:
- Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
- Net assets as of the quarter-end are used (there is a timing difference relative to the Full-Year forecast).
(Calculation model: Residual income model (Ohlson type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast or guarantee future share prices.)
This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.
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AI Financial Analysis
Executive Summary
Hirose Electric delivered solid top-line growth in FY2026 Q3, but profitability weakened as production costs rose faster than revenue. Revenue increased 8.4% year on year to ¥156.55bn. Operating income declined 5.0% to ¥32.50bn despite the higher sales base. Net income fell 10.0% to ¥24.81bn, with the decline exceeding that of operating income. Gross profit rose modestly to ¥66.35bn, but the gross margin contracted to 42.4% from 45.6% in the prior-year period, a 323bp compression. The operating margin declined to 20.8% from 23.7%, a 293bp contraction, although it remains excellent by manufacturing-sector standards. Cost of sales increased 14.9%, materially faster than revenue growth, and was the principal source of margin pressure. SG&A expenses increased 6.2%, below revenue growth, reducing the SG&A-to-sales ratio by approximately 45bp to 21.5%. Finance income of ¥2.95bn substantially exceeded finance costs of ¥0.16bn, supporting profit before tax of ¥35.29bn. The effective tax rate was 29.7%, and the tax burden factor of 0.703 was within a normal range. Cash conversion remained favorable, with operating cash flow of ¥33.27bn exceeding net income by 1.34x. However, receivables, inventories and the cash conversion cycle require close attention, as DSO was 88 days, DIO was 85 days and the cash conversion cycle was 125 days. These elevated working-capital days reflect a greater amount of capital tied up in the operating cycle despite otherwise strong cash generation. The balance sheet remains exceptionally conservative, with an 88.3% equity ratio, a debt-to-equity ratio of 0.13x and substantial financial assets. The company returned ¥31.51bn to shareholders through dividends and share repurchases during the nine-month period, exceeding net income and resulting in a 127.0% total return ratio. Full-year guidance implies a Q3 cumulative operating-income progress rate of 79.3%, modestly ahead of the standard 75% seasonal benchmark, while net-income progress is 81.4%. The central issue for the final quarter is whether revenue growth can be converted into renewed gross-margin expansion while working-capital intensity is contained.
Profitability Analysis
The reported annualized ROE was 8.8%, derived from a 15.8% net profit margin, 0.488x asset turnover and 1.13x financial leverage. The DuPont profile shows that returns are driven predominantly by high margins rather than leverage, consistent with the company's net-cash-rich and equity-funded capital structure. Financial leverage is low and therefore neither enhances nor meaningfully threatens shareholder returns. The principal year-on-year change was margin compression: gross margin declined by 323bp and operating margin by 293bp. Revenue growth of 8.4% was insufficient to offset a 14.9% increase in cost of sales, indicating weaker manufacturing cost absorption, product mix pressure, input-cost pressure, or a combination of these factors. SG&A discipline was comparatively good: SG&A rose 6.2%, below sales growth, and the SG&A ratio fell to 21.5% from approximately 21.9%. Thus, the earnings deterioration was concentrated in gross profit rather than overhead deleveraging. EBIT margin remained a strong 20.8%, well above the 15% threshold generally considered excellent. Net margin was also robust at 15.8%, although down from approximately 19.1% in the prior-year period. The interest burden of 1.086x reflects net finance income rather than debt-service pressure, as finance income materially exceeded finance costs. The annualized ROA implied by annualizing the nine-month net income is approximately 7.8% using average total assets, indicating solid but not exceptional balance-sheet productivity. Sustained improvement in ROE is therefore more likely to require recovery in gross margin and/or higher asset utilization than additional leverage.
Growth Assessment
Revenue growth of 8.4% demonstrates continuing demand momentum, but the lower operating and net profits indicate that growth quality weakened during the nine-month period. Gross profit increased only 0.7% year on year, far below revenue growth, because cost of sales grew faster than sales. Operating income declined 5.0%, while net income decreased 10.0%, showing that the incremental revenue generated lower profitability than the existing business base. Full-year company guidance calls for revenue of ¥205.00bn, operating income of ¥41.00bn and net income attributable to owners of ¥30.50bn. Q3 cumulative progress against the full-year forecast is 76.4% for revenue, 79.3% for operating income and 81.4% for net income. Compared with the standard Q3 progress benchmark of 75%, revenue is broadly in line, while operating and net income are ahead by 4.3 and 6.4 percentage points, respectively; neither deviation exceeds the 10-percentage-point threshold. The guidance therefore implies a final-quarter revenue contribution of ¥48.45bn, operating income of ¥8.50bn and net income of ¥5.69bn. This implied final-quarter operating margin is about 17.5%, below the nine-month 20.8% margin, consistent with prudent guidance or expected seasonal cost pressure. For an electronics connector manufacturer, the principal operational test is whether shipment growth is accompanied by a healthier product mix and sufficient factory utilization to restore gross-margin conversion. The increase in inventories and receivables means growth should be assessed not only by reported sales but also by the speed with which inventory is converted into customer cash receipts.
