MUTO SEIKO CO. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥14.84B
• Operating Income: ¥1.30B
• Net Income: ¥1.14B
• EPS: ¥155.17

Income Statement

Balance Sheet

Cash Flow Statement

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

FY2026 Q2 was a solid beat operationally with clear margin expansion and strong cash conversion. Revenue grew 4.4% YoY to 148.41, while operating income rose 14.3% YoY to 12.99, driving operating margin up materially. Ordinary income increased 21.2% to 15.25, aided by higher non-operating income of 2.60, and net income climbed 25.3% to 10.82, translating to EPS of 155.17 yen. Operating margin improved to about 8.75%, up roughly 76 bps YoY by our calculation, reflecting operating leverage as SG&A intensity remained contained. Net profit margin expanded to 7.29%, an estimated +122 bps YoY, supported by both better operations and non-operating gains (notably interest income of 0.81). Ordinary margin also expanded by an estimated +142 bps YoY. Gross margin stands at 20.9%, supporting improved profitability downstream. Cash generation quality was high: operating cash flow of 16.38 exceeded net income (OCF/NI 1.51x), and we estimate FCF at roughly 10.79 after capex of 5.59. The balance sheet is conservative with a current ratio of 224% and net cash of roughly 48.8 (cash 108.1 minus total loans 59.3), mitigating refinancing risk despite 38.31 of short-term loans. Leverage remains moderate (D/E 0.65x) and interest coverage is very strong at ~39.7x. ROE calculates to 5.5% via DuPont (7.3% net margin × 0.453 asset turnover × 1.65x leverage), improving primarily on margin gains, though still modest versus typical targets. ROIC is 6.5%, slightly below the 7–8% benchmark, suggesting room for further capital efficiency or mix improvements. Non-operating income accounts for about 24% of operating-level earnings, a support tailwind this quarter but a potential volatility source if interest income normalizes. Forward-looking, the combination of cost discipline, better margins, and healthy cash conversion provides capacity for continued investment and shareholder returns, but sustaining ROIC above the 7–8% threshold will likely require further margin enhancement or higher asset turns.

Profitability Analysis

ROE (5.5%) = Net Profit Margin (7.3%) × Asset Turnover (0.453) × Financial Leverage (1.65x). The largest positive driver this quarter was net margin expansion, evidenced by NI growth (+25.3% YoY) outpacing revenue (+4.4% YoY). Operating margin rose to ~8.75% from an estimated ~7.99% a year ago (+76 bps), while net margin rose by ~122 bps to 7.29%, supported by operating leverage and higher non-operating income (notably interest income of 0.81). Asset turnover remains moderate at 0.453, indicating room to enhance capital efficiency; leverage is steady and conservative at 1.65x. Business driver: stronger gross-profit capture (20.9% GPM) and controlled SG&A (SG&A-to-sales ~12.2%) improved operating leverage; non-operating tailwinds further lifted ordinary and net income. Sustainability: the operating margin gains appear more durable than the non-operating contribution; interest income may soften if cash balances decline or rates change. Watch for any reversal if SG&A growth starts to outrun revenue; for now, revenue growth (+4.4%) exceeded implied SG&A growth (not disclosed YoY), and operating income grew faster than sales, indicating positive operating leverage.

Growth Assessment

Top-line grew 4.4% YoY to 148.41, demonstrating steady demand. Operating income rose 14.3% YoY to 12.99, and ordinary income rose 21.2% to 15.25, with net income up 25.3% to 10.82—clear evidence of mix and cost discipline. Operating margin expanded ~76 bps and net margin ~122 bps YoY, showing improved profitability quality. Non-operating income of 2.60 (interest income 0.81) contributed meaningfully; ordinary margin expanded ~142 bps YoY. EBITDA was 19.46, for a 13.1% EBITDA margin. While the growth mix is healthy, part of the uplift stems from non-operating items (24% ratio), which may be less recurring. Outlook: sustaining mid- to high-single-digit top-line growth with continued cost control could keep operating margin in the high-8% range or better. To lift ROIC above 7–8%, management will likely need further efficiency gains or asset-light growth to improve asset turnover.

