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 (MHI) delivered FY2026 Q2 consolidated IFRS results showing solid top-line growth with mixed cash flow dynamics and moderate equity returns. Revenue reached 21,137.17 (100M JPY), up 7.3% YoY, evidencing demand resilience across long-cycle businesses. Gross profit was 4,117.76, translating to a 19.5% gross margin, a reasonable level for a diversified heavy-industry portfolio and suggestive of improving pricing and mix. SG&A of 2,815.48 leaves an implied core operating surplus of roughly 1,302.28 before other operating items, indicating a mid-single-digit operating margin on a simple view. Profit before tax was 1,737.20, exceeding the implied core result, helped by non-operating contributions including equity-method income of 115.29. Net income was 1,149.12, up 7.3% YoY, with an effective tax rate of 27.7%, broadly aligned with Japan’s statutory range after credits and adjustments. DuPont analysis shows ROE at 4.4%, decomposed into a 5.4% net margin, 0.302x asset turnover, and 2.68x financial leverage; the key drag remains low asset turnover typical of large, project-based industrials. Total assets were 70,025.46 and equity 26,119.37, implying a leverage profile consistent with a 35.6% equity ratio and debt-to-equity of 1.60x. Cash generation was weak in the period: operating cash flow was -88.67 and free cash flow was -857.42, reflecting working capital absorption and ongoing investment. Investing cash outflows of -768.75 likely capture capex and strategic investments tied to backlog execution and technology programs. Financing inflows of 1,991.76 indicate reliance on external funding to bridge negative FCF, consistent with long-cycle project timing. Despite positive earnings, OCF/Net income was -0.08x, underscoring a timing gap between revenue recognition and cash conversion. EPS (basic) was 34.21 yen, aligning with reported net income given average shares of 3.359 billion. Book value per share is calculated at 777.34 yen, implying a moderate leverage of assets to equity. Dividend indicators suggest a 67.5% payout ratio and FCF coverage of -1.11x for the period, which is not covered by internally generated cash. Data limitations are notable, including unreported operating income, capex, current liabilities, and interest expense; conclusions emphasize trends visible in the disclosed figures.

Profitability Analysis

ROE_decomposition: ROE 4.4% = Net margin 5.4% x Asset turnover 0.302 x Financial leverage 2.68x. The main constraint is low asset turnover inherent to large-scale, capital-intensive, project businesses. Net margin at 5.4% benefited from non-operating items, given that the simple implied operating result from gross profit less SG&A is lower than profit before tax. margin_quality: Gross margin of 19.5% is consistent with improving pricing discipline and mix shift, but SG&A intensity remains high at roughly 13.3% of revenue (2,815.48/21,137.17). Implied core operating margin (gross profit minus SG&A divided by revenue) is approximately 6.2%, though this excludes other operating income/expenses and IFRS classification effects; reported operating income is unreported. operating_leverage: Revenue grew 7.3% YoY while net income grew 7.3% YoY, implying stable incremental margins at the bottom line. The gap between gross profit and SG&A indicates some scale benefit, but working capital and potential project cost phasing likely dampened incremental operating leverage in cash terms.

Growth Assessment

revenue_sustainability: Top-line growth of 7.3% YoY suggests healthy backlog conversion across Energy, Defense, Infrastructure, and Machinery/Systems. Given the long-cycle nature of MHI’s businesses, growth likely reflects previously booked orders and improving supply chain throughput rather than short-term demand spikes. profit_quality: Profit before tax (1,737.20) exceeds implied core EBIT, indicating contributions from non-operating sources such as equity-method gains (115.29) and possibly other income. Net margin of 5.4% is acceptable, but underlying operating profitability appears mid-single-digit, implying sensitivity to execution on large projects. outlook: Assuming backlog execution continues and cost inflation is contained, revenue growth can remain steady into the next quarters. Key determinants include project milestone timing, FX effects on exports and imported components, and the mix of defense/energy projects, which typically carry better pricing but higher execution risk.

Financial Health

liquidity: Current assets are 39,116.32; current liabilities are unreported, so standard liquidity ratios (current, quick) cannot be calculated. Cash and deposits are unreported, but cash and equivalents stand at 6,578.16, offering a liquidity buffer for working capital needs. solvency: Total equity is 26,119.37 versus total assets of 70,025.46, resulting in reported equity ratio of 35.6% and leverage (assets/equity) of 2.68x. Debt-to-equity of 1.60x (based on total liabilities/equity) indicates moderate leverage typical of large industrials. capital_structure: Interest-bearing debt breakdown is unreported, but financing CF of +1,991.76 suggests net borrowing or other financing inflows to support negative FCF and working capital. Retained earnings of 15,886.43 underpin equity, and capital surplus is 447.42.

