KOKEN LTD. FY2025 Q3 Earnings Report

Financial Highlights

• Net Sales: ¥7.44B
• Operating Income: ¥547M
• Net Income: ¥310M
• EPS: ¥74.00

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

FY2025 Q3 was solid for Koken (7963), delivering double-digit profit growth on modest top-line expansion, with improved operating efficiency and healthy liquidity. Revenue rose 6.0% YoY to 74.43, while operating income increased 18.8% YoY to 5.47, and net income climbed 17.7% YoY to 3.64. Gross margin stood at a strong 43.8%, and operating margin improved to 7.35%, reflecting favorable mix and/or SG&A discipline. Based on prior-period reconstruction, operating margin expanded by roughly 79 bps versus last year (from about 6.56% to 7.35%), indicating positive operating leverage. Ordinary income reached 5.14 (up 8.8% YoY), with non-operating items modest in scale overall relative to operating profit. Profit before tax was 4.73, and the effective tax rate was 34.6%, yielding a net margin of 4.9%. Balance sheet remains conservative: current ratio is 254.6% and quick ratio 227.1%, with net debt limited given cash of 27.81 against total loans of roughly 39.68. Interest coverage is strong at 15.4x, underscoring low financial risk. ROE is 2.8%, restrained by low asset turnover (0.354x) and modest financial leverage (1.59x). ROIC is 2.5% (below the 5% warning threshold), signaling underutilized capital or a still-normalizing demand environment. Cash conversion cycle estimated at ~136 days (AR ~78 days, inventory ~107 days, AP ~49 days), which is working-capital intensive for a company of this size. Earnings quality cannot be fully assessed due to unreported cash flows; however, margin improvements and limited interest burden are positives. The implied payout ratio is 49.1%, appearing reasonable versus earnings, though FCF coverage cannot be verified. Forward-looking, sustaining margin gains while improving asset turnover will be key to lifting ROE/ROIC, with inventory discipline and order visibility the main swing factors. Absent cash flow disclosure, we remain cautious on earnings quality assessment, but the capital structure provides a solid buffer for volatility.

Profitability Analysis

ROE decomposition: ROE (2.8%) = Net Profit Margin (4.9%) × Asset Turnover (0.354x) × Financial Leverage (1.59x). The most impactful driver YoY is Net Profit Margin, as net income grew 17.7% vs revenue +6.0%, implying margin expansion. Operating margin rose to 7.35% (c. +79 bps YoY), indicating operating leverage likely from SG&A efficiency and/or better product mix (gross margin steady-high at 43.8%). Asset turnover remains subdued at 0.354x, reflecting a relatively large asset base against current revenue scale and a working-capital-heavy model. Leverage is modest at 1.59x and not a material ROE driver. The margin improvement appears partly sustainable if mix and pricing hold and SG&A remains controlled; however, any normalization of demand or input cost pressure could compress margins back toward mid-6% levels. Watch for signs of cost drift: if SG&A growth begins to outpace revenue, the operating leverage will reverse. Overall, the ROE shortfall is primarily a function of low asset turnover and conservative leverage rather than inadequate gross profitability.

Growth Assessment

Top-line growth of 6.0% YoY to 74.43 indicates steady demand, likely supported by industrial/health-related respirator and safety product sales. Profit growth outpaced sales (OI +18.8%, NI +17.7%), reflecting operating leverage and disciplined expense control. Non-operating items were small relative to operating profit, suggesting core operations drove the performance. Sustainability hinges on maintaining gross margin near 44% and continuing SG&A discipline; mix shifts toward higher-value products would help. With ROIC at 2.5%, incremental growth should prioritize capital-light initiatives and working capital efficiency to raise returns. Near-term outlook is cautiously positive if order flow remains stable; however, sensitivity to procurement cycles and public/industrial demand could introduce quarterly volatility. Lack of R&D and depreciation disclosure limits assessment of the innovation pipeline and maintenance capex needs.

