Mitsubishi Heavy Industries,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥2.11T
• Net Income: ¥115.99B
• EPS: ¥34.21

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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

Mitsubishi Heavy Industries (7011) delivered a solid FY2026 Q2 (cumulative) with revenue growth translating into higher operating and net earnings and healthy cash generation. Revenue rose 7.3% YoY to 21,137.2, while operating income reached 1,470.8 and net income came in at 1,149.1, also up 7.3% YoY. Gross profit was 4,454.3, implying a gross margin of 21.1%, and operating margin registered at 7.0%, indicating improved operating efficiency versus historical low-single-digit levels for heavy industry peers. Profit before tax was 1,737.2 and the effective tax rate was 27.4%. Equity-method income was 149.9, contributing 8.6% of profit composition—supportive but not dominant. ROE stood at 4.4%, consistent with the DuPont-derived figure (Net margin 5.4% × Asset turnover 0.302 × Leverage 2.68x). ROIC of 4.1% trails the 7–8% management-style target range, flagging capital efficiency as a key improvement area. Cash flow quality was strong: operating cash flow of 2,079.0 exceeded net income by 1.81x, and free cash flow was robust at 1,510.8 even after investing cash outflows. The balance sheet shows total assets of 70,025.5 and equity of 26,119.4 (equity ratio 35.6%), with a D/E of 1.68x—elevated versus our conservative benchmark but not excessive for a heavy industry prime contractor. Working capital is sizable, with receivables of 7,722.0 and inventories of 10,702.7 against payables of 7,940.4, underscoring the importance of project execution and billing milestones. Dividend payout ratio is indicated at 67.5%, above the <60% benchmark, but FCF coverage of 1.95x suggests current payouts are covered by cash generation. Margin trend analysis in basis points is constrained by limited YoY disclosure; given revenue and net income both rose 7.3%, we infer net margin was roughly flat YoY (≈0 bps change), but this is an assumption. Overall, the quarter demonstrates healthy top-line momentum, improved operating performance, strong cash conversion, and manageable leverage; the main headwinds are subdued ROIC and the structural working-capital intensity of long-cycle projects. Forward-looking, backlog execution, pricing discipline amid cost inflation, and ROIC uplift (via mix and asset turns) are central to sustaining earnings and improving capital efficiency.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin 5.4% × Asset Turnover 0.302 × Financial Leverage 2.68x = ROE 4.4%. The biggest structural drag on ROE is the low asset turnover (0.302), typical of long-cycle, asset-intensive businesses, followed by modest net margins. Operating margin of 7.0% (OI 1,470.8 / Revenue 21,137.2) reflects solid execution and SG&A discipline (SG&A ratio ~14.1%), with gross margin at 21.1%. Without prior-period margin disclosure, we cannot quantify bps changes; given revenue and net income both up 7.3%, we assume net margin was broadly flat YoY. Business drivers: improved mix and execution in defense/energy-related businesses likely supported the current operating margin, while equity-method income (149.9) provided an incremental but not dominant lift to PBT. Sustainability: operating improvements tied to execution and pricing appear sustainable if supply-chain stability and cost pass-through continue; equity-method contributions can be volatile and should be treated as semi-recurring. Watch for SG&A growth exceeding revenue growth in future periods; this quarter’s SG&A ratio (~14.1%) looks contained relative to gross profit growth.

Growth Assessment

Revenue expanded 7.3% YoY to 21,137.2, indicating solid demand and backlog conversion. Operating income of 1,470.8 and net income of 1,149.1 reflect improved operating leverage, though margin bps changes are not directly observable from disclosures. Equity-method income of 149.9 (8.6% contribution) adds diversification but is not the main growth engine. Profit growth quality is supported by strong OCF (2,079.0) exceeding NI (1,149.1), indicating earnings backed by cash. Sustainability hinges on backlog execution, pricing discipline amid input cost variability, and stabilization of supply chains. Outlook: with an equity ratio of 35.6% and robust FCF (1,510.8), MHI has room to invest in priority areas (energy transition solutions, defense, aero-engine services) while maintaining dividends. Near-term growth sensitivity remains to FX, commodity-linked components, and milestone timing within large EPC-type projects.