Financial Health
Financial health is exceptionally strong. Total equity was ¥377.63bn, representing an equity ratio of 88.3%, while total liabilities were only ¥50.20bn. The debt-to-equity ratio of 0.13x is far below the 2.0x level associated with aggressive leverage. Current assets of ¥240.64bn exceeded estimated current liabilities of ¥28.97bn by roughly ¥211.67bn, producing an estimated current ratio of 8.31x. This is substantially above the 1.0x warning threshold and indicates no short-term liquidity stress. Cash and cash equivalents were ¥86.34bn, and other current financial assets were ¥67.43bn, providing substantial liquid resources relative to current obligations. Non-current other financial assets were also significant at ¥76.25bn, further reinforcing balance-sheet flexibility. Lease liabilities totaled ¥6.07bn, comprising ¥1.12bn current and ¥4.95bn non-current, and are readily manageable relative to liquidity and equity. No maturity mismatch is evident because current liquid assets substantially exceed short-term liabilities. Total liabilities represented only 11.7% of total assets. Treasury stock increased in absolute magnitude by ¥14.98bn year on year to negative ¥42.45bn, reflecting the ¥15.02bn share repurchase executed during the period. This buyback modestly reduces equity but does not compromise solvency given the scale of retained earnings of ¥357.29bn. Other comprehensive income of ¥14.01bn, led by ¥12.03bn of exchange-translation differences, lifted comprehensive income to ¥38.82bn and contributed to equity resilience. The principal financial-health consideration is capital-allocation discipline rather than balance-sheet capacity.
Notable B/S Changes
Treasury stock: increased in absolute magnitude by ¥14.98bn to negative ¥42.45bn (+54.6% versus the prior-year balance) - reflects the ¥15.02bn share repurchase program; it reduces equity modestly but remains readily supportable given the 88.3% equity ratio and ¥357.29bn of retained earnings.
Cash Flow Quality
Cash-flow quality was strong, with operating cash flow of ¥33.27bn equal to 1.34x net income of ¥24.81bn. This is above the 0.8x warning threshold and indicates that reported earnings were converted into cash effectively. The accruals ratio was negative 2.0%, also supportive of earnings quality because cash generation was stronger than accrual-based earnings. Operating cash flow was nevertheless lower than ¥41.10bn in the prior-year period. Working-capital movements absorbed cash: receivables increased by ¥7.61bn and inventories increased by ¥1.15bn. Payables contributed ¥2.21bn of cash, while other working-capital movements added ¥3.78bn. Receivables rose 24.2% year on year to ¥50.16bn, broadly tracking stronger revenue but contributing to elevated DSO. Inventory increased 11.1% year on year to ¥27.89bn, tying up additional cash and contributing to high inventory days. The reported free cash flow was ¥30.36bn; after deducting disclosed capital expenditures of ¥16.20bn from operating cash flow, capex-adjusted free cash flow was ¥17.08bn. Capex represented 10.3% of nine-month revenue, above the typical 3-8% manufacturing range and consistent with a meaningful investment burden. Investing cash flow was limited to an outflow of ¥2.91bn overall, as purchases and sales of investments were broadly offsetting and time deposits decreased. Financing cash flow was an outflow of ¥32.26bn, driven principally by dividends and share repurchases. Despite these outflows, cash increased by ¥0.67bn during the period. The 88-day DSO is a quality alert because slow collections increase credit exposure and can delay conversion of reported sales into cash; it is above the 60-day warning level and should be reduced through tighter collection terms and customer-credit management. The 85-day DIO is also elevated relative to the 60-day benchmark, increasing risks of inventory carrying costs, product obsolescence and eventual discounting in a technology-component manufacturing cycle. The 125-day cash conversion cycle exceeds the 120-day warning threshold, demonstrating that the combination of slow collections and inventory holdings is absorbing capital despite healthy current-period operating cash flow.
