Central Forest Group Co., Ltd. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥268.91B
• Operating Income: ¥1.69B
• Net Income: ¥1.27B
• EPS: ¥183.48

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: A modestly positive quarter with resilient top-line growth and stable ordinary profit, but razor-thin margins and elevated leverage temper the quality of results. Revenue rose 5.5% YoY to 2,689.11, with operating income up 2.8% to 16.94 and ordinary income up 4.1% to 19.59. Net income increased 18.3% to 15.00, outpacing operating profit growth, supported by non-operating income of 2.78 and a small interest burden. Gross profit of 240.55 translated to an 8.9% gross margin, consistent with a low-margin wholesaler/distributor profile. Operating margin stands at 0.63%, and net margin at 0.56%, highlighting limited pricing power and/or cost pass-through constraints. Based on reported YoY growth, operating margin likely compressed by roughly 1–2 bps (current 0.63% vs prior ~0.65%), while net margin expanded by about 6 bps (current 0.56% vs prior ~0.50%) given stronger net income growth. Ordinary income margin is 0.73%, aided by 2.78 in non-operating income (dividends and interest), with non-operating income accounting for ~18.5% of operating income. ROE is 4.4% via DuPont (NPM 0.6% × AT 2.404 × leverage 3.31x), indicating modest returns largely supported by asset turnover and leverage rather than margin strength. Liquidity is adequate (current ratio 119.1%, quick ratio 105.7%), but the D/E ratio of 2.31x is high, driven by large trade payables (673.22) relative to receivables (460.60) and inventories (99.88). Interest coverage is very strong at 282x due to minimal interest expense (0.06), suggesting limited financial cost pressure despite leverage. Earnings quality cannot be fully assessed because cash flow statements are unreported; consequently, the OCF/NI ratio and FCF coverage of dividends are not calculable. The calculated payout ratio of 32.2% appears conservative, though DPS and cash dividend outflow are unreported and cannot be reconciled to EPS from available data. Forward-looking, sustaining volume growth while defending margins remains the key swing factor; leverage and working capital intensity require monitoring in a slowing macro or construction cycle. With ROIC at 5.0%, below the common 7–8% target, the focus should be on capital efficiency improvements and disciplined investment to lift returns. Non-operating income is supportive but should not be relied upon structurally; core operating margin expansion is needed to elevate ROE. Overall, the quarter is serviceable, but quality and sustainability hinge on working capital discipline, pricing, and capex/cash conversion, which are not observable from the current disclosure set.

Profitability Analysis

ROE decomposition (DuPont): ROE 4.4% = Net Profit Margin 0.6% × Asset Turnover 2.404 × Financial Leverage 3.31x. The largest driver of ROE is asset turnover, reflecting a high-volume, low-margin business model, while thin net margins are the primary constraint. Versus last year, operating income grew slower than revenue (+2.8% vs +5.5%), implying slight operating margin compression (~1–2 bps to 0.63%). Net income grew faster (+18.3%), lifting net margin by ~6 bps to 0.56%—helped by non-operating income (2.78) and a small interest burden (0.06). Business drivers: modest price/mix or procurement pressure likely weighed on operating margin, while dividend and interest income supported below-the-line. Sustainability: asset turnover appears structurally strong; however, the improvement in net margin looks partly driven by non-operating items and may not repeat. Watch for SG&A discipline: SG&A is 224.07 against gross profit of 240.55, leaving a thin operating buffer; absent SG&A breakdown trends, there is a risk that SG&A growth could exceed revenue growth if wage or rent pressures persist.

Growth Assessment

Top-line growth of 5.5% indicates steady demand and/or pass-through pricing. Operating profit growth of 2.8% trails revenue, suggesting limited operating leverage in the period. Net income growth of 18.3% exceeds operating profit growth, aided by non-operating income; this mix weakens the quality of profit growth. Gross margin is 8.9%, consistent with distribution/wholesale economics and vulnerable to procurement and pricing dynamics. Ordinary income margin of 0.73% and net margin of 0.56% remain tight; future growth will likely depend on volume expansion and procurement efficiencies rather than large pricing gains. With ROIC at 5.0% (below the common 7–8% target), structural growth should prioritize improving capital turns and margin uplift rather than balance-sheet expansion. Near-term outlook hinges on maintaining revenue momentum while preserving gross spread; any slowdown in end-market demand (e.g., construction/housing) could pressure both volumes and working capital.

