NIRECO CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥5.05B
• Operating Income: ¥728M
• Net Income: ¥500M
• EPS: ¥67.81

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: FY2026 Q2 was a mixed quarter for Nireco—top-line grew modestly, but margins compressed and profits declined, partially cushioned by solid operating cash flow and an exceptionally strong balance sheet. Revenue rose 2.9% YoY to 50.51, while operating income fell 7.5% YoY to 7.28 and ordinary income declined 10.3% to 7.58. Net income decreased 8.8% YoY to 5.02, with EPS (basic) at 67.81 yen. Gross profit reached 20.53 (gross margin 40.6%), and SG&A was 13.24, implying an SG&A ratio of 26.2%. Operating margin is 14.4% this period versus roughly 16.0% a year ago, indicating about 160 bps of compression. Ordinary margin is ~15.0% versus ~17.2% previously, a contraction of about 220 bps. Net margin is ~9.9% versus ~11.2% a year ago, compressing by about 120 bps, reflecting cost pressure and/or a less favorable mix. Non-operating items netted a small positive contribution (non-operating income 0.53 vs expenses 0.23), with dividend income of 0.34 and interest income of 0.05 partly offsetting. Earnings quality was solid: operating cash flow of 6.29 exceeded net income (5.02), with OCF/NI at 1.25x. The balance sheet remains a key strength: current ratio 832.8%, quick ratio 737.7%, and debt-to-equity 0.13x with negligible interest-bearing debt, limiting financial risk. ROE printed at 3.0% per DuPont, constrained by low asset turnover (0.267) and conservative leverage (1.13x). ROIC is flagged at 4.0%, below the 5% warning threshold, underscoring capital efficiency challenges despite ample cash (cash and deposits 47.12). Financing cash outflows of -6.52 likely reflect shareholder returns (dividends/buybacks), though detailed dividend and capex data were not disclosed; payout ratio shown (146.7%) appears elevated but is not fully verifiable from available cash flow detail. Near term, the focus should be on stabilizing margins (gross and operating) and lifting asset turnover to improve ROE/ROIC, while maintaining disciplined shareholder returns in line with cash generation. Absent capex and order/backlog disclosure, visibility on growth durability is limited, but the fortress balance sheet provides significant downside protection.

Profitability Analysis

ROE decomposition (DuPont): ROE (3.0%) = Net Profit Margin (9.9%) × Asset Turnover (0.267) × Financial Leverage (1.13x). The weakest component is asset turnover at 0.267, which is the primary drag on ROE given leverage is intentionally low and margin compressed YoY. Operating margin fell to ~14.4% from ~16.0% a year ago (~160 bps compression), and ordinary margin fell ~220 bps, indicating operating deleverage and/or higher SG&A vs revenue growth. The business driver likely includes cost inflation (labor/components), product mix shifts, and limited pricing power in the near term; non-operating income (notably dividends) helped but could not offset core margin squeeze. Sustainability: margin headwinds may persist absent pricing actions or mix improvement; however, conservative leverage and high cash levels support resilience while management optimizes costs. Concerning trend flags: revenue grew 2.9% while operating income declined 7.5%, implying opex growth outpaced gross profit growth (SG&A ratio at 26.2%); without detailed SG&A line items, the exact drivers are unclear, but the direction suggests negative operating leverage.

Growth Assessment

Revenue growth was modest at +2.9% YoY to 50.51, while profits contracted across operating (-7.5%), ordinary (-10.3%), and net (-8.8%), pointing to weaker operating leverage. Gross margin stands at 40.6%; with operating margin at 14.4%, the interim cost structure is absorbing a larger share of gross profit than last year. Non-operating income (0.53) provided a small buffer (dividends 0.34), but reliance remains low relative to operating profit. With ROIC at 4.0%, current investment returns are below a typical cost of capital, suggesting growth initiatives must be more selective or margin-accretive. Outlook hinges on securing better mix/pricing and improving throughput to lift asset turnover; absent order/backlog data and capex plans, sustainability of growth is uncertain. Management appears to be returning cash (financing CF -6.52 and small buyback of -0.12), which is prudent given the cash-rich balance sheet, but should be calibrated against operating cash generation trends.

