SANKYO SEIKO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥10.70B
• Operating Income: ¥586M
• Net Income: ¥-542M
• EPS: ¥-14.42

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: FY2026 Q2 was a mixed quarter with resilient core liquidity and positive operating cash flow, but profitability weakened materially and bottom line swung to a net loss due to extraordinary factors. Revenue fell 5.0% YoY to 106.98, while gross profit was 43.61 and operating income halved (-49.2% YoY) to 5.86. Gross margin held at a healthy 40.8%, but operating margin compressed to 5.5% as SG&A of 37.75 (35.3% of sales) absorbed most of the gross profit. Non-operating income was sizable at 6.63, mainly dividend income of 5.94 and interest income of 0.41, nearly matching operating income and highlighting reliance on investment income. Ordinary income reached 12.03 (-16.0% YoY), but profit before tax dropped to -2.08, implying significant extraordinary losses (~-14.1) not detailed in the disclosure. Net income was -5.51 (-11.6% YoY), contrasting sharply with total comprehensive income of 26.45, likely driven by unrealized valuation gains on investment securities. Despite the net loss, operating cash flow was positive at 8.51, aided by working capital and classification effects (dividends received often sit in operating CF under JGAAP). Balance sheet strength remains solid: current ratio 218.9%, quick ratio 173.2%, and debt-to-equity 0.37x; cash and deposits of 76.70 exceed total loans of 40.82, implying a net cash position. ROE deteriorated to -1.0% on a negative net margin (-5.2%), compounded by low asset turnover (0.147x) and modest leverage (1.37x). ROIC is weak at 1.2%, well below the 5% warning threshold, indicating poor capital efficiency. Interest coverage is strong at 17.76x, indicating no near-term solvency pressure. The effective tax rate is distorted (-160.1%) because taxes were incurred despite a pre-tax loss, consistent with extraordinary losses and non-taxable/OCI items. Cash returns to shareholders continued via share repurchases (-9.53) and capex remained controlled (-2.64), but dividend disclosure was not provided. Forward-looking, earnings sensitivity to investment income (dividends and valuation) and extraordinary items is high; stabilizing core operating profit and improving ROIC are key priorities. Overall, the quarter underscores balance sheet resilience but also profit quality concerns and volatility stemming from non-operating and extraordinary items.

Profitability Analysis

ROE decomposition (DuPont): ROE (-1.0%) = Net Profit Margin (-5.2%) × Asset Turnover (0.147x) × Financial Leverage (1.37x). The dominant driver of the ROE deterioration is the net profit margin turning negative, while asset turnover is low and leverage is modest. Operating margin compressed to 5.5% due to SG&A absorption (SG&A at 35.3% of sales), and extraordinary losses (~-14.1 vs ordinary income 12.03) swung PBT to -2.08, pushing NPM to -5.2%. Non-operating income (6.63) cushioned operating weakness—especially dividend income of 5.94—indicating profit composition skewed toward financial income rather than core trading operations. Business reason: revenue declined (-5.0% YoY) while SG&A did not flex down proportionally, and non-recurring extraordinary losses weighed on bottom line. Sustainability: the reliance on dividend income is recurring but market-dependent; extraordinary losses are, by definition, non-recurring, but volatility risk remains; operating margin recovery requires tighter cost control or mix improvement. Concerning trend: operating income fell 49.2% YoY versus revenue down 5.0%, signaling negative operating leverage; SG&A growth versus revenue is not disclosed, but the ratio (35.3%) is elevated relative to the lower sales base.

Growth Assessment

Top line contracted 5.0% YoY to 106.98, suggesting softness in core business demand or portfolio rationalization. Operating profit dropped 49.2% YoY to 5.86, implying a sharp deterioration in operating leverage. Ordinary income declined 16.0% YoY to 12.03 as higher dividend income partially mitigated operating weakness. Profit before tax turned negative (-2.08) due to sizable extraordinary losses (~-14.1), and net income was -5.51 (-11.6% YoY), highlighting earnings volatility. EBITDA was 11.86 (margin 11.1%), providing some buffer but not enough to offset extraordinary items. Given the material role of dividend income (5.94) relative to operating income (5.86), near-term growth visibility is tied to the stability of investee payouts and financial markets. Absent segment data, sustained recovery hinges on cost realignment, improved gross profit retention, and potential rebound in core sales. Outlook near term: subdued, with upside levered to normalization of extraordinary items and maintenance of dividend inflows; downside risk from further market volatility affecting investment income and valuations.

