Kawasaki Heavy Industries,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥996.25B
• Net Income: ¥24.67B
• EPS: ¥132.16

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

Kawasaki Heavy Industries (IFRS, consolidated) delivered FY2026 Q2 cumulative revenue of 9,962.54 (100M JPY), up 12.7% YoY, with net income of 220.89 (100M JPY), up a strong 61.6% YoY, indicating positive operating leverage despite ongoing working capital strain. Gross profit was 1,866.36, implying a gross margin of 18.7%; SG&A was 1,471.00, or 14.8% of revenue, suggesting disciplined overhead control relative to top-line growth. Operating income was unreported, but the implied core operating result before other operating items is roughly 395.36 (gross profit minus SG&A), equating to an implied EBIT margin near 4.0%; profit before tax was 353.74, and the effective tax rate was 25.0%. DuPont metrics show net margin of 2.2%, asset turnover of 0.324x, and financial leverage of 3.73x, yielding a calculated ROE of 2.7% (aligned with the reported figure), which is modest but improving with earnings growth. Total assets were 30,708.59 and equity 8,238.26, resulting in an equity ratio of 24.8% and a liabilities-to-equity (proxy for D/E) of 2.78x, highlighting a leveraged balance sheet typical of large project manufacturers. Operating cash flow was negative at -369.52, and free cash flow was -867.29, reflecting a sizable working capital build alongside capex of -433.37. Financing inflows of 1,238.89 bridge the cash gap, with cash and equivalents at 1,327.76 at period end. Comprehensive income of 294.81 exceeded net income, pointing to positive other comprehensive income (likely FX or pension-related under IFRS), which bolstered equity. Equity-method investment income was healthy at 85.57, contributing materially to pre-tax profit quality and diversification. The profitability expansion amid double-digit revenue growth suggests better mix/price and execution; however, the low net margin underscores the importance of further cost discipline and project risk control. The negative OCF versus positive earnings highlights earnings-to-cash conversion risk, driven by receivables and inventory tied up in long-cycle businesses. Dividend cash outflow was -50.36, modest relative to net income, but FCF coverage is currently negative given the working capital cycle. Many key items are unreported (operating income, interest expense, current liabilities, cash breakdown, interest-bearing debt detail, and DPS), which limits ratio precision and trend diagnostics. Overall, results show strengthening earnings momentum and operating leverage with elevated balance-sheet intensity and dependence on external financing in the period.

Profitability Analysis

ROE decomposition: Net profit margin 2.2% x asset turnover 0.324x x financial leverage 3.73x = 2.7% ROE. Margin quality: gross margin of 18.7% on revenue of 9,962.54 indicates reasonable value-add; SG&A at 14.8% of revenue implies operating spread (gross margin minus SG&A ratio) of about 3.9%. With operating income unreported, an implied core EBIT of ~395.36 suggests an approximate EBIT margin near 4.0%, consistent with the 3.6% PBT margin (353.74/9,962.54). The effective tax rate was 25.0%, broadly in line with statutory ranges, indicating limited tax distortions. Equity-method income of 85.57 is a notable contributor to PBT, supporting earnings but adding some external dependency. Operating leverage: revenue grew 12.7% YoY while net income rose 61.6% YoY, indicating favorable operating leverage and cost pass-through/mix improvements; sustaining this will depend on backlog quality and project execution. Absent disclosed interest expense and operating income, we cannot calculate interest coverage or confirm EBIT mix, but net income infers solid bottom-line conversion relative to PBT. Overall profitability is improving but absolute margins remain thin, leaving little room for execution slippage in long-cycle projects.

Growth Assessment

Revenue growth of 12.7% YoY to 9,962.54 demonstrates solid demand across the portfolio; the breadth of growth by segment is not disclosed, but long-cycle programs and transportation/energy demand likely underpin the top line. Profit growth outpaced sales (+61.6% YoY net income), pointing to mix/price discipline and SG&A efficiency, and possibly better project profitability recognition under IFRS. The implied EBIT margin (~4.0%) and PBT margin (3.6%) indicate improving but still modest profitability, with scope for further operating improvement as scale and mix shift. Sustainability: inventories (7,754.34) and receivables (7,643.83) are large, consistent with long-cycle contracts; this supports near-term revenue visibility but heightens cash conversion risk. Equity-method income (85.57) was material to PBT, which aids growth but introduces variability tied to affiliates. Outlook considerations (data-limited): near-term growth should continue if backlog conversion remains smooth and supply chain constraints ease; however, revenue recognition and milestone timing can create volatility intra-year. Without R&D and segment detail, we cannot assess technology-driven growth or program ramps precisely. Absent operating guidance, we treat the current growth trajectory as positive but sensitive to execution and cash conversion.

