SONOCOM CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.29B
• Operating Income: ¥161M
• Net Income: ¥137M
• EPS: ¥37.84

Income Statement

Balance Sheet

Cash Flow Statement

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: Solid topline and operating profit growth with clear margin expansion, but earnings quality is weakened by negative operating cash flow and heavy reliance on non-operating income. Revenue rose 13.4% YoY to 12.87, while operating income increased 51.9% YoY to 1.61, demonstrating strong operating leverage. Ordinary income was 2.08 (+20.5% YoY), and net income reached 1.37 (+23.2% YoY), yielding a net margin of 10.6%. Operating margin expanded to 12.5%, up roughly 320 bps from about 9.3% last year (derived from prior revenue/operating income). Net margin expanded by roughly 80 bps from about 9.8% last year. Gross margin stands at 27.7%, indicating stable pricing and/or mix improvements relative to SG&A, which was 2.51 (19.5% of revenue). Earnings mix is skewed: non-operating income was 1.05, with interest income of 0.51, reflecting significant financial asset income. The non-operating income ratio (76.8%) highlights a notable contribution from financial income, which can be more volatile or less controllable than core operations. Despite profit growth, operating cash flow was -2.44, resulting in an OCF/NI ratio of -1.78x, a clear quality red flag. Cash remained very strong at 37.67 with current liabilities at 3.77, translating to an exceptionally high current ratio of 1343.8% and abundant liquidity. Leverage is minimal with total liabilities of 6.15 against equity of 90.83 (D/E 0.07x), implying very low financial risk but also suppressing ROE via low leverage. DuPont analysis yields ROE of 1.5% (Net margin 10.6% × Asset turnover 0.132 × Leverage 1.07x), constrained by low asset turnover due to a large cash and investment base. ROIC is 1.9%, below the 5% warning line, underscoring capital efficiency challenges. Capex was modest at 0.84, implying investments remain disciplined; however, negative OCF means near-term free cash flow was likely negative despite low capex. Forward-looking, sustained core margin gains are encouraging, but improving cash conversion and reducing dependence on non-operating income are necessary to lift ROIC and ROE. With a calculated payout ratio of 43.8% and a strong balance sheet, dividends appear supportable near term, but higher-sustainability distributions will require better cash generation.

Profitability Analysis

ROE decomposition: ROE = Net Profit Margin (10.6%) × Asset Turnover (0.132) × Financial Leverage (1.07x) ≈ 1.5%. The largest driver of the YoY improvement in profitability is operating margin expansion: operating income grew 51.9% against 13.4% revenue growth, lifting OPM from roughly 9.3% to 12.5% (+~320 bps). Asset turnover remains low (0.132), reflecting a large asset base dominated by cash (37.67) and investment securities (21.63), which depress revenue-to-asset efficiency. Financial leverage is minimal (1.07x), limiting ROE amplification but keeping financial risk low. Business reason: strong operating leverage from SG&A discipline versus revenue growth; SG&A at 19.5% of sales suggests better cost containment or favorable mix. Sustainability: the operating margin gains are more likely sustainable than non-operating contributions, provided volume/mix holds; however, part of ordinary profit uplift is tied to non-operating income (notably interest income of 0.51), which is sensitive to interest rates and asset allocation. Watch-outs: SG&A growth data are not disclosed by component, but the fact that operating profit growth exceeded revenue suggests no immediate SG&A creep; still, dependence on non-operating income for overall profit mix raises quality concerns.

Growth Assessment

Revenue growth of 13.4% YoY is solid for a mature single-entity manufacturer/processor, with broad-based benefit from either demand recovery or pricing. Operating income up 51.9% demonstrates robust operating leverage, implying efficiency gains or favorable product mix. Net income growth of 23.2% trails operating income growth, likely due to swings below operating line and tax effects. Mix quality is mixed: operating earnings strengthened, but non-operating income (1.05, including 0.51 interest) remains sizable, elevating reliance on financial income. With gross margin at 27.7% and OPM at 12.5%, the core business shows improved economics; however, the OCF shortfall (-2.44) suggests working capital or receivable timing issues that could temper near-term growth conversion to cash. Outlook: if demand and pricing hold, OPM can remain >12%; the key will be normalizing working capital to convert profits to cash. Near-term macro sensitivity includes interest rate environment (affecting interest income) and input cost stability (to preserve gross margin).

