ONOKEN CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥125.12B
• Operating Income: ¥1.95B
• Net Income: ¥1.28B
• Earnings per Unit (EPU): ¥49.75

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution 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

FY2026 Q2 was a weaker quarter for Ono Ken (7414), with profits contracting materially on lower sales and thinner margins. Revenue declined 9.1% YoY to 1,251.2, while operating income fell 47.3% YoY to 19.5, compressing operating margin to roughly 1.6%. Ordinary income dropped 47.9% YoY to 19.8, and net income fell 51.0% YoY to 12.4, implying a net margin of about 1.0%. Gross profit was 125.6, yielding a 10.0% gross margin; SG&A was 106.1, or 8.5% of sales, leaving limited operating profit buffer. Using the disclosed YoY changes, we estimate operating margin compressed by about 112 bps YoY (from ~2.7% to ~1.6%). The DuPont-based ROE was 1.3% (Net margin 1.0% × Asset turnover 0.628 × Leverage 2.03x), confirming a step down in profitability, with ROIC at 0.9% signaling sub-par capital efficiency. Non-operating items were small and broadly neutral (non-op income 2.27 vs non-op expenses 1.96), with interest expense 1.82 covered amply by operating profit (interest coverage 10.7x). Liquidity is adequate but not abundant, with a current ratio of 134.6% and a quick ratio at 100.4%; short-term loans (319.5) fund a meaningful portion of working assets (receivables 430.7, inventories 267.0). The debt-to-equity ratio stands at 1.03x, a moderate level for a steel trading/distribution model. Earnings quality cannot be fully assessed as operating cash flow was not disclosed; this is a key limitation in evaluating the extent of working capital drag behind the profit decline. The calculated payout ratio is high at 139.7%, suggesting dividends outpaced earnings in the period, though seasonality and timing differences may be at play. Strategic implication: margin sensitivity to steel price/volume remains the key swing factor; with thin net margin, even modest price/volume pressure drives large profit swings. Near term, cost discipline and inventory risk management will be critical to stabilize margins. Balance sheet risk is manageable, but reliance on short-term funding underscores the need for disciplined working capital turnover. Absent a recovery in gross margin or acceleration in turnover, ROE/ROIC will remain below cost of capital. Monitoring of Q3–Q4 order momentum, steel price trends, and inventory valuation effects will be essential for outlook calibration.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin 1.0% × Asset Turnover 0.628 × Financial Leverage 2.03x = ROE 1.3%. The largest driver of the YoY decline is the net profit margin, as indicated by a 47.3% drop in operating income on a 9.1% sales decline and an estimated operating margin compression of ~112 bps (from ~2.68% to ~1.56%). Business drivers likely include weaker gross spreads amid softer steel prices/volumes and limited SG&A flexibility given an 8.5% SG&A-to-sales ratio. Asset turnover also likely softened YoY as revenue fell; total assets ended at 1,993.2, implying slower turnover absent asset downsizing. The leverage component appears stable at ~2.0x, not a major swing factor. Sustainability: margin pressure is cyclical for steel distributors; recovery depends on pricing power and inventory valuation tailwinds. Concerning trends: operating income decline outpaced revenue, indicating negative operating leverage; gross profit (10.0% margin) leaves a thin buffer over SG&A (8.5%), increasing earnings volatility risk if volumes or spreads weaken further.

Growth Assessment

Top-line contracted 9.1% YoY to 1,251.2, consistent with softer market conditions in steel distribution. Operating profit dropped 47.3% YoY to 19.5 as operating margin compressed to ~1.6%, highlighting adverse operating leverage. Non-operating line was modest (net +0.31), with interest expense 1.82 absorbing most of non-op income; ordinary income fell 47.9% YoY. Net income declined 51.0% to 12.4 as the effective tax rate (33.7%) normalized. Revenue sustainability is sensitive to steel price/volume cycles and downstream construction/manufacturing demand. Profit quality is thin given the small spread between gross margin (10.0%) and SG&A (8.5%). Outlook hinges on stabilization of spreads, inventory valuation effects, and the ability to flex SG&A; near-term bias remains cautious until margin recovery is visible.

