ARAYA INDUSTRIAL CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥19.85B
• Operating Income: ¥877M
• Net Income: ¥612M
• EPS: ¥123.72

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: Solid operating improvement despite top-line contraction, but earnings quality softened and capital efficiency remains low. Revenue declined 7.7% YoY to 198.5, while operating income rose 14.9% to 8.77, demonstrating successful margin defense and cost control. Gross profit was 40.64 with a gross margin of 20.5%, and SG&A was contained at 31.87, yielding an operating margin of 4.4%. Based on the YoY changes, operating margin likely expanded by roughly 87 bps (from about 3.6% to 4.4%), while ordinary income margin expanded by about 102 bps (to 5.3%). However, net income fell 14.0% YoY to 5.89 as below-the-line items and a high effective tax rate (36.2%) more than offset operating gains. Non-operating income of 2.34, largely dividend income of 1.83, meaningfully supported ordinary income; reliance on financial income increased earnings sensitivity to marketable securities. Total comprehensive income surged to 17.53, far exceeding net income, indicating sizable unrealized gains in investment securities impacting OCI rather than P&L. Operating cash flow of 4.55 covered only 77% of net income (OCF/NI 0.77x), signaling weaker earnings-to-cash conversion this half, likely due to working capital movements. Liquidity remains sound with a current ratio of 174% and quick ratio of 132%; net cash position is modest (cash 66.71 versus total loans 64.60). Leverage is conservative (D/E 0.67x) and interest coverage is strong at 24.36x. Capital efficiency is a clear weakness: ROE is 1.8% and ROIC is 1.7%, well below typical cost of capital and below the 5% warning threshold. Despite operating progress, the drop in net income and weak OCF raise questions about the sustainability of earnings momentum without further working capital discipline. The portfolio of investment securities (112.43) is a double-edged sword: it supports income via dividends but introduces valuation and income volatility. Forward-looking, continued mix improvement and cost management can sustain higher operating margins, but to lift ROE and ROIC the company needs either stronger growth, asset efficiency gains, or capital reallocation. Watch for inventory normalization, stability of dividend income from securities, and any change in tax burden to determine if net margins can recover in 2H.

Profitability Analysis

ROE decomposition: ROE (1.8%) = Net Profit Margin (2.97%) × Asset Turnover (0.367x) × Financial Leverage (1.67x). The weakest link is asset turnover at 0.367, reflecting a sizable asset base (assets 541.58) relative to sales (198.5). Period-on-period, operating profit improved despite lower revenue, implying net margin at the operating level expanded; however, net margin compressed YoY (NI -14%) due to higher tax burden and below-the-line items, making net margin the component that deteriorated the most in the DuPont chain. Business drivers: cost of sales declined faster than sales and SG&A discipline improved operating leverage, but higher non-operating expenses/extraordinary items and a higher effective tax rate eroded the flow-through to net profit. Sustainability: operating improvements (mix, procurement, SG&A control) are more sustainable than non-operating tailwinds; however, the contribution from dividend income (1.83) is market-dependent and may not be repeatable. Concerning trends: revenue fell 7.7% while we do not have SG&A YoY, but the absolute SG&A burden remains high at 16.1% of sales; non-operating income ratio (39.7%) indicates elevated reliance on non-core income; ROIC at 1.7% underscores inadequate return generation on the invested base.

Growth Assessment

Revenue contracted 7.7% YoY to 198.5, indicating weak demand or price pressure within core products. Despite this, operating income rose 14.9% to 8.77, implying improved mix and cost discipline. Ordinary income increased 14.2% to 10.55 aided by higher dividend income (1.83), while net income fell 14.0% to 5.89 due to higher tax burden and below-the-line drag (profit before tax 9.59 versus ordinary income 10.55). The quality of growth is mixed: operating profit growth looks organic and controllable, but dependence on financial income and elevated taxes reduced bottom-line scalability. Outlook hinges on 2H seasonality, normalization of working capital to support cash conversion, and stability of dividend income from investment securities. Without a rebound in volumes or pricing, sustaining operating margin gains may require continued SG&A and COGS control.