Cash Flow Quality

earnings_quality: OCF/Net income of -0.08x highlights poor cash conversion this period, likely due to working capital build in inventories (10,625.32) and receivables (9,846.84), alongside project advances and milestone timing. The negative OCF despite positive earnings suggests revenue recognition ahead of cash collection, common in long-cycle projects. FCF_analysis: Free cash flow was -857.42 (OCF -88.67 plus investing CF -768.75). Investing cash outflows indicate active capex or strategic investments; exact capex is unreported, so we cannot separate M&A or financial investments from maintenance/growth capex. working_capital: Accounts receivable of 9,846.84 and inventories of 10,625.32 are sizeable relative to revenue and assets, indicating heavy working capital intensity. Current liabilities are unreported, preventing net working capital assessment; however, accounts payable of 9,302.81 partially offsets the WC burden. The period’s cash profile indicates net WC absorption.

Dividend Sustainability

payout_ratio_assessment: Calculated payout ratio is 67.5% of net income; DPS figures are unreported but this implies a relatively high earnings payout for a capital-intensive company with mid-single-digit ROE. FCF_coverage: FCF coverage of dividends is -1.11x for the period, meaning dividends are not covered by free cash flow and would be reliant on balance sheet capacity or future cash inflows. This may be a timing issue if WC reverses in H2, but it bears monitoring. policy_outlook: Given MHI’s historical emphasis on stable dividends, management may target a payout within a policy range, balancing investment in energy transition, defense, and aerospace programs. Near-term sustainability hinges on cash conversion improving as projects reach cash milestones; absent that, payout growth could be constrained.

Risk Assessment

Business Risks:

• Project execution risk on large energy, infrastructure, and defense contracts (cost overruns, delays).
• Supply chain and component lead-time risks affecting delivery schedules and costs.
• Commodity and input cost inflation impacting margins if not fully passed through.
• Foreign exchange volatility (yen) influencing export competitiveness and import costs.
• Regulatory and policy shifts in energy and defense affecting order intake and profitability.
• Aerospace program recovery timing and certification risks.
• Concentration in long-cycle, milestone-based revenue recognition increasing earnings volatility.

Financial Risks:

• Negative operating and free cash flow in the period requiring external financing.
• Leverage sensitivity given debt-to-equity of 1.60x and potential interest rate exposure (interest expense unreported).
• Working capital build in receivables and inventories raising cash conversion risk.
• Pension/retirement benefit obligations risk (not disclosed here), common in heavy industry.
• Potential impairment risk on noncurrent assets if project economics deteriorate (goodwill/intangibles unreported).

Key Concerns:

• Sustained negative OCF if working capital does not reverse in H2.
• Dividend not covered by FCF at -1.11x, creating funding pressure if continued.
• Low asset turnover (0.302x) constraining ROE despite moderate margins and leverage.

Investment Implications

Key Takeaways:

• Revenue growth of 7.3% YoY with stable net income growth underscores resilient demand and backlog execution.
• Gross margin at 19.5% and implied core operating margin around 6.2% indicate disciplined cost control but room for operating efficiency gains.
• ROE at 4.4% remains modest, constrained by low asset turnover typical of the sector.
• Cash conversion is weak this half (OCF/NI -0.08x) due to working capital absorption; monitoring H2 reversal is critical.
• Balance sheet is solid with a 35.6% equity ratio, providing flexibility to bridge timing gaps via financing.
• Dividend payout (67.5% of earnings) is not covered by FCF this period, highlighting reliance on future cash inflows or financing.

Metrics to Watch:

• Order intake and backlog, and book-to-bill trajectory by segment.
• Operating income disclosure and segment margins once available.
• Working capital turns: DSO, inventory days, and payables days; change in contract assets/liabilities when disclosed.
• Operating cash flow conversion (OCF/NI) and FCF trend across H2.
• Capex level and mix (maintenance vs. growth) once reported.
• Equity-method income sustainability and other non-operating items.
• FX sensitivity and hedging efficacy; effective tax rate stability.

Relative Positioning: Within Japan’s heavy-industrial peer set (e.g., IHI, Kawasaki Heavy Industries), MHI demonstrates scale advantages and diversified exposure to energy and defense, supporting top-line stability; however, its ROE profile remains mid-pack due to low asset turnover and cash conversion volatility inherent in long-cycle project delivery.

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
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