NAGASE & CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥479.73B
• Operating Income: ¥21.06B
• Net Income: ¥15.45B
• EPS: ¥141.42

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

Verdict: A stable but subdued FY2026 Q2, with flat operating profit on marginally lower sales, modestly weaker bottom line, and acceptable cash conversion, but capital efficiency remains a clear weak point. Revenue was 4,797.34 (100M JPY, -0.3% YoY) and operating income held at 210.58 (100M JPY, +0.0% YoY), signaling resilience despite soft demand. Ordinary income increased to 207.17 (100M JPY, +2.1% YoY), aided by dividend and interest income, but offset by higher non-operating expenses. Net income declined to 150.89 (100M JPY, -5.6% YoY), reflecting a lighter non-operating balance and a normalized tax rate (effective tax 27.2%). Gross margin was 19.0%, and operating margin was approximately 4.39%; with revenue down slightly and operating profit flat, operating margin expanded by about 1 bp YoY. Net margin slipped to 3.15% from roughly 3.32% last year (about 17 bps compression), tracking the decline in net income. EBITDA was 290.53 (100M JPY) with a 6.1% margin, giving interest coverage of 11.78x—healthy for the sector. Operating cash flow of 162.77 (100M JPY) exceeded net income (OCF/NI = 1.08x), indicating acceptable earnings quality this quarter. Cash generation relative to capex implies a thin pre-acquisition FCF buffer (OCF 162.77 minus capex 129.30 ≈ 33.5), insufficient to fully cover dividends implied by a 65.6% payout of earnings plus buybacks of 118.61 (100M JPY). Balance sheet liquidity is solid (current ratio 193%, quick ratio 140%), and leverage is moderate (D/E 1.02x; assets/equity 2.02x). However, ROIC at 3.3% is well below the 7–8% management targets typical for trading companies and below the 5% warning threshold, underscoring capital efficiency challenges. Non-operating income was meaningful but not dominant (non-operating income ratio 14.6%), with dividend income of 10.74 and interest income of 3.62 partly offset by interest expense of 17.87. Equity-method income is unreported, limiting visibility on affiliate contributions—a key driver for trading-oriented models. Working capital remains heavy (receivables 3,145.85; inventories 1,461.81; payables 1,432.49), consistent with the company’s trading/manufacturing hybrid model and a key lever for cash flow. Looking ahead, margin discipline and working capital efficiency will be essential to lift ROIC and support shareholder returns without increasing balance sheet risk. Overall, a defensible quarter with steady core operations, but structural improvement in capital efficiency and FCF coverage is needed for a stronger trajectory.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.8% = Net Profit Margin 3.1% × Asset Turnover 0.590 × Financial Leverage 2.02x. The most notable change vs last year appears in net margin, which compressed by ~17 bps (from ~3.32% to 3.15%), while operating margin was essentially flat (expansion ~1 bp) as operating profit held steady on slightly lower revenue. Business drivers: non-operating items were a drag (net -3.41), with interest expense (17.87) outweighing interest income (3.62), partially offset by dividend income (10.74), and the effective tax rate normalized at 27.2%. Asset turnover of 0.59 is modest for a trading-heavy model and likely pressured by elevated receivables and inventories; this constrains ROE despite moderate leverage. Sustainability: the slight operating margin stability looks sustainable provided cost control continues, but net margin remains vulnerable to financing costs and limited non-operating tailwinds. ROE at 3.8% is constrained primarily by low asset turnover and subdued net margins rather than insufficient leverage; increasing leverage would not be prudent without improving ROIC. Watch-outs: no SG&A YoY detail was disclosed; we cannot confirm operating leverage or cost inflation dynamics. Given ROIC at 3.3%, returns on incremental capital appear below target, implying margin or turnover improvement is needed to lift ROE.

Growth Assessment

Top-line declined slightly (-0.3% YoY), implying soft end-market demand, likely in chemicals/materials distribution and related manufacturing. Operating profit was flat (+0.0% YoY), indicating effective cost containment despite revenue headwinds. Ordinary income grew (+2.1% YoY) on stable core operations with modest financial income support, but net income fell (-5.6% YoY) due to a less favorable non-operating balance and taxes. Revenue sustainability: with heavy exposure to industrial/chemical supply chains, growth will hinge on inventory normalization, pricing power, and demand in electronics/auto/semiconductor-related segments; current numbers suggest stabilization rather than acceleration. Profit quality: operating margin stability is encouraging, but bottom-line sensitivity to non-operating items persists. Outlook: incremental improvements likely require working capital turnover gains, selective portfolio pruning, and higher margin contribution from specialty chemicals and manufacturing affiliates; otherwise, ROIC and ROE could remain subdued.

