KITAZAWA SANGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥6.98B
• Operating Income: ¥141M
• Net Income: ¥113M
• EPS: ¥6.07

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: Soft quarter with significant profit compression despite adequate liquidity, as operating income fell sharply and cash conversion lagged profits. Revenue declined 7.3% YoY to 69.8, with gross profit of 21.85 and a gross margin of 31.3%. Operating income dropped 58.9% YoY to 1.41, translating to an operating margin of about 2.0%. Ordinary income declined 44.8% YoY to 2.13 (ordinary margin ~3.0%), supported by non-operating income of 0.87 including 0.47 of dividend income. Net income fell 54.9% YoY to 1.12 (net margin ~1.6%), while total comprehensive income surged to 5.13 due to strong OCI (likely valuation gains on securities), highlighting a gap between accounting NI and broader equity gains. Based on last year’s implied levels, operating margin compressed roughly 260 bps (from ~4.6% to ~2.0%), ordinary margin by ~210 bps (from ~5.1% to ~3.0%), and net margin by ~170 bps (from ~3.3% to ~1.6%). The effective tax rate was an elevated 61.7%, further pressuring net profit. Cash generation was weak: operating CF was 0.43 versus net income of 1.12 (OCF/NI 0.38x), signaling poor earnings quality for the period. Balance sheet remains conservative with D/E at 0.58x, current ratio at 147.5%, and interest coverage at 10.95x. However, ROE is low at 1.0% and ROIC is only 0.7%, indicating subpar capital efficiency. Non-operating income is a meaningful pillar of earnings (non-operating income ratio 77.6%), implying a reliance on investment income/dividends amid softer core operations. Capital expenditures of 1.06 against modest OCF imply negative implied FCF in the period. Short-term loans are 21.0 versus cash and deposits of 37.49, reducing immediate refinancing risk. Forward-looking, restoring operating margin via cost discipline and sales stabilization is essential, while elevated taxes and reliance on non-operating items remain watch points. The jump in comprehensive income provides equity support but may not be repeatable or cash-generative.

Profitability Analysis

ROE = Net margin (1.6%) × Asset turnover (0.397) × Leverage (1.58x) ≈ 1.0%. Biggest driver: margin compression from weaker operating profit amid relatively sticky SG&A. Business reasons: revenue contraction (-7.3% YoY) with limited cost flexibility; high effective tax rate reduced NI. Sustainability: operating headwinds may be cyclical; tax rate likely to normalize; dividend income is recurring but market/affiliate dependent. Flags: SG&A growth versus revenue not disclosed, but high SG&A-to-gross profit implies limited cushion; non-operating income is large relative to operating income.

Growth Assessment

Top-line contracted 7.3% YoY to 69.8, pointing to a softer demand environment or slower project flow. Gross margin held at 31.3%, but operating margin slid to ~2.0% on fixed-cost absorption and limited SG&A flexibility. Ordinary income and net income dropped 44.8% and 54.9% YoY, respectively, with non-operating dividends cushioning ordinary profit. The tax burden (61.7% effective rate) amplified the net decline. EBITDA was 3.37 (EBITDA margin ~4.8%), leaving limited buffer for further shocks. Outlook hinges on revenue stabilization and better cost control; normalization of the tax rate would aid net margins. Given the elevated contribution from dividends, earnings are partially dependent on external investment performance. Without evidence of a backlog recovery or cost restructuring, near-term profit recovery appears constrained. Comprehensive income strength suggests hidden balance sheet support via securities valuation, but this is not a driver of recurring operating growth.

Financial Health

Liquidity adequate (CR 147.5%, QR 147.5%); no CR < 1.0 or D/E > 2.0 warnings. Solvency conservative (D/E 0.58x; interest coverage 10.95x). Maturity mismatch low: cash 37.49 + AR 17.14 > short-term loans 21.0 and covers a large portion of current liabilities. No disclosed off-balance sheet obligations.

Cash Flow Quality

OCF/NI at 0.38x indicates weak cash realization. Implied FCF approximately -0.63 (OCF 0.43 minus Capex 1.06), suggesting internal cash does not cover both capex and potential dividends. No apparent working capital manipulation identifiable from disclosed items; however, lack of inventory/payable details limits analysis.

Dividend Sustainability

Calculated payout ratio of 212.7% is well above sustainable levels. With OCF modest and implied FCF negative, dividends would rely on cash reserves or financing. Unless operating cash flow improves, sustaining such a payout would be challenging.

Risk Assessment

Business Risks:

• Demand softness leading to 7.3% YoY revenue decline
• High SG&A intensity limiting operating margin resilience
• Reliance on dividend and other non-operating income to support ordinary profit
• Elevated effective tax rate impacting net income

Financial Risks:

• Weak cash conversion (OCF/NI 0.38x) and implied negative FCF
• Low ROIC (0.7%) and ROE (1.0%) indicating inefficient capital use
• Potential pressure on liquidity if financing outflows persist while OCF remains weak
• Concentration in short-term loans (21.0) adds rollover exposure (partly mitigated by cash 37.49)

Key Concerns:

• Margin compression across operating, ordinary, and net levels
• Earnings quality gap between NI (1.12) and comprehensive income (5.13)
• Volatility of investment income
• Data limitations (no inventories, SG&A breakdown, investing CF) impede detailed diagnostics

Investment Implications

Key Takeaways:

• Operating profitability weakened materially; margin recovery is the key swing factor
• Earnings quality flagged by low OCF/NI and reliance on non-operating dividends
• Balance sheet remains a support (cash > short-term loans; D/E 0.58x), buying time for operational fixes
• ROIC at 0.7% underscores the need for sharper capital allocation and cost measures
• High tax rate depressed net profit; normalization would provide upside to net margin

Metrics to Watch:

• Order intake/backlog and revenue run-rate for signs of top-line stabilization
• SG&A trajectory versus revenue to restore operating leverage
• OCF trend and working capital movements (receivables/Payables/Inventories once disclosed)
• Non-operating income (dividends) durability and equity securities valuation sensitivity
• Effective tax rate normalization and its impact on net margins

Relative Positioning: Compared to domestic small-cap equipment/solution distributors, Kitazawa Sangyo’s balance sheet is comparatively conservative with ample cash, but operating margins and cash conversion lag peers, and capital efficiency (ROIC/ROE) is notably weaker; reliance on non-operating income further differentiates its earnings profile.

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