KUWAZAWA Holdings Corporation FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥31.40B
• Operating Income: ¥516M
• Net Income: ¥429M
• EPS: ¥27.91

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 soft quarter with margin compression and weaker operating profit despite relatively stable sales, compounded by poor cash conversion. Revenue was 314.0 (−0.9% YoY), while operating income fell to 5.16 (−24.7% YoY), dragging ordinary income to 7.16 (−13.0% YoY) and net income to 4.17 (−17.6% YoY). Gross profit was 45.61, implying a gross margin of 14.5%, while SG&A of 40.45 kept the SG&A ratio elevated at 12.9%. Operating margin declined to 1.64%, down roughly 52 bps YoY (from ~2.16% based on prior-year implied figures). Net margin was 1.33%, pressured by a high effective tax rate of 40.7%. Non-operating income of 2.30 (notably interest and dividends) cushioned ordinary profit, with a high non-operating contribution to profit structure. EBITDA was 6.53, translating to a slim 2.1% EBITDA margin, highlighting limited operating leverage in the current environment. Earnings quality was weak: operating cash flow was −0.27 versus net income of 4.17 (OCF/NI −0.06x), indicating working-capital drag or timing mismatches. Liquidity is adequate but not robust (current ratio 131%), and leverage measured as total liabilities/equity is moderate-high at 1.79x, though interest-bearing loans are small and coverage is strong (19.85x). Capital efficiency remains a concern with ROE at 2.5% and ROIC at 3.0% (below a 5% warning threshold). Despite these headwinds, the balance sheet shows ample current assets (370.27) against current liabilities (282.65), limiting immediate refinancing risk. Dividend sustainability appears stretched with a calculated payout ratio of 72.1% against negative OCF and thin operating margins. Forward-looking, stabilization of gross margin and normalization of working capital will be key to restoring cash generation. Focus should be on demand trends in construction-related end markets, cost pass-through effectiveness, and SG&A discipline. The quarter underscores sensitivity to small changes in gross margin and operating costs, making execution in pricing and procurement critical for H2.

Profitability Analysis

ROE decomposition (DuPont): Net profit margin 1.33% × Asset turnover 0.674 × Financial leverage 2.79x = ROE 2.5% (matches reported). The largest change driver versus last year appears to be the net profit margin, given operating income declined 24.7% on a modest 0.9% revenue decrease, implying operating deleverage and margin compression. Operating margin contracted to 1.64% (≈−52 bps YoY), while gross margin sits at 14.5% and SG&A ratio at 12.9%, leaving a narrow operating spread. Business reasons likely include softer top line in the core construction/materials distribution environment and tighter pricing/spread (possibly materials cost pressure and/or lag in price pass-through) coupled with fixed-cost absorption. Non-operating income (2.30) partly offset weaker operations, but reliance on non-core items is elevated and not a stable driver of ROE. Sustainability: margin pressure could ease if input costs stabilize and price pass-through improves, but with a high tax rate and thin operating margins, sustained ROE expansion requires either meaningful margin improvement or asset rotation to lift asset turnover. Watch for SG&A growth relative to sales; current SG&A appears sticky, and any SG&A growth ahead of revenue would further compress profitability. Overall, the DuPont profile is constrained by low margins and modest asset turnover, with leverage (2.79x assets/equity) providing only limited boost.

Growth Assessment

Top-line declined slightly (−0.9% YoY), indicating a flat-to-soft demand environment. Operating income fell markedly (−24.7% YoY), demonstrating negative operating leverage on a small revenue dip. Ordinary income decline (−13.0% YoY) was milder due to higher non-operating income, highlighting profit composition skewed toward non-core items. Net income declined 17.6% YoY under a relatively high effective tax rate (40.7%). Revenue sustainability hinges on regional construction activity and public/private project timing; without volume or pricing tailwinds, growth looks muted in the near term. Profit quality is pressured by low EBITDA margin (2.1%), leaving limited buffer for cost shocks. Outlook depends on stabilization of materials costs and improved spread management; if gross margin can lift by 50–100 bps and SG&A is contained, operating income could recover despite flat sales. Absent clear signs of order momentum or backlog growth (not disclosed), we assume a cautious H2 with focus on mix and pricing discipline.

