SANKO SANGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥4.90B
• Operating Income: ¥64M
• Net Income: ¥7M
• EPS: ¥0.91

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: Mixed quarter—solid top-line growth and an operating turnaround, but bottom-line hit by an unusually high effective tax rate that crushed net income. Revenue increased 9.4% YoY to 49.0, with gross profit of 10.6 and a gross margin of 21.6%. Operating income rose 141.2% YoY to 0.64, implying operating margin of 1.3% and a likely c. +70–75 bps margin expansion versus last year (back-of-the-envelope). Ordinary income surged 595.8% YoY to 0.77, supported by non-operating income of 0.42 (dividends 0.16, interest 0.13, other 0.13) offset by non-operating expenses of 0.29. Profit before tax was 0.49, but income tax of 0.42 drove an 85.7% effective tax rate, resulting in net income of just 0.07 (−91.2% YoY). EBITDA was 2.50, and interest coverage was a healthy 7.33x, indicating adequate service capacity. Cash generation was strong: operating CF of 3.91 materially exceeded EBITDA, suggesting a favorable working capital tailwind in the half. The balance sheet is robust with current ratio 289.5%, quick ratio 263.5%, and a conservative D/E of 0.38x, supported by cash and deposits of 27.2. ROE was anemic at 0.1%, with DuPont pointing to ultra-thin net margin (0.1%) as the binding constraint despite modest asset turnover (0.407) and low leverage (1.38x). ROIC printed at 0.4%, well below the 5% warning threshold, signaling sub-par capital efficiency. The reported payout ratio of 1,125.5% appears mechanically inflated due to the very low net income base and should not be extrapolated without full-year context. Earnings quality looks high this quarter (OCF/NI ~56x), but the divergence is driven by transitory tax and working capital effects rather than structural profitability. Forward-looking, the key question is whether the tax rate normalizes and whether operating margin gains can be sustained to lift ROE and ROIC. If tax normalizes and operating discipline persists, bottom-line recovery could be disproportionate; if not, capital efficiency will remain a headwind despite healthy liquidity. Monitoring mix, SG&A control, and any one-off tax items is essential into 2H.

Profitability Analysis

ROE decomposition: ROE (~0.1%) = Net Profit Margin (0.1%) × Asset Turnover (0.407) × Financial Leverage (1.38x). The dominant drag is the net profit margin, which was compressed by an unusually high effective tax rate (85.7%) despite operating margin improvement. Operating profitability improved (operating income +141.2% YoY to 0.64), implying operating margin expansion from roughly 0.6% to 1.3%, driven by revenue growth (+9.4% YoY) and better operating leverage. Non-operating items netted a modest benefit (+0.13), mainly dividend and interest income, but this was not enough to offset the tax impact at the net level. The high tax rate appears non-recurring in nature (mismatch between PBT of 0.49 and tax of 0.42) and, if it normalizes, net margin and ROE should lift mechanically. SG&A (9.96) is large relative to gross profit (10.6), leaving a thin operating spread; while SG&A YoY is not disclosed, the structure indicates limited buffer to absorb shocks. Sustainability: operating margin gains may be sustainable if cost discipline holds, but net margin should improve primarily through tax normalization rather than further non-operating support. Key watchouts: any acceleration of SG&A above revenue growth would quickly erode the currently fragile operating margin.

Growth Assessment

Top-line growth of 9.4% YoY to 49.0 indicates solid demand resilience. Operating income growth (+141.2% YoY) outpaced revenue, signaling positive operating leverage off a low base. Ordinary income (+595.8% YoY) benefited from both operating improvement and steady non-operating income, but net income collapsed (−91.2% YoY) due to the extraordinary tax burden. Revenue quality appears decent with gross margin at 21.6%, though we lack segment mix details to assess sustainability. EBITDA of 2.50 against capex of 1.36 suggests ongoing capacity and maintenance investment is manageable. With OCF exceeding EBITDA, working capital movements were favorable this half; the durability of this tailwind is uncertain. Outlook hinges on: (1) maintaining operating margin above 1% via SG&A control and mix, (2) normalization of the effective tax rate toward historical levels, and (3) steadiness of dividend/interest income. Near-term growth could translate more fully to net if tax normalizes; otherwise, bottom-line growth will lag operating trends.

