THE KINKI SHARYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥16.27B
• Operating Income: ¥341M
• Net Income: ¥274M
• EPS: ¥39.96

Income Statement

Balance Sheet

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

Verdict: Solid top-line growth but earnings quality and profitability remain weak, with ordinary and net income collapsing year on year due to prior-year one-offs and thin operating margin. Revenue rose 19.7% YoY to 162.69, driven by stronger deliveries/order execution, but operating income fell slightly (-0.5% YoY) to 3.41, implying operating margin of 2.1%. Gross profit reached 21.96 for a gross margin of 13.5%, while SG&A totaled 18.55 (11.4% of sales), leaving little operating leverage. Operating margin compressed by about 42 basis points from roughly 2.5% in the prior-year period (back-calculated), despite the robust revenue growth. Non-operating items netted +0.50 (1.96 income minus 1.46 expenses), lifting ordinary income to 3.91, but this was down 99.2% YoY, indicating a very large prior-year non-operating gain that did not recur. Net income declined 99.6% YoY to 2.74, despite a normal effective tax rate of 29.7%, confirming that the YoY delta is driven by base effects rather than this quarter’s tax burden. Interest coverage remains acceptable at 9.0x (operating income 3.41 vs. interest expense 0.38), signaling manageable financial costs relative to earnings. Liquidity is healthy with a current ratio of 178.9% and working capital of 183.98, moderated by short-term loans of 41.00. Leverage looks conservative with total liabilities/equity at 0.85x and financial leverage of 1.85x. That said, capital efficiency is a clear weak point: ROE is only 0.8% (Net margin 1.7% × Asset turnover 0.261 × Leverage 1.85x), and ROIC is reported at 0.8%, well below the 5% warning threshold. Earnings quality cannot be validated due to unreported operating cash flow, and the calculated payout ratio of 126.1% suggests potential pressure on dividend sustainability if cash generation does not improve. Non-operating income (notably dividends 0.91 and interest income 0.86) is sizable versus operating income, underlining earnings sensitivity to financial income. The balance sheet shows ample cash and deposits (58.49) and investment securities (79.72), which support liquidity but also indicate reliance on financial assets for profit contribution. Forward-looking, margin recovery is the key swing factor: converting the higher revenue into operating profit requires tighter cost control and better project execution. Without an improvement in operating margin and confirmation of cash conversion, the risk/reward skews toward stabilization rather than rapid earnings recovery.

Profitability Analysis

ROE decomposition (DuPont): ROE 0.8% = Net Profit Margin 1.7% × Asset Turnover 0.261 × Financial Leverage 1.85x. The component that changed most versus last year is Net Profit Margin, given the 99.6% YoY drop in net income versus a 19.7% rise in revenue (implies a severe contraction in NPM due to the absence of last year’s non-operating gains). Business reason: prior-year extraordinary/non-operating boosts (e.g., investment-related gains) likely did not recur; current period’s profitability is dominated by a thin 2.1% operating margin and only modest positive non-operating contributions. Asset turnover remains low at 0.261, consistent with project-based, long-cycle deliveries and substantial working capital needs. Financial leverage at 1.85x is moderate and not the driver of ROE swings. Sustainability: the margin compression due to the loss of one-offs is structural unless operating margin can expand; conversely, if operating execution improves (pricing, procurement, and project management), NPM can normalize modestly, but a snap-back to prior-year ordinary/net profit levels purely from non-operating items is unlikely. Concerning trends: SG&A at 11.4% of sales limited operating leverage despite nearly 20% revenue growth; operating income fell slightly (-0.5% YoY), indicating cost growth outpaced gross profit expansion.

Growth Assessment

Revenue growth of +19.7% YoY to 162.69 indicates solid demand/order execution in FY26 H1. However, operating income decreased (-0.5% YoY) to 3.41, signaling insufficient cost pass-through and/or project mix headwinds. Gross margin at 13.5% is modest for rolling stock and implies tight pricing or higher material/subcontracting costs. Non-operating income (1.96) provided a partial cushion, but the YoY collapse in ordinary income (-99.2%) reveals last year’s unusually high non-operating gain. Profit growth sustainability hinges on converting backlog into higher-margin revenue; absent this, growth will not translate to earnings. Outlook: near-term earnings traction requires operating margin expansion above ~2.5% and better SG&A efficiency; otherwise, profit will lag revenue. Key swing variables: input cost trends (steel and components), delivery timing, change orders, and FX effects on imported parts versus export projects. Given the low base for ordinary/net profits this year, headline YoY comparisons may normalize in H2 if any one-time items occur, but underlying quality should be judged on operating margin improvement.

