SATO SHO-JI CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥142.37B
• Operating Income: ¥3.23B
• Net Income: ¥2.93B
• EPS: ¥139.38

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 solid but modestly improving quarter with margin expansion and healthy cash conversion, though capital efficiency remains weak. Revenue grew 1.8% YoY to 1,423.73, with operating income up 16.3% YoY to 32.29 and ordinary income up 15.6% to 35.20, indicating improved operating leverage. Net income increased 3.7% YoY to 29.30, while basic EPS reached 139.38 JPY. Gross profit was 113.24, implying an 8.0% gross margin. Operating margin was 2.27% and net margin 2.06%. Based on derived prior-period figures, operating margin expanded by about 29 bps and net margin by about 4 bps YoY. Cash flow quality was strong, with OCF of 38.88 exceeding net income (OCF/NI 1.33x). Interest coverage of 19.93x and a current ratio of 135.9% indicate sound liquidity and manageable leverage. However, ROE was 4.1% and ROIC 2.4%, both low versus industry benchmarks, signaling underwhelming capital efficiency. Non-operating income of 5.16 (notably 3.61 from dividends) contributed moderately to ordinary income, but profit remains primarily operating-driven. Working capital remained sizable (AR 537.09, inventories 306.12), consistent with a metals-focused trading model. Financing cash flows were negative (-17.33), consistent with debt reduction or dividends, but dividends and buybacks were unreported. Free cash flow is likely positive if we approximate FCF as OCF minus capex, but investing CF details are missing. Forward-looking, incremental margin improvements and disciplined SG&A underpin steady earnings, but sustaining growth will depend on inventory discipline, commodity price pass-through, and managing short-term borrowing costs. The payout ratio (calculated) at 56.5% appears within a sustainable range assuming stable FCF. Overall, the quarter demonstrates operational resilience with improved profitability, but structural returns remain below target levels, implying continued focus on asset efficiency and ROIC uplift.

Profitability Analysis

ROE decomposition (DuPont): ROE 4.1% = Net profit margin 2.1% × Asset turnover 0.829 × Financial leverage 2.39x. The largest change driver this quarter appears to be net profit margin, which improved modestly: operating margin rose to 2.27% (approx. +29 bps YoY) and net margin to 2.06% (approx. +4 bps YoY), while leverage and asset turnover likely remained broadly stable given balance sheet scale. Business explanation: tighter gross-to-operating conversion (SG&A discipline) and modest non-operating tailwinds (dividend income 3.61) supported ordinary profit, while a normalized effective tax rate of 28.2% limited net profit expansion. Sustainability: operating margin gains appear achievable to sustain if pricing discipline and mix hold; non-operating dividends can be recurrent but are market-dependent; overall net margin uplift is modest and likely sustainable but sensitive to steel price volatility. Asset turnover at 0.829 is low for a trading model, reflecting heavy working capital (AR/inventories) relative to sales; improving turnover will be key to ROE expansion. Financial leverage at 2.39x aids ROE but remains within conservative bounds; further leverage-driven ROE increases are not advisable. Watch for SG&A growth outpacing revenue: current SG&A was 80.95 versus revenue growth of 1.8%; without YoY SG&A detail, we cannot confirm operating deleverage, but the operating income growth (+16.3%) suggests SG&A discipline this quarter.

Growth Assessment

Revenue growth of 1.8% YoY was modest, likely volume/mix-driven amid stable to slightly firmer demand in core metal trading segments; detailed segment data were not disclosed. Operating income outpaced revenue growth (+16.3% YoY), indicating positive operating leverage from improved gross-to-OP conversion and controlled SG&A. Ordinary income (+15.6% YoY) benefited from 5.16 in non-operating income, including 3.61 in dividend income, which is supportive but non-core. Net income growth of 3.7% lagged ordinary profit due to the effective tax rate (28.2%). Margin quality improved slightly: operating margin ~2.27% and net margin ~2.06%. Outlook: near-term growth sustainability hinges on inventory management, pass-through of input price changes, and maintaining receivables quality. With asset turnover at 0.829 and ROIC at 2.4%, structural growth in profits will likely require better capital efficiency rather than pure volume growth. Non-operating income contributions are helpful but could be volatile depending on market conditions for investment securities and affiliates.