Financial Health

Liquidity: Current ratio 131% and quick ratio 128% indicate adequate short-term liquidity, though below a >150% comfort benchmark; no explicit warning since it remains above 1.0. Solvency: Total liabilities/equity at 1.79x is moderate-high but below a 2.0x caution trigger; interest-bearing loans are modest (short-term 1.10; long-term 3.99), and interest coverage is strong at 19.85x, mitigating refinancing risk. Maturity mismatch: Current assets 370.27 comfortably exceed current liabilities 282.65, suggesting low near-term maturity risk. Off-balance sheet obligations: Not disclosed; none inferred from provided data. Equity base stands at 166.74, providing a buffer, but capital efficiency remains low (ROIC 3.0%). Overall, balance sheet resilience is acceptable, but efficiency and cash generation need improvement.

Cash Flow Quality

OCF was −0.27 versus net income 4.17, yielding OCF/NI of −0.06x, a clear earnings quality red flag. The divergence suggests working capital outflows or timing effects (e.g., receivables build or payables reduction), though detailed movements are not disclosed. With investing CF and capex unreported, free cash flow cannot be calculated; however, negative OCF alongside dividends (payout ratio 72.1%) implies potential external funding or cash balance draw if maintained. Interest coverage remains strong, reducing immediate stress, but sustained negative OCF would pressure liquidity. No overt signs of deliberate working capital management can be confirmed without period-over-period balance detail, but the combination of high receivables (189.30) relative to payables (134.81) warrants monitoring of collections. Sustainability will depend on normalizing working capital cycles and stabilizing margins.

Dividend Sustainability

The calculated payout ratio is 72.1%, above a conservative <60% benchmark and inconsistent with negative operating cash flow this quarter. With FCF unreported, coverage cannot be assessed precisely, but near-term sustainability appears strained unless H2 OCF improves or cash on hand (70.48) is utilized. Balance sheet leverage is not excessive, and interest-bearing debt is small, but relying on cash balances to fund dividends is not a durable strategy if earnings and OCF remain weak. Policy outlook likely emphasizes stability, but prudence may require aligning payout with cash generation until margins and OCF recover.

Risk Assessment

Business Risks:

• Gross margin pressure due to materials cost volatility and lagging price pass-through
• Demand softness in construction-related end markets leading to negative operating leverage
• High reliance on non-operating income to support ordinary profit
• Elevated effective tax rate (40.7%) dampening net profitability
• Regional concentration risk if operations are skewed to specific geographies

Financial Risks:

• Weak cash conversion (OCF/NI −0.06x) indicating working capital strain
• Moderate-high liabilities/equity (1.79x) though interest-bearing debt is limited
• Low ROIC (3.0%) signaling capital efficiency challenges
• Dividend coverage risk given negative OCF and high payout ratio

Key Concerns:

• Operating margin compressed to 1.64%, leaving little buffer for shocks
• Receivables heavy balance (189.30) vs payables (134.81) raises collection and cash timing concerns
• Limited visibility on capex and investment needs due to unreported investing CF and capex
• Profit composition skewed toward non-operating items increases earnings volatility

Investment Implications

Key Takeaways:

• Margin compression and a 24.7% YoY drop in operating income despite stable sales signal fragile operating leverage
• Earnings quality is weak with OCF negative versus positive NI
• Ordinary profit is supported by non-operating income, elevating volatility risk
• Liquidity is adequate but not abundant; efficiency (ROIC 3.0%) needs improvement
• Dividend sustainability is questionable at a 72% payout amid negative OCF

Metrics to Watch:

• Gross margin (target stabilization or +50–100 bps improvement)
• SG&A ratio versus revenue growth (avoid SG&A growth outpacing sales)
• OCF/NI ratio (aim >1.0) and working capital turns, especially receivables days
• Operating margin (restore toward >2.0%) and EBITDA margin (>3.0%)
• ROIC trajectory (move toward >5% near-term, >7% medium-term)

Relative Positioning: Within domestic construction/materials distribution peers, the company exhibits weaker cash conversion and lower capital efficiency this quarter, with adequate but not strong liquidity; reliance on non-operating income further differentiates its risk profile versus peers with stronger core operating margins.

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