Financial Health

Liquidity is solid: current ratio 174.3% and quick ratio 131.5% exceed healthy thresholds; no warning on current ratio <1.0. Short-term loans are 49.90 against cash of 66.71 and sizable receivables/inventories, suggesting manageable near-term refinancing risk; maturity mismatch risk appears low. Total liabilities are 217.87 versus equity 323.70 (D/E 0.67x), comfortably below the 2.0 warning threshold. Interest coverage is strong at 24.36x, indicating ample buffer against interest rate increases. Investment securities are large at 112.43, providing liquidity but adding market risk. Off-balance sheet obligations are not disclosed in the data provided.

Cash Flow Quality

OCF of 4.55 versus net income of 5.89 yields an OCF/NI of 0.77x, below the 0.8 threshold and flagged as an earnings quality concern. The gap suggests working capital absorption or timing effects; given inventories (69.76) and receivables (62.19), a build in working capital is a plausible driver. Capex was 3.91; using analyst-derived math, implied FCF is modestly positive at roughly 0.64 (OCF 4.55 minus capex 3.91), but the company did not report FCF directly. Financing CF was an inflow of 2.75, including minor share repurchases (-0.01). No clear signs of aggressive working capital manipulation are visible from the limited dataset, but the sub-1.0 OCF/NI warrants monitoring. Sustainability of cash generation depends on normalizing inventories and maintaining operating margins amid lower sales.

Dividend Sustainability

Dividend disclosure is limited (DPS and total dividends not reported). The calculated payout ratio of 307.9% points to distributions exceeding current earnings, which would be unsustainable if representative; however, given data gaps, this metric may reflect timing or methodology differences. Cash coverage: implied FCF of ~0.64 is far below net income, leaving little room for dividends after capex absent balance-sheet support. With a healthy liquidity position and modest net cash, the company could fund dividends temporarily, but long-term sustainability requires higher FCF or lower payout. Policy outlook cannot be assessed without explicit guidance; monitor next disclosure for DPS and payout policy details.

Risk Assessment

Business Risks:

• Demand softness evidenced by a 7.7% YoY revenue decline
• Margin sensitivity to input costs (materials/energy) despite recent operating margin expansion
• Dependence on dividend income from investment securities to support ordinary income
• Potential product mix shifts affecting gross margin sustainability

Financial Risks:

• Earnings-to-cash conversion weakness (OCF/NI 0.77x)
• Low capital efficiency (ROIC 1.7%, ROE 1.8%) relative to cost of capital
• Valuation risk on a large securities portfolio (112.43) affecting OCI and potentially equity
• Tax rate volatility (effective tax 36.2%) pressuring net margins

Key Concerns:

• Net income decline (-14.0% YoY) despite operating gains
• Ordinary income reliance on non-operating dividend income (1.83 of 2.34 non-op income)
• Working capital absorption likely weighing on OCF
• Potential future compression if non-operating tailwinds reverse

Investment Implications

Key Takeaways:

• Operating execution improved: operating income +14.9% on -7.7% sales; operating margin ~4.4%
• Net margin compressed YoY due to higher taxes and below-the-line items; NI -14.0%
• Earnings quality flagged: OCF/NI 0.77x; implied FCF marginally positive
• Balance sheet resilient with current ratio 174% and net cash ≈ 2.1
• Capital efficiency weak: ROE 1.8%, ROIC 1.7%; need asset efficiency or capital policy actions
• Non-operating dividend income is material and market-dependent
• OCI-driven comprehensive income surge signals equity portfolio valuation gains

Metrics to Watch:

• Operating margin trajectory and SG&A ratio
• OCF/NI and working capital turns (inventory and receivables days)
• Dividend income stability and composition of non-operating items
• Effective tax rate and any extraordinary items
• ROIC progression and asset turnover improvement
• Size and volatility of investment securities and their impact on equity/OCI
• Short-term debt rollover versus cash and liquid assets

Relative Positioning: Versus domestic specialty manufacturing peers, the company shows better-than-expected operating resilience in a down revenue environment, but lags on capital efficiency (low ROE/ROIC) and cash conversion; liquidity is strong and leverage conservative, offering stability but limiting returns without structural improvements.

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