Financial Health

Liquidity is adequate: current ratio 134.6% (>1.0, <1.5 benchmark), quick ratio 100.4% (~healthy threshold). No explicit warning triggers (Current Ratio is not <1.0; D/E is 1.03x, below 2.0). Maturity structure: short-term loans 319.5 are substantial versus cash 48.9, but are supported by receivables 430.7 and inventories 267.0; current assets 1,050.7 comfortably exceed current liabilities 780.8. Solvency: D/E 1.03x is moderate; long-term loans 207.8 provide term funding. Interest coverage is strong at 10.69x, indicating manageable debt service. No off-balance sheet obligations are disclosed in the provided data. Working capital stands at 269.9, but cash coverage of short-term debt is low, underscoring reliance on collections and inventory turnover.

Cash Flow Quality

Operating cash flow was not disclosed, preventing a direct OCF/Net Income assessment; accordingly, we cannot compute OCF/NI or FCF. Given the business model, working capital swings (receivables and inventory) typically drive OCF volatility; with lower sales YoY, there could be some release, but inventory price effects can offset. No signs of working capital manipulation can be inferred from the limited data. Dividend and capex coverage by FCF cannot be evaluated due to missing cash flow disclosure; this is a key limitation in assessing sustainability.

Dividend Sustainability

The calculated payout ratio of 139.7% implies dividends exceeded earnings for the period, which is not sustainable if persistent. However, DPS and total dividends were not disclosed, and interim timing/seasonality may distort the ratio versus full-year earnings. With OCF and FCF unreported, coverage cannot be validated. Balance sheet flexibility exists (equity 984.0; interest coverage 10.7x), but sustained payouts above earnings would pressure cash if not backed by working capital releases. Policy outlook should be monitored for any revision tied to full-year guidance and profit trajectory.

Risk Assessment

Business Risks:

• Commodity price volatility in steel affecting gross spreads and inventory valuation
• Demand cyclicality from construction/manufacturing end-markets impacting volumes
• Thin operating margin (~1.6%) magnifying earnings sensitivity to small spread changes
• Competitive pricing pressure in steel distribution compressing gross margin

Financial Risks:

• Reliance on short-term borrowing (319.5) to fund working capital; refinancing and rate risk
• High payout ratio (calculated 139.7%) potentially stressing cash if earnings remain weak
• Potential inventory markdown risk if steel prices decline further
• Moderate leverage (D/E 1.03x) amid declining profits increases sensitivity to shocks

Key Concerns:

• ROIC at 0.9% is well below the 5% warning threshold, indicating capital inefficiency
• Operating leverage negative: operating income down 47.3% on a 9.1% sales decline
• Earnings quality opaque due to absent cash flow disclosures
• Liquidity cushion is modest (current ratio 134.6%, quick ratio 100.4%) relative to short-term debt load

Investment Implications

Key Takeaways:

• Profitability compressed materially; operating margin down ~112 bps YoY to ~1.6%
• ROE 1.3% and ROIC 0.9% highlight below-cost-of-capital returns
• Liquidity adequate but dependent on receivables/inventory turnover; short-term debt is sizable
• Non-operating items net-neutral; core margin recovery is required for earnings rebound

Metrics to Watch:

• Gross margin and SG&A-to-sales to gauge operating leverage
• Inventory levels and turnover; inventory valuation gains/losses versus steel price trends
• Receivables collection and OCF once disclosed; OCF/NI ratio target >1.0
• Interest expense trajectory and short-term debt rollovers amid rate environment
• Full-year dividend guidance versus earnings to assess payout sustainability

Relative Positioning: As a steel trading/distribution player, Ono Ken operates with structurally thin margins and working-capital intensity; current profitability sits below peers with stronger spread management, and capital efficiency is weak, leaving the company more exposed to cycle and pricing swings until margins recover.

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