Financial Health

Liquidity is strong: current ratio 224.3% and quick ratio 215.0% comfortably exceed benchmarks. There is no warning on current ratio (<1.0) or D/E (>2.0); D/E is a conservative 0.65x. Cash and deposits of 108.10 exceed short-term loans of 38.31, reducing near-term refinancing risk; total current assets (216.12) comfortably cover current liabilities (96.37). Long-term loans are 21.02; total loans 59.33 imply a net cash position of ~48.8, further strengthening solvency. Interest coverage is robust at ~39.69x, indicating ample buffer against rate increases. No off-balance sheet obligations are reported in the provided data. Maturity mismatch risk appears low given cash-on-hand and working capital headroom (working capital 119.75).

Cash Flow Quality

OCF/NI of 1.51x indicates high-quality earnings backed by cash. With capex of 5.59, estimated FCF is ~10.79, leaving meaningful internally generated funds after investment. Financing CF was -5.43, reflecting outflows (likely debt service, share repurchases of 1.30, and potential dividends—unreported). Working capital appears well managed given strong OCF, though detailed drivers (AR/AP/inventory changes) are not disclosed; no clear signs of working capital manipulation are evident from the limited data. The cash balance (108.10) provides additional flexibility to absorb investment needs or distributions.

Dividend Sustainability

Reported payout ratio is 67.6%, modestly above the typical 60% sustainability benchmark but potentially manageable given strong cash generation. While DPS and total dividends are unreported, the implied payout suggests distributions are covered by earnings. On an estimated basis, FCF of ~10.79 could cover an implied dividend outlay (if aligned with a ~67.6% NI payout) with an approximate 1.4–1.6x coverage; this is a rough inference due to missing dividend disclosures. Balance sheet strength (net cash) and healthy OCF support ongoing dividends, but maintaining payout above 60% could constrain reinvestment flexibility if growth capex rises or non-operating income normalizes. Policy outlook: absent formal guidance, current profitability and cash flows support stable to modestly rising dividends, contingent on sustaining operating margin and ROIC.

Risk Assessment

Business Risks:

• Margin sensitivity to input cost inflation and pricing power, given GPM at 20.9%.
• Demand cyclicality in core end-markets (industrial/precision components), which could pressure volumes and utilization.
• Execution risk in maintaining SG&A discipline to preserve operating leverage.
• Potential normalization of non-operating income (interest income) that supported ordinary profit.

Financial Risks:

• Reliance on short-term loans (38.31) introduces rollover exposure, albeit mitigated by cash of 108.10.
• ROIC at 6.5% is below the 7–8% benchmark, implying capital efficiency risk if growth requires higher investment.
• Moderate leverage when assessed versus EBITDA (Debt/EBITDA ~3.05x), manageable but sensitive to EBITDA volatility.

Key Concerns:

• Non-operating income ratio of ~24% indicates a meaningful non-core earnings contribution, which may be volatile.
• ROE at 5.5% remains modest despite margin improvements, limiting equity value creation versus higher-ROE peers.
• Data gaps (investing CF, dividend amounts, SG&A detail) limit full assessment of sustainability and cost drivers.

Investment Implications

Key Takeaways:

• Profits outpaced sales growth, delivering ~76 bps operating margin and ~122 bps net margin expansion YoY.
• High-quality earnings with OCF/NI at 1.51x and estimated FCF of ~10.79 after capex.
• Balance sheet strength with net cash ~48.8 and strong liquidity (current ratio 224%).
• ROE at 5.5% and ROIC at 6.5% indicate progress but still below typical targets, highlighting capital efficiency upside.
• Non-operating tailwinds (interest income) boosted ordinary profit; durability depends on cash levels and rates.

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio for continued operating leverage.
• ROIC versus 7–8% benchmark and drivers (asset turnover improvements).
• Working capital turns (AR, inventory) to enhance asset efficiency and cash conversion.
• Non-operating income mix and sensitivity to interest rate changes.
• Capex intensity versus OCF to sustain positive FCF after shareholder returns.

Relative Positioning: Versus domestic small/mid-cap industrial peers, the company exhibits stronger liquidity and cash conversion, moderate leverage, and improving margins, but still trails on ROE/ROIC targets; continued efficiency gains and disciplined capital allocation are key to closing the gap.

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