KYORITSU (7795) FY2026 Q3 Earnings Report

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Executive Summary

Revenue and operating income both exceeded the previous-year period, resulting in higher revenue and earnings; however, it should be noted that most of the sharp increase in net income was attributable to temporary factors outside the core business. Revenue was ¥31.77B (+7.9% YoY), operating income was ¥0.99B (+21.6%), and ordinary income was ¥0.93B (+22.5%). Net income increased substantially to ¥0.97B (¥0.42B in the previous-year period), primarily due to extraordinary income including a ¥0.97B gain on the sale of investment securities. This should be evaluated separately from the +21.6% improvement in operating income, which reflects the improvement in the core business. The gross profit margin improved to 11.9% (11.0% in the previous year), but SG&A expenses increased by +13.9%, outpacing revenue growth, and the operating margin improved only modestly to 3.1% (2.8% in the previous year).

Factors Affecting Performance

【Revenue】Revenue increased +7.9% YoY to ¥31.77B. Although segment information was not disclosed, cost of sales also increased by +6.9% YoY, broadly in line with revenue, suggesting that volume expansion was the primary driver. Progress against the full-year plan of ¥42.30B was 75.1%, representing a standard pace of progress.

【Profit and Loss】The gross profit margin improved to 11.9% from 11.0% in the previous-year period, and gross profit increased by +15.8%. Meanwhile, SG&A expenses increased by +13.9%, outpacing revenue growth, limiting the improvement in the operating margin to 35bp. Operating income of ¥0.99B (+21.6%) and ordinary income of ¥0.93B (+22.5%) both increased, but net income of ¥0.97B (+132.8%) was significantly boosted by extraordinary income including a ¥0.97B gain on the sale of investment securities. Extraordinary losses included impairment losses of ¥0.17B and losses on disposal of fixed assets of ¥0.08B, resulting in a net positive contribution from extraordinary gains and losses of ¥0.70B. In conclusion, the results can be characterized as higher revenue and earnings on a core-business basis, while the increase in net income included temporary factors.

Key Financial Indicators

【Profitability】The operating margin was 3.1% and the gross profit margin was 11.9%. Both improved slightly from the previous-year period, but the low-margin business structure continues. The net profit margin was 3.0% (1.4% in the previous year); excluding the impact of the gain on the sale of investment securities, the improvement in core-business profitability was more gradual.【Cash Flow Quality】Net income of ¥0.97B appears to be close to operating income of ¥0.99B, but net income includes extraordinary income of ¥0.97B. Accordingly, operating income and ordinary income should be emphasized when evaluating recurring cash-generating capacity. Inventories increased +12.8% YoY, outpacing revenue growth, and the trend of inventory accumulation warrants attention.【Investment Efficiency】Annualized ROE was 7.3%, slightly below the general capital-efficiency benchmark of 8%. ROIC also remained below approximately 5%, indicating room for improvement in the ability to generate returns from invested capital.【Financial Soundness】The equity ratio was 41.2% (41.7% in the previous year), essentially unchanged, while the current ratio was 135.6%, indicating no significant concern regarding short-term liquidity. Long-term borrowings increased to ¥8.63B (+9.8% YoY), and goodwill increased to ¥2.16B (+67.9%), requiring continued monitoring of changes in the asset composition.

Cash Flow Analysis

Although the cash flow statement was not disclosed, fund movements can be assessed from changes in the balance sheet. Cash and deposits were ¥9.41B, a modest increase from ¥9.22B in the previous-year period. Accounts receivable and notes receivable were ¥6.59B, increasing +1.0% YoY, below revenue growth of +7.9%, with no significant deterioration in collection efficiency. Meanwhile, inventories were ¥1.28B, increasing +12.8% YoY and accumulating at a pace exceeding revenue growth, which could place pressure on funds through working capital. Accounts payable and notes payable were ¥3.60B and remained broadly flat. Long-term borrowings increased by ¥0.77B YoY to ¥8.63B, suggesting that asset acquisitions funded by external financing, including increases in goodwill and intangible fixed assets, may be progressing. The ¥0.97B gain on the sale of investment securities included in net income is a non-cash extraordinary factor, and actual cash inflows depend on the sale proceeds at the time of asset disposal. Therefore, it should be assessed separately from recurring cash-generating capacity.

