NAKANISHI INC. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥58.75B
• Operating Income: ¥10.54B
• Net Income: ¥8.08B
• EPS: ¥73.85

Income Statement

Balance Sheet

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 top-line growth but profitability compressed, leading to a sharp drop in bottom-line and a below-target ROE for FY2025 Q3. Revenue rose 3.8% YoY to 587.52, demonstrating demand resilience in core dental/industrial precision segments. Gross profit reached 329.25 with a gross margin of 56.0%, indicating the franchise retains strong product economics. Operating income declined 7.5% YoY to 105.40, pulling operating margin down to 17.9% despite higher sales. Ordinary income fell 11.0% to 109.34, with non-operating items (net +8.87) partly cushioning operating weakness. Net income dropped 23.5% to 61.81, with net margin at 10.5% and an effective tax rate of 32.7% weighing on after-tax results. We estimate operating margin compressed by about 218 bps YoY, and net margin by roughly 376 bps, given revenue growth and reported YoY changes. SG&A was 215.32 (36.7% of sales), suggesting cost inflation and/or strategic investments drove negative operating leverage. ROE calculated at 5.2% via DuPont (NPM 10.5% × ATO 0.362 × leverage 1.36x), notably below typical mid- to high-single-digit targets for this quality profile. Liquidity is very strong (current ratio 381%, quick ratio 327%), and leverage is conservative (D/E 0.36x), underpinned by substantial cash of 534.60. Balance sheet shows large intangibles (goodwill 190.85; intangibles 345.13), implying impairment risk if earnings pressure persists. Earnings quality cannot be verified due to unreported cash flows; OCF/NI and FCF are unavailable, limiting assessment of cash conversion and dividend coverage. The payout ratio is high at 78.6%, which is manageable near term given cash, but sensitive to further profit pressure in the medium term. Forward-looking, the company needs to re-establish operating leverage (cost control and pricing/mix) to protect margins, sustain ROIC above WACC, and maintain dividend policy without over-reliance on the cash balance.

Profitability Analysis

ROE decomposition (DuPont): ROE 5.2% = Net Profit Margin 10.5% × Asset Turnover 0.362 × Financial Leverage 1.36x. The largest change driver YoY is the Net Profit Margin, which contracted materially (estimated ~376 bps), as net income fell 23.5% despite 3.8% sales growth. Business reason: negative operating leverage from higher SG&A (36.7% of sales) and likely cost inflation (labor/components/logistics), only partially offset by robust gross margin and positive non-operating income (interest income 5.70). Asset turnover remains low (0.362), reflecting significant asset base including large intangibles/goodwill from past investments; we cannot quantify YoY movement due to missing prior balance sheet detail. Leverage is modest (1.36x equity multiplier; D/E 0.36x), contributing little to ROE uplift and appropriately conservative. Sustainability: margin pressure could be cyclical if costs normalize and pricing/mix improve; however, absent visible SG&A moderation, current NPM may persist near-term. Concerning trends: operating income down 7.5% vs revenue up 3.8% implies SG&A growth > revenue growth; effective tax rate of 32.7% also dampens after-tax profitability.

Growth Assessment

Top-line growth of 3.8% indicates steady demand, likely supported by core dental handpiece replacements and geographic diversity; however, growth failed to translate into profit expansion. Operating income decline (-7.5%) and ordinary income decline (-11.0%) show worsening operating leverage and slightly lower contribution from non-operating items versus the scale of operations. Net income fell sharply (-23.5%) due to margin compression and higher effective tax burden. Estimated operating margin contracted from ~20.1% to 17.9% (≈218 bps), while ordinary margin compressed from ~21.7% to 18.6% (≈310 bps), signaling broad-based profitability pressure. Non-operating income (13.10), driven by interest income (5.70) and low interest expense (0.42), mitigated but did not offset operating headwinds. ROIC is cited at 8.4%, slightly above typical 7–8% targets, but the downtrend in earnings raises risk to sustaining >8%. Outlook hinges on cost normalization, potential pricing/mix improvements, and stabilization of tax rate; absent that, profit growth may lag revenue, keeping ROE subdued.