Financial Health

Liquidity is strong: current ratio 218.9% and quick ratio 173.2%, comfortably above benchmarks. Cash and deposits of 76.70 exceed total loans (short-term 29.82, long-term 11.00) indicating a net cash position of roughly 35.9, and interest coverage is robust at 17.76x. Solvency is conservative with D/E at 0.37x and total equity of 528.29 supporting a sizable investments portfolio (investment securities 360.43). No explicit warning triggers: Current Ratio is well >1.0 and D/E is well <2.0. Maturity mismatch risk appears low: current assets 156.64 vs current liabilities 71.56; cash+AR 119.04 covers short-term loans 29.82 and accounts payable 20.42. Off-balance sheet obligations are not disclosed in the provided data; none identified.

Cash Flow Quality

OCF of 8.51 versus net income of -5.51 yields an OCF/NI ratio of -1.54, triggering a quality flag; the divergence is driven by non-cash extraordinary losses, working capital movements, and JGAAP classification where dividends received (5.94) often bolster operating cash flow. Capital expenditures were modest at -2.64, implying a proxy FCF of about 5.87 (OCF - Capex), positive despite the accounting loss. Investing CF was unreported, limiting full FCF analysis; nonetheless, positive proxy FCF alongside net cash provides cushion for shareholder returns. Working capital signs: inventories at 32.68 against half-year COGS of 63.36 look manageable; no clear signs of aggressive working capital manipulation from the limited data. Overall, cash generation quality is mixed—cash flow is supported by investment income and working capital while earnings are depressed by non-operating/extraordinary items.

Dividend Sustainability

Dividend amounts were not disclosed; payout ratio metrics are not reliably calculable with a negative net income. With proxy FCF around 5.87 and a net cash position, the balance sheet can support modest shareholder returns, as evidenced by share repurchases of -9.53 during the period. However, sustainability depends on maintaining positive OCF (partly tied to dividend receipts) and avoiding repeat extraordinary losses. Without explicit DPS or total dividends paid, we cannot assess FCF coverage of dividends; policy visibility is limited. Near-term, capital allocation appears weighted to buybacks; a stable dividend would be more secure if operating profit normalizes and ROIC improves.

Risk Assessment

Business Risks:

• Operating leverage risk: 49.2% YoY decline in operating income on a 5.0% sales decline indicates high sensitivity of profits to revenue.
• Profit composition risk: heavy reliance on dividend income (5.94) to support earnings.
• Earnings volatility from extraordinary items (~-14.1 implied), which drove PBT negative.
• Demand risk in core trading/apparel-related businesses given revenue contraction.
• Execution risk in cost discipline with SG&A at 35.3% of sales.

Financial Risks:

• Capital efficiency risk: ROIC at 1.2% (<5% warning), risking value dilution.
• Market risk on investment securities (360.43) affecting OCI and future earnings.
• Tax volatility risk: negative effective tax rate (-160.1%) reflecting misalignment between taxable income and accounting profit.
• Cash flow dependency on dividends received; potential variability under market stress.
• Refinancing/interest rate risk is low near term given net cash and strong coverage, but rising rates could impact investment income valuations.

Key Concerns:

• Negative net margin (-5.2%) resulting in ROE of -1.0%.
• Ordinary income positive (12.03) but PBT negative (-2.08) suggests material undisclosed extraordinary losses.
• ROIC well below target ranges, signaling underperforming invested capital.
• Gap between net income (-5.51) and total comprehensive income (26.45) implies dependence on unrealized valuation gains.

Investment Implications

Key Takeaways:

• Core operations weakened: operating margin compressed to 5.5% and operating income fell 49.2% YoY.
• Earnings were supported by dividend income (5.94), underscoring investment income dependence.
• Extraordinary losses (~-14.1) drove the swing from ordinary income to pre-tax loss.
• Balance sheet remains strong with net cash and liquidity headroom (current ratio 219%).
• Cash generation positive (OCF 8.51; proxy FCF ~5.87) despite accounting loss.
• Capital efficiency is a concern with ROIC at 1.2% and ROE at -1.0%.
• Comprehensive income positive (26.45) due to valuation gains, but not cash-realized.

Metrics to Watch:

• Operating margin and SG&A ratio to sales (target: reduce below 33% if sales flat).
• Dividend income trajectory and composition of non-operating income.
• Extraordinary gains/losses line and causes driving PBT volatility.
• ROIC progression toward >5% in the medium term.
• Working capital metrics (inventory vs COGS; AR turns) to sustain OCF.
• Net cash position versus buyback/dividend outflows.

Relative Positioning: Within trading-oriented peers, the company shows superior liquidity and low leverage but lags in capital efficiency and profitability, with a higher dependence on investment income and greater exposure to extraordinary-item volatility than best-in-class general trading companies.

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