Financial Health

Liquidity is strong: current ratio 193.2% and quick ratio 140.3% (both above benchmarks). No warning on current ratio (<1.0) or D/E (>2.0); D/E at 1.02x and assets/equity at 2.02x indicate moderate leverage. Maturity structure: short-term loans 536.23 vs ample current assets 5,343.86 and cash 406.63; with receivables 3,145.85 and inventories 1,461.81, near-term refinancing risk is limited though working capital intensity is high. Long-term loans of 534.19 provide terming, keeping maturity mismatch manageable. Interest coverage at 11.78x is solid. No off-balance sheet obligations were disclosed in the provided data.

Cash Flow Quality

OCF/Net Income of 1.08x indicates acceptable earnings quality with reasonable cash conversion. Minimum pre-acquisition FCF proxy is positive: OCF 162.77 minus capex 129.30 ≈ 33.47 (100M JPY), but investing CF overall is unreported, so true FCF is unknown. Given a calculated payout ratio of 65.6% (≈ 99.6 on NI of 150.89) and buybacks of 118.61, internal cash generation appears insufficient to fully fund shareholder returns and capex without relying on cash on hand or incremental financing. Working capital is sizable; no explicit signs of manipulation are evident from the limited disclosure, but receivables and inventories remain key swing factors for OCF. Overall, cash flow quality is adequate, but FCF coverage of capital allocation appears tight.

Dividend Sustainability

The calculated payout ratio is 65.6%, slightly above the 60% benchmark, suggesting a mildly stretched position relative to internal cash generation. With indicative pre-acquisition FCF of ~33.5 (100M JPY) and unreported investing flows, organic coverage of dividends (≈ 100) looks challenging absent asset sales or lower capex. Buybacks of 118.61 compound the cash requirement and likely required balance sheet support. Liquidity and leverage headroom mitigate near-term risk, but medium-term sustainability depends on improving ROIC, margin mix, and working capital turnover. Dividend policy details and DPS were unreported; we assume continuity unless management signals changes.

Risk Assessment

Business Risks:

• Commodity and chemical price volatility impacting gross margins and inventory valuations
• End-market demand softness in electronics/auto/semiconductor-related segments
• Execution risk in raising ROIC from a low 3.3% toward target levels
• Affiliate/associate performance volatility (equity-method contribution unreported)

Financial Risks:

• Tight FCF coverage of dividends and buybacks, implying reliance on financing or cash reserves
• Interest rate risk with interest expense (17.87) exceeding interest income (3.62)
• Working capital intensity (large receivables/inventories) increasing cash flow volatility
• Moderate leverage (D/E ~1.02x) with Debt/EBITDA ~3.68x

Key Concerns:

• ROIC at 3.3% below 5% warning threshold indicating weak capital efficiency
• Net margin compression (~17 bps YoY) despite stable operating margin
• Data gaps (equity-method income, investing cash flows, DPS) limit full assessment of recurring earnings and FCF

Investment Implications

Key Takeaways:

• Core operations stable: flat operating profit on slightly lower sales with resilient margins
• Bottom line softer due to non-operating drag and normalized tax rate
• Cash conversion acceptable (OCF/NI 1.08x) but FCF coverage of shareholder returns is thin
• Balance sheet liquidity strong; leverage moderate with solid interest coverage
• Capital efficiency is the main weakness (ROIC 3.3%), needing margin/turnover uplift

Metrics to Watch:

• ROIC trajectory and segment-level returns
• Working capital turnover (receivable and inventory days)
• Equity-method income breakdown and sustainability
• Operating margin vs SG&A trends (once disclosed)
• FX sensitivity (USD/JPY, EUR/JPY) and commodity price pass-through
• Capex discipline and project returns vs WACC

Relative Positioning: Within Japanese trading-oriented chemical distributors/manufacturing hybrids, Nagase shows solid liquidity and earnings stability but lags peers on capital efficiency (ROIC) and FCF coverage of shareholder returns; improvements in mix toward higher-margin specialty businesses and tighter working capital management are required to close 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