Dividend Sustainability
The disclosed interim dividend was ¥245 per share, and the calculated dividend payout ratio was 35.2% based on the dividend paid during the period. This dividend-only payout is conservative relative to the 60% sustainability benchmark. The full-year forecast dividend is ¥490 per share, implying that the current interim amount is consistent with an unchanged equal interim and year-end payment pattern. Based on forecast EPS of ¥911.47, the forecast dividend payout ratio is approximately 53.8%, which remains within a sustainable range. Reported free cash flow covered the disclosed dividends by 3.47x. On a capex-adjusted free-cash-flow basis, dividends of ¥16.49bn were covered by approximately 1.04x, leaving limited residual cash after both capital investment and dividends but still indicating coverage. The company additionally spent ¥15.02bn on share repurchases. Dividends plus buybacks totaled ¥31.51bn, equivalent to a total return ratio of approximately 127.0% of nine-month net income. Accordingly, shareholder distributions exceeded period earnings when repurchases are included, although the balance sheet can readily support this because of very high equity capitalization and substantial financial assets. The sustainability of the ordinary dividend appears strong; the pace of buybacks is more discretionary and should be assessed against future operating cash flow, capital-expenditure requirements and working-capital needs.
Risk Assessment
Business risks include Margin risk: cost of sales increased 14.9% versus 8.4% revenue growth, compressing gross margin by 323bp and operating margin by 293bp. For a connector manufacturer, product mix, factory utilization, input costs and pricing discipline are key determinants of whether this pressure persists., Receivables-collection risk: DSO of 88 days exceeds the 60-day warning level. The root cause is that trade receivables increased ¥9.76bn year on year to ¥50.16bn. This can be partly associated with growth, but it raises customer-credit and cash-conversion risk if collection periods do not normalize., Inventory risk: DIO of 85 days exceeds the 60-day benchmark. Inventory rose ¥2.80bn year on year to ¥27.89bn, increasing exposure to demand revisions, component obsolescence and potential inventory write-downs in electronics supply chains., Cash-conversion-cycle risk: the 125-day cash conversion cycle exceeds the 120-day warning level. This reflects the combined effect of high DSO and DIO, and it may constrain the cash benefits of future revenue growth., Foreign-exchange and overseas-demand risk: ¥12.03bn of exchange-translation gains contributed substantially to other comprehensive income, illustrating sensitivity of overseas asset values and reported equity to currency movements. Global electronics demand cycles can also affect volumes and utilization..
Financial risks include Capital-return risk: dividends and share repurchases totaled ¥31.51bn, exceeding nine-month net income of ¥24.81bn. While funding capacity is ample, continuation of buybacks at this pace would reduce retained liquidity available for investment and cyclicality management., Investment-spending risk: capital expenditure was ¥16.20bn, or 10.3% of nine-month revenue. High investment can support capacity and technology, but returns depend on demand growth and utilization., Market-value risk in financial assets: the company holds ¥143.68bn of other financial assets across current and non-current classifications, making comprehensive income and capital potentially sensitive to market and currency movements..
Key concerns include Highest priority is whether gross-margin pressure reverses, since earnings declined despite revenue growth., Second priority is normalization of DSO, DIO and the 125-day cash conversion cycle; these three quality alerts are operationally linked and directly affect cash efficiency., Third priority is ensuring that capital expenditures, dividends and repurchases remain aligned with sustainable cash generation rather than solely with the balance-sheet cash reserve..
Investment Implications
Key takeaways include Revenue growth remained positive at 8.4%, but operating income and net income fell 5.0% and 10.0%, respectively, owing to material gross-margin compression., Profitability remains high in absolute terms, with a 20.8% operating margin, 15.8% net margin and 8.8% annualized ROE., Cash earnings quality is favorable: operating cash flow exceeded net income by 1.34x and the accruals ratio was negative 2.0%., The balance sheet provides substantial resilience, with an 88.3% equity ratio, 0.13x debt-to-equity ratio and an estimated 8.31x current ratio., Working-capital efficiency is the main operating concern, with 88-day DSO, 85-day DIO and a 125-day cash conversion cycle., The dividend is supported by earnings and free cash flow, while buybacks lift the total return ratio to 127.0% of nine-month earnings..
Metrics to watch include Gross margin and operating margin recovery from 42.4% and 20.8%, respectively, Cost-of-sales growth relative to revenue growth, DSO of 88 days and trade-receivable balance of ¥50.16bn, DIO of 85 days and inventory balance of ¥27.89bn, Cash conversion cycle of 125 days, Operating cash flow relative to net income and capex-adjusted free cash flow, Capital-expenditure intensity and the pace of share repurchases, Achievement of full-year operating-income guidance of ¥41.00bn and net-income guidance of ¥30.50bn.
Regarding relative positioning, Hirose Electric is positioned as a financially conservative, high-margin electronics manufacturer with strong cash conversion at the earnings level and substantial balance-sheet flexibility. Its relative operational weakness in this period is not leverage or liquidity, but declining incremental margins and above-benchmark working-capital days. The company’s ability to restore gross-margin conversion while reducing capital tied up in receivables and inventories will be more important than financing capacity.