Financial Health

Liquidity is strong: current ratio 254.6% and quick ratio 227.1% comfortably exceed benchmarks. No warning on leverage: D/E at 0.59x is conservative, and interest coverage at 15.41x indicates ample buffer. Maturity mismatch risk appears low—current assets (101.98) far exceed current liabilities (40.06); short-term loans (12.00) are covered by cash (27.81) and receivables (16.04). Total loans (short + long) are 39.68 vs cash 27.81, implying modest net debt. No off-balance sheet obligations are disclosed in the provided data. Equity base is solid at 132.17, with retained earnings 119.11, supporting resilience.

Cash Flow Quality

Operating cash flow and free cash flow are unreported, so OCF/Net Income and FCF coverage cannot be assessed. This is a key limitation for earnings quality analysis. Working capital intensity is notable: AR of 16.04 and inventories of 11.00 imply AR days ~78 and inventory days ~107 (using YTD sales and COGS), partially offset by AP days ~49, yielding an estimated CCC of ~136 days. Without OCF data, we cannot rule out working capital-driven earnings divergence; therefore, monitor inventory build and receivable collections closely. Given low interest burden and moderate capex typical for this business, FCF could be adequate, but this remains unverified.

Dividend Sustainability

The calculated payout ratio is 49.1%, within a generally sustainable range (<60%). DPS is unreported, but based on EPS of 74 JPY, implied annual DPS would be roughly mid-30s JPY if the 49% payout is applied; this is illustrative, not confirmed. Balance sheet strength (net debt modest, strong liquidity) supports dividend continuity. However, in the absence of OCF/FCF disclosure, we cannot confirm cash coverage of dividends and capex. Policy outlook likely targets a stable-to-progressive dividend aligned with earnings, contingent on maintaining current margin profile and working capital discipline.

Risk Assessment

Business Risks:

• Demand variability in industrial/medical respirator markets tied to procurement cycles and macro conditions
• Product mix and pricing risk affecting gross margin (43.8% currently)
• Supply chain and raw material cost volatility impacting cost of sales
• Regulatory/quality compliance risk in safety equipment
• Inventory management risk given estimated 107 inventory days

Financial Risks:

• Low ROIC (2.5%) indicating capital efficiency challenges
• Earnings sensitivity to SG&A discipline given 37.6% SG&A-to-sales ratio
• Working capital intensity (estimated CCC ~136 days) potentially weighing on OCF
• Small-cap scale risk limiting operating leverage in downturns

Key Concerns:

• ROE at 2.8% constrained by low asset turnover (0.354x)
• Unreported cash flow statements limit assessment of earnings quality and dividend coverage
• Potential extraordinary losses/adjustments between ordinary income and PBT introducing volatility
• Dependence on domestic market cycles could amplify quarterly fluctuations

Investment Implications

Key Takeaways:

• Solid Q3 with revenue +6.0% and operating income +18.8% YoY; operating margin expanded ~79 bps to 7.35%
• Balance sheet is robust (current ratio 2.55x, D/E 0.59x, interest cover 15.4x)
• Return metrics are subdued (ROE 2.8%, ROIC 2.5%) due to low asset turnover and conservative leverage
• Working capital intensity is high (estimated CCC ~136 days), a key gate to stronger OCF
• Dividend payout appears moderate at ~49%, but FCF coverage unverified due to missing CF data

Metrics to Watch:

• Operating cash flow and free cash flow trends (OCF/NI > 1.0 target)
• Inventory and receivables turnover (inventory days, AR days) and overall CCC
• Gross and operating margins by product/segment to assess sustainability of mix/pricing
• SG&A growth vs revenue growth to monitor operating leverage
• ROIC progression toward >5% near term and >7% medium term

Relative Positioning: Within Japan-listed safety equipment peers, Koken exhibits healthy margins and strong liquidity but lags on capital efficiency (low ROIC/ROE). Its conservative balance sheet reduces financial risk, yet improving asset turnover and working capital efficiency is essential to close the return 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