Financial Health

Liquidity is adequate: current ratio 135.9% and quick ratio 102.1% (above caution thresholds). No warning on current ratio (<1.0) or D/E (>2.0): D/E is 1.39x, within a conservative range but on the higher side of comfort for a trading firm. Working capital is positive at 325.56, with current assets of 1,231.25 covering current liabilities of 905.69, mitigating near-term funding stress. Short-term loans are 267.85 against substantial current assets (AR 537.09; inventories 306.12; cash 48.48), suggesting manageable maturity mismatch risk; nonetheless, reliance on short-term funding implies interest rate sensitivity. Long-term loans are modest at 44.02, limiting refinancing risk. Total liabilities are 998.60 versus total equity of 719.39, indicating a stable capital structure. Off-balance sheet obligations were not reported; absent disclosure, contingent commitments typical for trading (e.g., guarantees) cannot be assessed.

Cash Flow Quality

OCF/Net Income is 1.33x, indicating good earnings quality and cash conversion. Reported OCF of 38.88 comfortably covers reported depreciation (6.47) and supports ongoing operations. Approximated FCF, assuming capex of 20.56 is the principal investing outflow, is around 18.32; however, full investing CF details were unreported, so true FCF may differ. Financing CF was -17.33, consistent with debt reduction and/or shareholder returns, but dividend and buyback amounts were unreported. No clear signs of working capital manipulation are observable from available data; however, given the business model’s reliance on AR and inventories, cash flows can be timing-sensitive. With interest coverage at 19.93x, cash interest burden is low relative to EBITDA, supporting cash flow resilience.

Dividend Sustainability

The calculated payout ratio is 56.5%, within the generally sustainable range (<60%), suggesting alignment with a stable dividend policy. While DPS and total dividends paid were unreported, OCF of 38.88 and an estimated FCF of about 18.32 imply potential coverage for dividends if absolute cash distributions are moderate; data limitations prevent definitive FCF coverage confirmation. Balance sheet flexibility (current ratio 135.9%, D/E 1.39x) and strong interest coverage (19.93x) further support dividend sustainability. Key caveats: investing CF details are missing, and non-operating income (dividends received) can fluctuate with market conditions, potentially impacting distributable cash in stress scenarios.

Risk Assessment

Business Risks:

• Commodity price volatility (steel and metals) impacting gross margin and inventory valuation.
• Thin operating margins (~2.27%) magnify sensitivity to small pricing or cost shifts.
• Working capital intensity (AR 537.09; inventories 306.12) elevates exposure to demand slowdowns and credit risk.
• Dependence on non-operating dividends (3.61) as a recurrent but market-sensitive income stream.
• Customer concentration risk typical in metals trading (not disclosed, but industry common).

Financial Risks:

• Interest rate risk given reliance on short-term loans (267.85).
• Capital efficiency risk: low ROIC (2.4%) and ROE (4.1%) versus benchmarks could pressure valuation and limit reinvestment capacity.
• Potential maturity mismatch if current assets become less liquid (e.g., inventory build) relative to current liabilities.
• Equity ratio and D/E (1.39x) are acceptable but leave limited headroom if earnings weaken.

Key Concerns:

• Sustained sub-target ROIC (warning threshold <5%) indicates structural returns below cost of capital.
• Asset turnover at 0.829 is low for a trading model, constraining ROE expansion.
• Non-operating income ratio at 17.6% highlights some reliance on financial income in a low-margin core business.
• Data gaps (investing CF, DPS, segment details) limit visibility on recurring vs one-off drivers.

Investment Implications

Key Takeaways:

• Operational improvement with operating profit +16.3% YoY and operating margin up ~29 bps to 2.27%.
• Healthy cash conversion (OCF/NI 1.33x) and strong interest coverage (19.93x).
• Capital efficiency remains the core issue: ROE 4.1% and ROIC 2.4% are below targets.
• Balance sheet is sound (current ratio 135.9%, D/E 1.39x), but short-term borrowing exposure is notable.
• Dividend payout (calculated 56.5%) appears sustainable if OCF remains stable.

Metrics to Watch:

• Gross and operating margin progression (bps) versus steel price moves.
• Asset turnover and working capital days (DSO/DIO/DPO) to drive ROIC improvement.
• Non-operating income composition (dividends, interest) and stability.
• Short-term loan levels and effective interest rate as rates evolve.
• OCF versus NI trend and FCF after capex once full investing CF is disclosed.

Relative Positioning: Within Japanese metals trading peers, the company demonstrates stable operations and solid liquidity but lags on capital efficiency (ROE/ROIC) and asset turnover versus larger, more diversified trading houses; reliance on working capital remains comparatively high, implying a focus on inventory/receivables discipline 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