Financial Health

Liquidity: Very strong. Current ratio 381.4% and quick ratio 326.6%; cash and deposits of 534.60 comfortably exceed short-term loans (56.72) and total current liabilities (242.28). No warning triggers (Current Ratio well >1.0). Solvency: Conservative. D/E 0.36x; total liabilities 429.02 vs equity 1,195.64. Interest coverage 251.9x underscores negligible refinancing risk. Maturity profile: Short-term loans (56.72) are trivial relative to cash and current assets; low maturity mismatch risk. Asset composition: Intangible assets 345.13 and goodwill 190.85 are sizable, elevating potential impairment risk if profitability deteriorates. Off-balance sheet: None disclosed in provided data. Equity base: Owners’ equity 1,191.68; retained earnings 1,186.25 indicate strong internal capital, supporting resilience.

Cash Flow Quality

Operating cash flow is unreported; thus OCF/Net Income and FCF cannot be assessed. We cannot confirm earnings-to-cash conversion or working-capital dynamics. Balance-sheet indicators (cash 534.60; inventories 132.72; receivables 91.25) appear well covered by current liabilities (242.28), but without period flows, inventory/AR turns and potential working-capital build are unknown. Non-operating income includes interest income (5.70), which is cash-like and supportive; however, reliance on financial income is not a substitute for operating cash generation. With unreported capex and dividends, FCF coverage of shareholder returns cannot be verified. No explicit signs of working-capital manipulation can be identified due to lack of CF and turnover data.

Dividend Sustainability

The calculated payout ratio is 78.6%, above the <60% benchmark for comfortable sustainability. Near-term affordability looks manageable given abundant cash (534.60) and low leverage, but declining earnings and unreported FCF introduce medium-term risk if margin recovery stalls. Without OCF and capex data, FCF coverage is unknown, and we cannot test dividend against maintenance and growth investments. Policy outlook likely hinges on restoring operating margin and protecting ROIC; a continued gap between profit and cash generation (if any) would pressure sustainability, while cost normalization would alleviate risk.

Risk Assessment

Business Risks:

• Margin compression from SG&A cost inflation and negative operating leverage
• Demand sensitivity to dental procedure volumes and capital spending cycles
• Product mix and pricing pressure in competitive dental/industrial precision markets
• Regulatory and quality/recall risks impacting brand and costs
• Goodwill/intangible impairment risk given large balances (goodwill 190.85; intangibles 345.13)

Financial Risks:

• High payout ratio (78.6%) amid falling earnings
• Potential tax rate volatility (effective tax 32.7%) reducing net profit
• FX exposure affecting revenue and margins given global sales footprint
• Limited visibility on cash generation due to unreported CF statements

Key Concerns:

• ROE at 5.2% below historical quality benchmarks; requires margin recovery
• Operating margin compressed ≈218 bps YoY despite revenue growth
• Net income down 23.5% YoY, outpacing top-line growth, indicating profitability headwinds
• Dependence on non-operating income (interest income 5.70) to support ordinary profit

Investment Implications

Key Takeaways:

• Top-line grew 3.8% but operating profit fell 7.5%, highlighting negative operating leverage
• Operating margin ~17.9% and net margin 10.5%; estimated contractions of ~218 bps and ~376 bps YoY, respectively
• ROE 5.2% is subdued; primary drag is net margin, not leverage or asset turnover
• Balance sheet strength (cash 534.60; D/E 0.36x; current ratio 381%) provides resilience
• High intangibles/goodwill elevate impairment sensitivity if earnings weakness persists
• Payout ratio 78.6% is elevated; sustainability depends on earnings and FCF, which are unreported

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio (currently 36.7%)
• Gross margin stability (56.0%) versus input cost trends
• Order intake and regional sales mix to gauge demand durability
• OCF/Net Income and FCF once disclosed to assess dividend coverage
• Effective tax rate normalization
• ROIC relative to 8% threshold and any impairment indicators

Relative Positioning: Within Japanese precision/dental equipment peers, the company maintains superior liquidity and a conservative balance sheet, but current profitability metrics (ROE 5.2% and contracting margins) trail high-quality benchmarks; near-term performance depends on restoring operating leverage and maintaining ROIC above cost of capital.

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