Financial Health

Liquidity: current assets were 20,239.01, but current liabilities were unreported; therefore, current and quick ratios cannot be computed. The presented 'working capital' figure equals current assets due to missing current liabilities; true working capital is unknown. Cash and deposits were unreported, but cash and equivalents at period end were 1,327.76, providing some buffer. Solvency/capital structure: equity was 8,238.26 (equity ratio 24.8%), liabilities were 22,918.87, yielding a liabilities-to-equity ratio of 2.78x; leverage is significant for a project-heavy industrial. Interest-bearing debt details and tenor are unreported, limiting assessment of refinancing risk and covenant headroom. Comprehensive income exceeded net income, adding to equity during the period. Financing cash inflow of 1,238.89 indicates reliance on external funding to support working capital and capex in H1. Overall, balance sheet is asset- and working-capital-intensive with moderate equity cushion and significant leverage, typical for the business model; liquidity assessment is constrained by missing current liability and cash detail.

Cash Flow Quality

Earnings quality: net income was 220.89, but operating cash flow was -369.52, yielding OCF/NI of -1.67x, indicating poor cash conversion in the period. The shortfall is consistent with sizable increases in receivables (7,643.83) and inventories (7,754.34) relative to the scale of the business, typical of long-cycle order execution and milestone timing under IFRS. Free cash flow was -867.29 (OCF -369.52 plus investing CF -497.77), with capex of -433.37 (capex intensity ~4.35% of revenue). Financing CF of 1,238.89 plugged the FCF gap, implying incremental borrowing or other financing. Working capital dynamics likely drove OCF weakness; without current liability movement and contract asset/liability disclosures, we cannot isolate the contribution from advances or milestone billing. Depreciation and amortization of 428.47 provides a sizeable non-cash cushion, but was outweighed by working capital outflows. Overall cash flow quality this half is weak, and sustainability of earnings depends on conversion of receivables and inventory to cash in H2.

Dividend Sustainability

Dividends paid were -50.36 in cash during the period. The reported payout ratio (calculated) is 114.0%, but with NI of 220.89 this would imply a cash payout well above earnings if measured on the same period; actual cash payout to NI is about 22.8% using the dividends paid line, suggesting the 114% figure is derived from a different basis (e.g., announced DPS vs. period-attributable earnings, or parent basis vs. consolidated). Free cash flow coverage is -3.44x, indicating dividends were not covered by FCF in H1 due to working capital and capex. With financing CF positive and equity ratio at 24.8%, near-term capacity to maintain dividends exists, but sustainability hinges on normalization of OCF and continued profitability. DPS and payout policy details are unreported; thus, we cannot assess adherence to a target payout or DOE policy. Monitoring H2 cash conversion and full-year FCF will be key to evaluating ongoing dividend safety.

Risk Assessment

Business Risks:

• Execution risk on long-cycle, project-based contracts affecting margins and revenue recognition under IFRS
• Working capital volatility from receivables and inventory build impacting cash conversion and funding needs
• Supply chain constraints and input cost inflation potentially pressuring gross margin
• Currency fluctuation risk affecting both earnings and OCI (export exposure, USD/EUR/JPY)
• Dependence on equity-method investees for a portion of PBT
• Program timing and milestone variability driving quarterly earnings volatility

Financial Risks:

• High leverage with liabilities/equity at 2.78x and equity ratio of 24.8%
• Negative operating and free cash flow requiring external financing (financing CF 1,238.89)
• Insufficient disclosure on interest-bearing debt and interest expense limits visibility on coverage and refinancing risk
• Liquidity assessment constrained by missing current liability data; true working capital buffer unknown
• Potential covenant pressure if cash conversion remains weak and margins compress

Key Concerns:

• OCF/NI at -1.67x signals weak earnings-to-cash conversion in the period
• Thin net margin (2.2%) leaves limited cushion for cost overruns or schedule delays
• Reliance on financing inflows to fund working capital and capex in H1

Investment Implications

Key Takeaways:

• Top-line growth (+12.7% YoY) coupled with outsized net income growth (+61.6% YoY) indicates improving operating leverage
• Implied EBIT margin near 4% and PBT margin 3.6% show progress but remain modest
• Cash conversion is weak (OCF negative), with significant working capital tied up in receivables and inventory
• Leverage is high (equity ratio 24.8%, liabilities/equity 2.78x), but comprehensive income supported equity in the period
• Dividend outflow is modest versus NI, but not covered by FCF this half

Metrics to Watch:

• Operating income and operating margin disclosure in subsequent filings
• Order intake and backlog conversion to gauge revenue sustainability
• Working capital turns: AR days, inventory days, and contract assets/liabilities
• Operating cash flow and FCF trajectory in H2
• Interest-bearing debt levels, interest expense, and interest coverage once disclosed
• Segment mix and equity-method income contribution
• Capex versus growth initiatives and returns

Relative Positioning: Within heavy industrials and transportation equipment peers, Kawasaki shows solid revenue momentum and improving operating leverage but remains more working-capital-intensive with thinner net margins and higher balance-sheet leverage; near-term performance depends on backlog execution and 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