Financial Health

Liquidity is exceptionally strong: current ratio 1343.8% and quick ratio 1342.8%, with cash of 37.67 vs current liabilities of 3.77. Solvency is robust: D/E at 0.07x and equity of 90.83 vs liabilities of 6.15. No warning triggers: Current Ratio >> 1.0 and D/E well below 2.0. Maturity mismatch risk is minimal given cash far exceeds current liabilities; short-term debt is unreported, but the cash position provides substantial buffer. Interest-bearing debt details are unreported, but the balance sheet structure implies low borrowing, and interest expense is not provided. Off-balance sheet obligations are not disclosed; no information on guarantees or leases beyond standard operating items. Overall, the company carries a fortress-like balance sheet with excess liquidity but at the cost of capital efficiency.

Cash Flow Quality

OCF/Net Income is -1.78x, flagging a material earnings quality issue this half. While non-cash D&A is 0.69, the negative OCF implies significant working capital outflows (likely receivables build given AR of 8.23 and negligible inventories), timing of collections, or tax/prepaid dynamics; exact drivers are undisclosed. Estimated FCF based on available data is approximately -3.28 (OCF -2.44 minus capex 0.84), indicating that the period’s profits were not cash-backed. Financing CF was -0.43, likely reflecting dividends and/or minor debt movements, further reducing cash albeit from a high base. Sustainability: with modest capex needs and a very strong cash balance, liquidity is not at risk, but sustained negative OCF would constrain capital returns without drawing down cash. No explicit signs of working capital manipulation are visible from disclosed data, but the scale of OCF shortfall warrants monitoring of receivable days and customer credit terms.

Dividend Sustainability

The calculated payout ratio is 43.8%, within a generally sustainable range (<60%). Dividend per share data are unreported, but ordinary cash generation this period was insufficient to cover dividends and capex based on estimated FCF (-3.28). Nevertheless, the large cash position (37.67) and low leverage provide ample headroom to maintain dividends near term. Medium-term sustainability hinges on normalizing OCF and improving ROIC; relying on balance sheet drawdowns to fund distributions is not a best practice. Policy outlook: absent explicit guidance, the firm appears capable of maintaining current payout levels, but upward adjustments should be contingent on cash conversion improving.

Risk Assessment

Business Risks:

• Earnings mix dependence on non-operating income (1.05), notably interest income (0.51), which may not be recurring at current levels if rates/assets shift
• Working capital volatility leading to negative OCF despite profit growth
• Potential input cost or pricing pressure affecting gross margin (27.7%)
• Customer concentration risk (not disclosed) could amplify receivable timing effects

Financial Risks:

• Low capital efficiency (ROIC 1.9%) suggests underutilized assets and depressed returns
• Asset turnover is very low (0.132), constraining ROE despite healthy margins
• Ordinary vs. pre-tax profit gap suggests possible extraordinary items volatility (details not disclosed)
• Interest rate risk impacting returns on large cash and securities balances (totaling ~59.3 of assets)

Key Concerns:

• OCF/NI ratio of -1.78x indicates weak cash conversion
• High reliance on financial income to support ordinary income quality
• Sustainability of margin expansion without corresponding cash inflows
• Data limitations on debt schedule, dividend cash outflow, and extraordinary items

Investment Implications

Key Takeaways:

• Core operating margins improved meaningfully (OPM ~12.5%, +~320 bps YoY), driving strong operating profit growth
• Profit mix remains partly financial-income driven (non-operating income 1.05; interest income 0.51)
• Earnings quality is soft this half (OCF -2.44; estimated FCF ~-3.28), requiring WC normalization
• Balance sheet is exceptionally strong (cash 37.67; D/E 0.07x), limiting downside risk but weighing on ROE/ROIC
• ROIC at 1.9% is below the 5% warning threshold, highlighting a need for better capital deployment or asset rationalization

Metrics to Watch:

• Operating cash flow and receivable days (cash conversion cycle)
• Sustained OPM >12% and stability of gross margin
• Non-operating income trends, especially interest income sensitivity to rates and asset balances
• ROIC and asset turnover improvements (e.g., redeployment of excess cash/securities)
• Dividend cash outflow vs. FCF coverage once OCF normalizes

Relative Positioning: Within small-cap Japanese manufacturers with cash-rich balance sheets, Sonocom shows above-peer margin improvement and very low financial risk, but lags on capital efficiency and cash conversion; upside to returns hinges on deploying excess liquidity and stabilizing OCF.

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
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