Financial Health

Liquidity: Current ratio cannot be assessed due to unreported current liabilities; cash and deposits not disclosed. However, current assets are sizable at 44,831.4, and cash & equivalents total 7,161.0, providing a liquidity cushion. Solvency: D/E is 1.68x (Total liabilities 43,906.1 / Equity 26,119.4), above our conservative 1.5x benchmark but below a high-risk threshold (2.0x). Equity ratio is 35.6%, acceptable for a heavy industry prime contractor. Maturity mismatch: Not assessable given lack of short-term debt/current liabilities disclosure; nonetheless, elevated inventories (10,702.7) and receivables (7,722.0) vs payables (7,940.4) imply reliance on project cash milestones—monitor billing and collection discipline. Off-balance sheet: No data on guarantees/contingent liabilities disclosed here; note that large project businesses often carry performance guarantees.

Cash Flow Quality

OCF/NI is 1.81x, indicating high-quality earnings with strong cash conversion. Operating CF of 2,079.0 and Investing CF of -568.2 produced FCF of 1,510.8, comfortably funding capex (-949.6) and leaving room for dividends. No signs of aggressive working-capital pull-forwards are evident from the aggregate data, but working capital remains structurally high (inventories and receivables heavy), which can introduce volatility. Dividend and buyback cash outflows are unreported; however, implied payout ratio is 67.5%, and FCF coverage is 1.95x—suggesting current distributions are sustainable under base-case cash generation.

Dividend Sustainability

Payout ratio is indicated at 67.5%, above our <60% comfort zone, but supported by strong FCF coverage of 1.95x this period. With OCF exceeding NI and capex manageable, near-term dividend capacity appears adequate. Medium-term sustainability depends on maintaining positive FCF after growth capex and potential project cash swings. Policy outlook cannot be confirmed from disclosures; monitor for a balanced approach prioritizing ROIC improvement and debt discipline alongside shareholder returns.

Risk Assessment

Business Risks:

• Long-cycle project execution risk (schedule delays, cost overruns) affecting margins and cash timing
• Input cost inflation and supply-chain disruption impacting fixed-price/legacy contracts
• Program concentration in defense/energy/aero segments leading to earnings volatility if milestones slip
• Technology and certification risks in new energy solutions and aero-engine programs
• FX volatility affecting export-heavy revenues and procurement costs

Financial Risks:

• Elevated leverage vs benchmark (D/E 1.68x) amid working-capital-intensive model
• ROIC at 4.1% below 5% warning threshold, implying low capital efficiency
• Potential maturity mismatch unassessable due to missing current liability and debt tenor data
• Equity-method income variability (149.9; 8.6% contribution) can swing PBT

Key Concerns:

• Capital efficiency: ROIC 4.1% well below 7–8% target range
• Sizable inventories (10,702.7) and receivables (7,722.0) elevate cash conversion cycle risk
• Payout ratio at 67.5% above comfort level despite strong FCF (coverage 1.95x)
• Limited visibility on interest coverage and debt maturity profile due to unreported items

Investment Implications

Key Takeaways:

• Solid top-line growth (+7.3% YoY) with operating margin at ~7.0%
• High-quality earnings: OCF/NI 1.81x and FCF 1,510.8
• Capital efficiency remains the weak spot: ROE 4.4%, ROIC 4.1%
• Leverage moderate-to-elevated (D/E 1.68x) but equity ratio healthy at 35.6%
• Equity-method income supportive but not a primary driver (8.6% contribution)

Metrics to Watch:

• Order intake and backlog conversion; milestone billing and collections
• Operating margin bridge by segment; SG&A growth vs revenue growth
• ROIC trajectory toward 7–8% through mix and asset-turn improvements
• Working capital turns: inventory and receivable days vs payable days
• Net debt and interest coverage (once disclosed); debt maturity ladder
• Dividend policy signals vs FCF and growth capex needs

Relative Positioning: Within global heavy industrial primes, MHI shows improving operating performance and strong cash conversion this period, offset by sub-target ROIC and structurally heavy working capital. Balance sheet resilience is acceptable, though leverage sits above conservative benchmarks.

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