NAC CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥27.38B
• Operating Income: ¥419M
• Net Income: ¥281M
• EPS: ¥6.73

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

FY2026 Q2 was mixed for Nac (9788): top line was resilient but profitability compressed materially, with cash flow quality flashing caution. Revenue declined slightly to 273.83, down 1.6% YoY, while operating income fell sharply to 4.19 (-45.1% YoY). Gross profit was 137.05, implying a 50.0% gross margin, but SG&A of 132.86 absorbed nearly all gross profit, leaving a thin operating margin. Operating margin contracted to about 1.5% from roughly 2.8% a year ago, a compression of approximately 120–130 bps. Ordinary income was 4.29 (-43.2% YoY), supported by a small net non-operating gain (non-op income 1.25 vs non-op expenses 1.16). Net income rose to 2.81 (+160.5% YoY), but this appears to reflect low base effects rather than structural improvement, given profit before tax of 5.36 and a high effective tax rate of 47.4%. EBITDA was 8.59, with an EBITDA margin of 3.1%, underscoring subdued operating leverage. ROE printed at 1.3%, constrained by a very low net profit margin of 1.0% and only moderate asset turnover of 0.703, despite conservative leverage (1.76x). Liquidity is a bright spot: current ratio is 206.2%, quick ratio 178.8%, and cash and deposits of 82.12 exceed short-term loans of 27.00. Solvency remains sound with debt-to-equity at 0.76x and interest coverage a strong 12.32x. However, cash flow quality is weak: operating cash flow was -2.18 against net income of 2.81 (OCF/NI -0.78x), implying earnings not yet converting to cash, potentially due to working capital build. Capex was modest at 2.30, but negative OCF suggests free cash flow was likely negative this half. Dividend sustainability looks stretched as the calculated payout ratio stands at 364.9%, far above typical thresholds, against a quarter with negative OCF. ROIC is a significant concern at 1.1%—well below a 5% warning line—indicating capital efficiency pressure. Near term, the company needs to re-tighten SG&A, restore operating margin, and convert earnings to cash to support shareholder returns and reinvestment.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 1.0% × 0.703 × 1.76x ≈ 1.3%. The component dragging ROE the most is the net profit margin, at only 1.0%, versus a moderate asset turnover (0.703) and modest leverage (1.76x). Operating margin deterioration is the core driver: operating income dropped 45.1% YoY on a 1.6% revenue decline, indicating negative operating leverage as SG&A (132.86) nearly matched gross profit (137.05). We estimate operating margin compressed by roughly 122 bps YoY (from ~2.75% to ~1.53%), while gross margin at 50.0% suggests cost of goods was controlled but overhead intensity increased. Business reason: weak demand mix and/or higher fixed costs (personnel, marketing, logistics) likely outpaced revenue, squeezing margins. Non-operating items were nearly neutral (net +0.09), so they did not mask the operating deterioration. Sustainability: without SG&A discipline or pricing/mix improvement, the current margin profile is not sustainable for value creation; however, if part of the SG&A spike is seasonal or front-loaded investment, some recovery is possible in H2. Watch for any trend where SG&A growth exceeds revenue growth—this appears to have occurred given the magnitude of operating profit decline versus a small revenue dip. The high effective tax rate (47.4%) further suppresses net margin; normalization would modestly lift ROE but does not offset the core operating shortfall.

Growth Assessment

Top-line trajectory is slightly negative (-1.6% YoY), indicating soft underlying demand or portfolio adjustments. Profit growth quality is weak: despite net income rising 160.5% YoY, this is inconsistent with ordinary and operating profit declines and accompanied by negative OCF; thus, earnings quality is low. Operating leverage turned adverse as a modest revenue decline translated into a large profit contraction, implying high fixed cost intensity. EBITDA margin of 3.1% is low for a services-oriented portfolio and suggests limited buffer for shocks. Non-operating contribution was small; no evidence of one-time gains is reported in the provided breakdown, but the high tax rate complicates comparability. Outlook hinges on SG&A control, pricing, and mix improvement; even minor revenue acceleration could meaningfully aid profit if costs are contained. Near-term catalysts would include margin stabilization in H2, normalization of working capital to turn OCF positive, and evidence of ROIC improvement from 1.1% toward at least 5%. Absent these, growth in value terms (economic profit) remains constrained despite stable revenues.