Financial Health

Liquidity is strong: current ratio 289.5% and quick ratio 263.5% comfortably exceed benchmarks. No warning on current ratio (<1.0) or D/E (>2.0); D/E is 0.38x, indicating conservative leverage. Maturity profile appears sound: short-term loans (5.33) are well covered by cash and deposits (27.20) and current assets (67.89) versus current liabilities (23.45). Total liabilities are modest at 33.35 against equity of 86.98, reinforcing solvency. Interest coverage of 7.33x indicates adequate buffer against interest rate increases. No off-balance sheet obligations are disclosed in the provided data. Equity base remains solid with retained earnings of 37.27 and book value per share estimated at 1,123.62 JPY.

Cash Flow Quality

OCF/Net Income is 55.87x, which flags very high cash conversion this period; however, this is driven by unusually low net income (tax distortion) and likely favorable working capital movements, not purely higher structural cash earnings. Proxy FCF (OCF − Capex) is approximately 2.55, indicating capacity to fund maintenance capex internally; full investing CF is unreported, so this proxy may omit other investments. Financing CF was an inflow of 1.73, likely reflecting net borrowings or other financing activities; dividends and buybacks are unreported. No clear signs of working capital manipulation from the available snapshot, but the degree to which OCF exceeds EBITDA suggests a working capital release that may not repeat. Earnings quality appears better than accounting income suggests this quarter, but normalization of tax and WC will likely narrow OCF/NI divergence.

Dividend Sustainability

The calculated payout ratio of 1,125.5% is mechanically inflated by very low net income and should not be interpreted as a structural policy signal. With proxy FCF of ~2.55 and strong liquidity, the company has near-term capacity to maintain ordinary dividends if they are modest; however, the absence of disclosed DPS and total dividends limits precision. Sustainability over the medium term requires net income recovery (via tax normalization and operating margin retention) so that payout ratios regress toward <60% benchmarks. Until net income normalizes, payout ratios will appear optically unsustainable even if cash coverage is sufficient.

Risk Assessment

Business Risks:

• Thin operating margin (1.3%) leaves limited buffer against input cost or demand shocks
• Dependence on non-operating income (dividend/interest) to augment below-trend operating profit
• Potential volatility in gross margin due to mix or pricing dynamics (details not disclosed)
• Execution risk in SG&A control given SG&A nearly equals gross profit

Financial Risks:

• ROIC at 0.4% signals sub-par capital efficiency and potential value dilution if not improved
• Earnings sensitivity to tax rate; an elevated effective tax rate can compress net margin
• Possible normalization of working capital that could reduce OCF versus this half's level

Key Concerns:

• Net income declined 91.2% YoY despite operating improvement, driven by an 85.7% tax rate
• ROE at ~0.1% is materially below cost of equity, indicating poor shareholder returns
• High reported payout ratio due to low NI may constrain perceived capital return flexibility

Investment Implications

Key Takeaways:

• Revenue growth healthy at +9.4% YoY; operating turnaround evident off a low base
• Net income weakness is tax-driven; normalization would significantly lift net margin
• Balance sheet strength (CR 2.9x, D/E 0.38x, cash 27.2) provides resilience
• ROIC 0.4% and ROE 0.1% are key negatives—capital efficiency must improve
• OCF strong (3.91) with proxy FCF ~2.55, but likely aided by non-repeat WC tailwinds

Metrics to Watch:

• Effective tax rate trajectory in 2H and full-year
• Operating margin progression and SG&A growth versus revenue
• Working capital turns (AR and inventory days) and OCF sustainability
• EBITDA/interest coverage and any changes in borrowing
• Dividend disclosure and cash payout coverage by FCF

Relative Positioning: Versus small-cap peers, the company shows stronger liquidity and modest leverage but lags on capital efficiency (ROIC/ROE). Near-term cash generation is supportive, yet structurally low margins and tax volatility weigh on the earnings profile.

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