Financial Health

Liquidity is healthy: Current ratio 178.9% (417.08 current assets vs. 233.10 current liabilities). Quick ratio is shown as 178.9%, but inventories are unreported; true quick ratio is likely lower—still expected to exceed 1.0 given sizable cash (58.49) and receivables (83.29). No warning triggers: Current ratio well above 1.0 and D/E (liabilities/equity) at 0.85x is comfortably below the 2.0 threshold. Maturity profile: short-term loans of 41.00 are material against cash 58.49 and current assets 417.08, suggesting manageable near-term refinancing needs; noncurrent liabilities are 54.11, but long-term loans are unreported. Maturity mismatch risk appears moderate given ample working capital and investment securities (79.72) that bolster liquidity. Off-balance sheet obligations are not disclosed in the provided data; no assessment possible. Overall solvency is solid with financial leverage (assets/equity) of 1.85x and equity of 336.53.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income cannot be assessed; earnings quality is therefore indeterminate. The reliance on non-operating income (dividends 0.91 and interest income 0.86) to support ordinary income raises a quality flag: core operating profitability remains thin at a 2.1% margin. Free cash flow is unreported; thus, coverage of dividends and capex cannot be evaluated. Working capital behavior cannot be analyzed due to missing inventory and OCF detail; no signs or exoneration of manipulation can be inferred. Interest coverage of 8.97x suggests current earnings comfortably cover interest, but cash interest coverage is unknown.

Dividend Sustainability

The calculated payout ratio of 126.1% indicates dividends exceed current earnings capacity; without OCF data, coverage is uncertain and potentially stretched. With ROE at 0.8% and ROIC at 0.8%, internal capital generation is weak, arguing for cautious distributions until operating margins improve. Liquidity (cash 58.49, investment securities 79.72) provides a temporary buffer, but sustainable dividends require stronger recurring operating cash flow. Policy outlook: Absent disclosure of DPS and cash flow, we infer that maintaining a payout above earnings is unlikely to be durable if profitability stays at current levels.

Risk Assessment

Business Risks:

• Project execution risk leading to cost overruns and margin erosion in rolling stock manufacturing.
• Input cost volatility (steel, components) compressing gross margin (currently 13.5%).
• Delivery timing and mix risk causing quarter-to-quarter earnings volatility.
• Customer concentration in rail operators and public-sector procurement cycles.
• FX exposure on imported parts and potential export contracts.

Financial Risks:

• Earnings dependence on non-operating income (dividends and interest) relative to thin operating margin.
• Potential dividend coverage shortfall given a 126.1% payout ratio and unreported OCF.
• Refinancing/rollover of short-term loans (41.00) amid uncertain cash generation.
• Low capital efficiency (ROIC 0.8%) limiting organic deleveraging and investment capacity.

Key Concerns:

• Ordinary income (-99.2% YoY) and net income (-99.6% YoY) declines suggest disappearance of prior-year one-off gains.
• Operating margin of 2.1% with ~42 bps YoY compression despite +19.7% revenue growth.
• Data gaps on OCF, capex, inventory, and DPS hinder assessment of cash conversion and dividend safety.
• Inventories unreported, obscuring working capital dynamics critical for project businesses.

Investment Implications

Key Takeaways:

• Top-line momentum (+19.7% YoY) did not translate into operating profit growth (OI -0.5% YoY).
• Operating margin compressed to 2.1%, highlighting weak pricing power/cost pass-through.
• Ordinary and net income collapsed due to non-recurring prior-year items; current run-rate reflects core weakness.
• Balance sheet liquidity is sound (current ratio 178.9%; cash 58.49; securities 79.72) with moderate leverage (D/E 0.85x).
• Earnings quality unclear without OCF; payout ratio at 126.1% appears unsustainably high without stronger cash generation.
• Capital efficiency is poor (ROE 0.8%, ROIC 0.8%), signaling value creation challenges unless margins improve.

Metrics to Watch:

• Order intake/backlog and pricing on new contracts.
• Gross margin trajectory and SG&A ratio vs. sales.
• Operating cash flow and working capital (receivables and inventories turns).
• Capex/maintenance needs vs. FCF.
• Non-operating income volatility (dividends/interest) and interest expense trend.
• Short-term debt rollover and cash balance dynamics.

Relative Positioning: Within Japanese rolling stock and rail equipment peers, Kinki Sharyo shows healthy liquidity and conservative leverage but lags on profitability and capital efficiency; margins are thin versus larger peers, leaving results more sensitive to project mix and input costs.

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