Financial Health

Liquidity is strong: current ratio 206.2% and quick ratio 178.8% exceed healthy thresholds; no warning for current ratio < 1.0. Cash and deposits (82.12) exceed short-term loans (27.00), mitigating rollover risk and suggesting limited maturity mismatch. Working capital is ample at 127.24, and accounts receivable (51.83) plus inventories (32.86) are well covered by cash. Solvency is conservative to moderate: debt-to-equity is 0.76x (below the 1.5x guideline), and equity-to-asset ratio is approximately 56.7% (220.97 / 389.33). Interest coverage is strong at 12.32x, indicating ample buffer to service debt. Long-term loans (32.19) complement short-term loans (27.00), providing a balanced maturity profile; no explicit off-balance sheet obligations are reported in the provided data. Overall financial health supports operations, but sustained weak ROIC and negative OCF, if persistent, could gradually erode flexibility.

Cash Flow Quality

OCF/Net Income is -0.78x (<0.8), indicating low earnings quality this period and poor cash conversion. Operating CF was -2.18 against NI of 2.81, suggesting working capital outflows and/or non-cash profit components; with only a single-period balance sheet provided, we cannot isolate the drivers (receivables, inventories, payables) with certainty. Capex was modest at 2.30, but negative OCF implies likely negative free cash flow for the half, limiting internal funding capacity. No signs of aggressive working capital manipulation can be concluded from the provided snapshot, but the divergence between NI and OCF warrants monitoring for seasonality vs structural issues. Financing CF was a small outflow (-0.17), indicating limited reliance on incremental debt or buybacks in the period. For dividend and investment capacity, a return to positive OCF in H2 is necessary to avoid balance sheet drawdown.

Dividend Sustainability

The calculated payout ratio is 364.9%, far above the <60% benchmark for sustainability. With OCF negative (-2.18) and capex at 2.30, internally funded FCF does not appear to cover dividends in this half. While the balance sheet liquidity is strong and could temporarily support distributions, sustaining a high payout against low earnings quality and 1.1% ROIC is not prudent without a near-term profit and cash recovery. Dividend data (DPS, total dividends paid) are unreported here, so we cannot reconcile exact cash outflows; assessment is based on the provided payout ratio metric. Policy outlook should prioritize aligning dividends with normalized FCF and targeting ROIC improvements; any continuation of elevated payouts would raise medium-term risk.

Risk Assessment

Business Risks:

• Margin compression risk from elevated SG&A relative to revenue
• Demand softness leading to negative operating leverage
• Pricing power constraints in core service/product lines
• Execution risk in cost controls needed to restore operating margin

Financial Risks:

• Earnings quality risk: OCF/NI at -0.78x indicating weak cash conversion
• Capital efficiency risk: ROIC at 1.1% well below cost of capital
• Potential dividend strain if payouts exceed internally generated cash
• Tax rate volatility affecting net margins (effective tax 47.4%)

Key Concerns:

• Sustained low operating margin (~1.5%) despite 50% gross margin
• Dependency on H2 working capital unwinds to normalize OCF
• Possible need to rebalance debt or use cash if FCF remains negative
• Visibility limited due to unreported line-item breakdowns (SG&A, investing CF, DPS)

Investment Implications

Key Takeaways:

• Profitability weakened: operating income -45.1% YoY on only -1.6% revenue, with ~120 bps margin compression
• Cash conversion weak (OCF negative), heightening caution on earnings quality
• Liquidity and solvency are strong, providing time to execute a margin recovery
• ROIC at 1.1% signals value creation headwinds absent operating improvement
• Dividend sustainability looks strained given negative OCF and high calculated payout ratio

Metrics to Watch:

• Operating margin and SG&A-to-sales ratio each quarter
• OCF/Net Income and working capital movements (receivables, inventories, payables)
• ROIC trend versus a 5–8% threshold
• Effective tax rate normalization
• Capex discipline and any changes in financing CF (debt or buybacks)
• Cash balance versus short-term loans (refinancing buffer)

Relative Positioning: Within diversified domestic service and distribution peers, Nac currently shows weaker operating margin resilience and cash conversion but maintains stronger-than-average liquidity and moderate leverage; improving SG&A efficiency and converting earnings to cash are prerequisites to closing the profitability and ROIC 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