Financial Health

Liquidity is exceptionally strong: current ratio 832.8% and quick ratio 737.7%, with working capital of 111.78—no warning on liquidity; Current Ratio is far above the 1.0/1.5 thresholds. Solvency is robust: debt-to-equity 0.13x, with long-term loans of only 0.10 and interest coverage at ~909x; D/E is well below any risk threshold (no D/E > 2.0 warning). Maturity mismatch risk is minimal: current assets 127.03 vs current liabilities 15.25 provide a wide cushion. Equity is 167.55 (owners' equity 166.66), reflecting a very conservative capital structure. Investment securities of 17.27 introduce market valuation volatility but do not impair liquidity. Off-balance sheet obligations were not disclosed; none can be assessed from the available data.

Cash Flow Quality

OCF/Net Income is 1.25x, indicating good earnings quality for the period. Operating CF of 6.29 covers a significant portion of financing outflows (-6.52), but without investing CF and capex disclosure, free cash flow cannot be determined. Working capital details (AR 32.35, inventories 14.51, AP 3.11) are available only as balances; the direction of working capital changes is not disclosed, limiting manipulation assessment. Interest expense is de minimis (0.01) and interest coverage is extremely high, implying negligible cash strain from financing. Based on available information, cash conversion looks healthy, but sustainability depends on maintaining margins and managing receivables/inventories turnover. FCF coverage of dividends cannot be assessed due to missing capex and dividend cash out data.

Dividend Sustainability

Reported payout ratio is not available, and detailed dividend payments are unreported; a calculated payout ratio of 146.7% is presented but cannot be reconciled from disclosed cash flows. Financing CF of -6.52 includes shareholder returns (and confirmed buybacks of -0.12), implying meaningful cash returns, but the exact dividend amount is unknown. With OCF at 6.29 and large cash reserves (cash and deposits 47.12), near-term dividend capacity appears well supported from a liquidity standpoint. However, with ROIC at 4.0% and net income declining YoY, sustaining an effectively >100% payout (if accurate) would not be prudent over the medium term without margin/earnings recovery. Policy outlook should prioritize aligning total shareholder return (dividends + buybacks) to normalized FCF once capex is clarified.

Risk Assessment

Business Risks:

• Margin compression risk from input cost inflation and mix shifts (operating margin down ~160 bps YoY).
• Demand cyclicality in industrial automation/instrumentation end-markets affecting volume and pricing.
• Potential pricing pressure from large OEM/industrial customers.
• Execution risk on cost controls with SG&A ratio at 26.2%.
• Supply chain and component availability risks impacting gross margin.

Financial Risks:

• Market value volatility of investment securities (17.27) affecting comprehensive income.
• Currency fluctuation risk if exports/imports are material (not disclosed).
• Potential mismatch if shareholder returns persistently exceed internally generated cash (financing CF -6.52 vs OCF 6.29), though cash levels are high.

Key Concerns:

• ROIC at 4.0% below the 5% warning threshold (capital efficiency shortfall).
• ROE at 3.0% constrained by low asset turnover (0.267) and conservative leverage.
• Operating and ordinary margin compression (≈160–220 bps YoY).
• Limited disclosure on capex, investing CF, and dividend cash payments, obscuring FCF and payout sustainability.
• Dependence on non-operating dividend income (0.34) as a partial buffer, though currently modest.

Investment Implications

Key Takeaways:

• Revenue growth (+2.9% YoY) did not translate to profit growth; operating income -7.5% YoY.
• Operating margin compressed to ~14.4% (~160 bps YoY), indicating negative operating leverage.
• OCF quality is solid (OCF/NI 1.25x), providing comfort on earnings convertibility.
• Balance sheet strength (current ratio ~8.3x, D/E ~0.13x, minimal debt) significantly lowers downside risk.
• Capital efficiency is the main overhang: ROIC 4.0%, ROE 3.0% with low asset turnover.
• Shareholder returns appear active (financing CF -6.52, buyback -0.12), but alignment with sustainable FCF is unclear.

Metrics to Watch:

• Operating margin and SG&A ratio trajectory (cost control effectiveness).
• Gross margin resilience amid input cost and mix changes.
• Order intake/backlog and inventory turnover to gauge demand and asset turnover.
• ROIC uplift from portfolio/product mix and pricing actions.
• OCF/NI ratio and working capital movements (AR, inventory).
• Dividend policy disclosures and capex plans (to assess FCF and payout sustainability).

Relative Positioning: Relative to domestic industrial instrumentation peers, Nireco offers superior balance sheet safety (net cash, ultrahigh liquidity) but underperforms on capital efficiency (ROIC/ROE) and shows recent margin compression; near-term upside depends on restoring operating leverage while preserving cash discipline.

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