ESPEC CORP. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥30.32B
• Operating Income: ¥2.61B
• Net Income: ¥1.91B
• EPS: ¥87.49

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: Soft quarter with margin compression—revenue was essentially flat while profits declined double-digit, pointing to cost/mix pressure and weaker operating leverage. Revenue was 303.22 (−0.5% YoY), operating income 26.07 (−20.9% YoY), ordinary income 27.04 (−20.4% YoY), and net income 19.12 (−22.0% YoY). Gross profit was 105.54, implying a gross margin of 34.8%. Operating margin was 8.6% (26.07/303.22), ordinary margin 8.9%, and net margin 6.3%. Based on the YoY declines versus revenue, we estimate operating margin compressed by roughly 222 bps YoY (from ~10.8% to 8.6%). We also estimate net margin compressed by about 174 bps YoY (from ~8.0% to 6.3%). SG&A was 79.47 (26.2% of sales), indicating limited operating leverage given near-flat revenue. Non-operating income of 1.74 (notably dividend income 0.90 and interest income 0.27) provided a modest earnings buffer; non-operating income ratio was 9.1% of operating income. ROE calculated by DuPont was 3.3%, constrained by low asset turnover (0.394) and moderate leverage (1.33x). ROIC was 4.4%, below the 5% warning threshold, implying underwhelming capital efficiency this period. Earnings quality cannot be verified due to unreported operating cash flow; however, interest coverage is very strong at 162.9x, suggesting no near-term financing stress. Liquidity is robust with a current ratio of 349.9% and substantial net cash (cash and deposits 173.69 vs total loans 6.91). The calculated payout ratio stands at 118.2%, which is not sustainable on earnings alone absent strong free cash flow. Balance sheet resilience (equity ratio ~75.3%) provides flexibility to navigate profit volatility, but sustained ROIC improvement is needed for better capital efficiency. Forward-looking, profitability hinges on restoring gross margin and controlling SG&A while converting backlog to cash—monitor order intake, pricing, and working capital.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin (6.3%) × Asset Turnover (0.394) × Financial Leverage (1.33x) = ROE 3.3%. The most material adverse change versus last year is the margin component, as revenue was nearly flat (−0.5%) but operating and net profit fell ~21–22%, implying margin compression as the dominant driver. Business context suggests higher input costs, less favorable product mix, and/or reduced utilization limiting gross margin, coupled with SG&A that did not flex down (SG&A/sales at 26.2%). Asset turnover at 0.394 is modest for capital goods in a half-year snapshot and likely secondary to the ROE decline this quarter; leverage remains low and stable. The compression appears partly cyclical (cost inflation, delivery timing, mix) rather than structural, but recovery requires pricing discipline and throughput normalization. Watch for SG&A growth outpacing revenue—this quarter’s near-flat sales with double-digit OP decline indicates unfavorable operating leverage. Sustainability: margin headwinds can abate with cost pass-through and mix, but absent revenue acceleration, ROE will stay subdued.

Growth Assessment

Top line was stable at 303.22 (−0.5% YoY), indicating demand resilience but no growth catalyst in the period. Profit contraction (OP −20.9% YoY, NP −22.0% YoY) signals negative operating leverage and/or mix. Gross margin at 34.8% is adequate but likely lower YoY given the profit trajectory. Non-operating income (1.74) modestly supported ordinary earnings; underlying operating momentum remains the key swing factor. With ROIC at 4.4%, incremental growth investments must be selective until returns improve. Outlook depends on backlog conversion, pricing power in environmental test chambers, and normalization of cost inflation. Absent evidence of accelerating orders or mix improvement, near-term growth in profits may be limited; focus on sequential margin trends and book-to-bill.

Financial Health

Liquidity is strong: current ratio 349.9% and quick ratio 331.1%, well above benchmarks. No warning triggers (Current Ratio <1.0 or D/E >2.0) apply. Balance sheet is conservative with total liabilities 189.67 versus equity 579.67; liabilities-to-equity approximates 0.33x, and equity ratio is about 75.3% (579.67/769.34). Interest-bearing debt is low (short-term loans 2.50, long-term loans 4.41), while cash and deposits are 173.69, implying a sizable net cash position (~166.8). Interest coverage is very strong at 162.94x, reflecting minimal interest burden. Maturity mismatch risk is low: current assets 514.79 comfortably cover current liabilities 147.13; accounts receivable 149.90 and cash 173.69 together exceed all current liabilities. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

Operating cash flow is unreported; OCF/Net Income cannot be assessed. Free cash flow is also unreported, limiting visibility on cash conversion. Working capital: accounts receivable of 149.90 is sizable relative to half-year revenue (303.22), consistent with long project/delivery cycles; inventories are comparatively low at 27.58, suggesting build-to-order dynamics. Without OCF, there is no evidence of working capital manipulation, but monitoring DSO and advance receipts is prudent. Given the calculated payout ratio above 100%, FCF coverage is a key watchpoint once disclosed.

Dividend Sustainability

The calculated payout ratio is 118.2%, implying dividends exceed current-period earnings and are not sustainable on earnings alone. With net cash of ~166.8 and strong liquidity, the company could maintain dividends temporarily; however, long-term sustainability requires earnings/FCF alignment. FCF coverage cannot be evaluated due to unreported cash flows and capex. Policy outlook likely hinges on profit normalization in H2 and FY achievements; if margins do not recover, a recalibration toward a lower payout or earnings catch-up would be necessary to sustain distributions.

Risk Assessment

Business Risks:

• Margin pressure from input cost inflation and product mix shifts reducing gross margin
• Negative operating leverage if SG&A does not flex with sales amid flat demand
• Order timing/backlog conversion risk affecting quarterly revenue recognition
• Pricing power risk in competitive environmental test equipment markets
• Potential slowdown in capex from key end-markets (auto/EV, electronics, battery, semiconductor)

Financial Risks:

• ROIC at 4.4% (<5%) signals underperforming capital efficiency
• Dividend coverage risk with payout ratio at 118.2% absent strong FCF
• Receivables concentration and elongated terms could elevate DSO and cash conversion risk

Key Concerns:

• Estimated margin compression: operating margin down ~222 bps YoY; net margin down ~174 bps YoY
• Earnings quality cannot be validated due to unreported OCF/FCF
• Low ROE (3.3%) driven by weak margin and modest asset turnover

Investment Implications

Key Takeaways:

• Profits declined materially despite stable revenue, pointing to margin compression and weak operating leverage
• ROE 3.3% and ROIC 4.4% indicate below-target capital efficiency
• Balance sheet strength (equity ratio ~75%, net cash ~166.8) mitigates financial risk
• Dividend payout (118.2%) appears stretched on earnings; FCF visibility needed
• Non-operating income provided only a small buffer; core operations must recover for profit growth

Metrics to Watch:

• Order intake and book-to-bill to gauge revenue trajectory
• Gross margin and SG&A-to-sales ratio for operating leverage
• Operating cash flow, DSO, and working capital trends
• Capex and R&D disclosures once reported to assess growth investment and future margins
• ROIC progression toward >7–8% management benchmark

Relative Positioning: Versus domestic industrial equipment peers, the company’s balance sheet is stronger than average with ample net cash, but profitability metrics (ROE/ROIC) lag due to margin compression and modest asset turnover; near-term performance hinges on restoring margin and improving cash conversion.

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