Financial Health

Liquidity: current ratio 119.1% and quick ratio 105.7% are above 1.0 but below the 1.5 comfort benchmark; adequate but not ample. Solvency: D/E is 2.31x (warning: >2.0), indicating high leverage, though interest coverage is extremely strong at 282x due to minimal interest expense reported. Balance sheet structure: large accounts payable (673.22) fund working capital relative to receivables (460.60) and inventories (99.88), indicating reliance on supplier credit; this reduces cash needs but introduces rollover/terms risk in a downturn. Maturity mismatch risk: elevated, given high current liabilities (746.34) versus current assets (889.04); manageable at present but sensitive to collection cycles. Off-balance sheet: no disclosures provided; cannot assess guarantees or operating lease commitments from available data.

Cash Flow Quality

OCF, FCF, and capex are unreported, so OCF/Net Income and FCF coverage cannot be assessed. This is a key limitation for earnings quality analysis. Working capital posture leans on payables; if payable days extend faster than receivable days, near-term OCF can be flattered—this possibility cannot be confirmed without cash flow data. Interest expense is minimal (0.06), reducing cash earnings drag. Until OCF is disclosed, we cannot validate the sustainability of profit conversion or the capacity to fund dividends and potential capex internally.

Dividend Sustainability

Reported/calculated payout ratio of 32.2% appears conservative versus typical benchmarks (<60%). However, DPS, total dividends paid, OCF, and FCF are unreported, preventing a cash coverage assessment. Retained earnings of 229.66 provide balance sheet capacity to support distributions absent near-term shocks. With ROE at 4.4% and ROIC at 5.0%, reinvestment returns are modest; maintaining a moderate payout may be compatible with capital needs if cash conversion is healthy. Policy outlook cannot be inferred due to missing DPS history and cash flow data.

Risk Assessment

Business Risks:

• Thin operating margin (0.63%) leaves little cushion against input cost volatility or demand shocks.
• Procurement/pricing risk: gross margin at 8.9% is sensitive to supplier terms and pass-through ability.
• Customer credit risk: large accounts receivable (460.60) relative to equity increases exposure to collection cycles.
• End-market cyclicality: likely exposure to construction/housing or industrial demand cycles could pressure volumes.
• Dependence on non-operating income (~18.5% of operating income) to support ordinary/net income.

Financial Risks:

• High leverage: D/E 2.31x (warning threshold exceeded).
• Working capital funding concentration in trade payables (673.22) elevates rollover/terms risk.
• Liquidity buffer only moderate: current ratio 1.19 and quick ratio 1.06.
• Cash flow opacity: OCF and FCF unreported, limiting visibility on debt service and dividend capacity.

Key Concerns:

• ROIC at 5.0% below 7–8% management benchmarks suggests limited value creation headroom.
• Operating leverage muted: operating income growth (+2.8%) trails revenue growth (+5.5%).
• Potential margin compression at the operating level (estimated ~1–2 bps YoY).
• Data gaps (cash flow, depreciation, DPS) hinder assessment of earnings durability and capital intensity.

Investment Implications

Key Takeaways:

• Top-line growth is solid at +5.5% YoY, but operating margin remains extremely thin at 0.63%.
• Net income benefited from non-operating items, pushing NI growth to +18.3%, but quality is mixed.
• Leverage is high (D/E 2.31x) even as interest burden is currently light; reliance on payables is notable.
• ROE (4.4%) and ROIC (5.0%) are modest; sustained improvement likely requires margin and capital efficiency gains.
• Liquidity is adequate but not robust; careful working capital management is essential.

Metrics to Watch:

• Operating cash flow and OCF/NI ratio (target >1.0) once disclosed.
• Gross and operating margin trajectory (bps changes), especially procurement vs selling price spread.
• Working capital turns: receivable days, inventory days, payable days.
• Leverage trend (D/E) and any changes in interest expense/coverage.
• ROIC by segment (if available) and capital allocation discipline.
• Composition of non-operating income (recurring vs one-off dividends/securities gains).

Relative Positioning: Within low-margin distribution models, the company shows healthy turnover and exceptional interest coverage, but carries higher-than-ideal leverage and below-target ROIC; near-term resilience hinges on stable demand and disciplined working capital, with upside dependent on small-margin improvements rather than outsized operating leverage.

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