Earnings Quality

The current period’s earnings comprise both recurring improvement in the core business and temporary factors, making it important to distinguish between the two. Operating income increased +21.6% YoY, primarily due to the improvement in the gross profit margin (11.0%→11.9%). However, the +13.9% increase in SG&A expenses exceeded revenue growth of +7.9%, limiting the pace of recurring profit expansion. Most of the +132.8% YoY increase in net income to ¥0.97B was attributable to extraordinary income of ¥0.97B, including a ¥0.97B gain on the sale of investment securities. Even after deducting extraordinary losses, comprising impairment losses of ¥0.17B and losses on disposal of fixed assets of ¥0.08B, the gain contributed a positive ¥0.70B. In non-operating income and expenses, non-operating income of ¥0.10B, including dividends received of ¥0.07B, was more than offset by non-operating expenses of ¥0.16B, mainly comprising interest expenses of ¥0.15B, resulting in ordinary income decreasing by ¥0.06B from operating income. The fact that inventories are increasing at a pace exceeding revenue growth is an accrual-related point to consider regarding future revenue recognition. Overall, core-business profitability is improving gradually, but the increase in net income is highly dependent on temporary factors and its sustainability must be evaluated separately from the pace of core-business improvement.

Earnings Forecast and Guidance

Against the full-year company forecast, revenue progress was 75.1% (¥31.77B/¥42.30B), representing a standard pace, while operating income progress was 65.6% (¥0.99B/¥1.51B) and ordinary income progress was 64.3% (¥0.93B/¥1.44B), both below revenue progress. Achieving the full-year plan requires operating income of ¥0.52B in Q4, corresponding to a required margin of approximately 4.9%, above the cumulative operating margin of 3.1%. Net income progress was high at 87.9% (¥0.97B/¥1.10B), but this was attributable to extraordinary income including the gain on the sale of investment securities and must be considered separately from operating income progress. The extent to which profitability improves in Q4 will be the key to achieving the full-year plan.

Shareholder Returns

The Q2 dividend was ¥4.00 per share, and the full-year dividend forecast is ¥8.00. The forecast payout ratio against the company’s forecast EPS of ¥25.16 was approximately 31.8%, representing a restrained dividend burden relative to earnings. Retained earnings were ¥11.37B and cash and deposits were ¥9.41B, indicating that sufficient financial capacity has been secured to fund dividend payments. Meanwhile, treasury stock increased by ¥0.28B YoY to ¥1.29B. When evaluating total shareholder returns, it is necessary to confirm the Total Return Ratio, combining share repurchases with the payout ratio. Since net income includes temporary extraordinary income, dividend sustainability is partly dependent on the future trend in core-business earnings.

Risk Factors

1. Vulnerability of the Profitability Structure: An operating margin of 3.1% and a gross profit margin of 11.9% represent low-margin levels, making profitability susceptible to pressure if increases in raw material and labor costs cannot be passed through to prices. The fact that the SG&A expense growth rate of +13.9% exceeds revenue growth of +7.9% also warrants attention.

2. Delayed Progress Against the Full-Year Plan: Operating income and ordinary income progress rates were 65.6% and 64.3%, respectively, below revenue progress of 75.1%. Achieving the full-year plan requires an operating margin of approximately 4.9% in Q4, and the gap from the standard progress level suggests a risk of failure to achieve the plan.

3. Capital Allocation Risk Associated with Increases in Goodwill and Borrowings: Goodwill increased +67.9% YoY to ¥2.16B, while long-term borrowings increased +9.8% to ¥8.63B. Goodwill/equity of 12.3% remains within a sound range, but impairment risk could materialize if the profitability of the acquired assets falls below plan.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Compared with the industry median, both the operating margin and net profit margin are positioned at the lower end of the industry range.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median, and top-line expansion was relatively strong within the industry.

Source: Compiled by the Company

Key Points from the Financial Results

1. Core-business results showed higher revenue and earnings accompanied by an improvement in the gross profit margin (11.0%→11.9%), and operating income increased +21.6% YoY. However, since the SG&A expense growth rate exceeded this level, the impact of operating leverage was limited.

2. The +132.8% YoY increase in net income was attributable to extraordinary income primarily arising from the ¥0.97B gain on the sale of investment securities and should be considered separately from the degree of core-business improvement.

3. Operating income progress against the full-year plan was 65.6%, below revenue progress, making profitability improvement in Q4 the key to achieving the full-year plan. The continuing increases in goodwill and borrowings also require ongoing monitoring.

Theoretical Share Price (Reference Value)

Sensitivity: ¥361–¥381 at ±1% for the cost of equity, and ¥369–¥372 at ±0.1 for ω.

Notes:

• Since net income progress against the full-year forecast (88%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies ahead of plan tend to outperform forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Since forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end have been used (there is a timing difference from the full-year forecast).
• Since net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest-rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data and is not a forecast of the market share price, a recommendation of any specific investment action, or a prediction or guarantee of the future share price.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with a professional as necessary.

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