ZAOH COMPANY,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥4.00B
• Operating Income: ¥392M
• Net Income: ¥266M
• EPS: ¥49.01

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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

Zao Sangyo (9986) delivered solid topline and a sharp profit rebound in FY2026 Q2 on a standalone JGAAP basis, with revenue up 9.8% YoY to ¥3,999m and operating income up 59.9% YoY to ¥392m. Gross profit of ¥1,744m implies a gross margin of 43.6%, indicating favorable product mix and/or pricing discipline. Operating margin expanded to roughly 9.8%, reflecting strong operating leverage as SG&A grew slower than revenue. Ordinary income of ¥406m outpaced operating income, suggesting modest positive non-operating contributions. Net income increased 73.6% YoY to ¥266m, with EPS of ¥49.01 on the disclosed basis. DuPont metrics point to a 6.65% net margin, low asset turnover (0.268x), and modest leverage (1.16x), culminating in a reported ROE of 2.06% for the period. The ROE appears constrained by low asset turnover and conservative leverage rather than weak profitability. Liquidity appears very strong, with a current ratio of approximately 1,274% and total liabilities of only ¥1,881m against total assets of ¥14,898m. While the disclosure shows an equity ratio of 0.0%, simple recalculation from totals implies an equity ratio of about 86.5% (¥12,885m equity / ¥14,898m assets), underscoring balance sheet strength. Cash flow from operations was ¥45m, well below net income, indicating a working capital outflow in the period; the OCF/NI ratio of 0.17 signals timing effects or growth-related investment in receivables and/or inventory (inventory not disclosed). Financing cash outflow of ¥275m likely reflects shareholder returns or other financing activities, but detailed drivers are not disclosed. Dividend per share is shown as ¥0.00 with a 0% payout, which may reflect timing (interim) or undisclosed information in the period rather than a definitive full-year policy. Interest expense is reported as zero, consistent with the company’s light financial leverage and robust equity base. Several key items (cash, inventories, investing cash flows, share counts, equity ratio) are unreported in XBRL, so some point-in-time ratios provided by the feed (e.g., interest coverage and effective tax rate) are not meaningful. Overall, fundamentals indicate improving profitability on a very strong balance sheet, but cash conversion lagged in the first half and several disclosures are incomplete, warranting caution in extrapolating full-year outcomes.

Profitability Analysis

ROE decomposition (DuPont): Net margin 6.65% × Asset turnover 0.268 × Financial leverage 1.16 = ROE 2.06% (as reported). The net margin improvement, alongside operating income growth of +59.9% on +9.8% revenue, points to healthy operating leverage and better cost absorption. Gross margin is high at 43.6%, suggesting favorable product mix and pricing amid stable input costs. EBITDA of ¥459m yields an 11.5% EBITDA margin; the spread between gross and EBITDA margins implies well-controlled SG&A. Operating margin at about 9.8% is solid for a trading/distribution-heavy model and reflects scale benefits. Ordinary income exceeded operating income, implying mild non-operating gains; with interest expense unreported (shown as zero), financial costs likely did not pressure earnings. The main drag on ROE is low asset turnover (0.268x), typical of businesses with significant receivables or inventory and a conservative balance sheet. Financial leverage at 1.16x is low, which limits ROE but supports resilience. Overall profitability quality appears sound, but the sustainability of the current margin mix should be monitored through H2 seasonality and pricing discipline.

Growth Assessment

Revenue grew 9.8% YoY to ¥3,999m, a healthy pace for a midcycle half-year. Operating income grew 59.9% YoY, signaling strong incremental margins and operating leverage. Net income rose 73.6% YoY to ¥266m, benefiting from both operating improvements and non-operating tailwinds. The quality of growth is mixed: margins improved notably, but cash conversion lagged (OCF/NI 0.17) due to working capital consumption, which could reflect demand strength (higher receivables) or inventory build (inventory not disclosed). Sustainability depends on maintaining the favorable product mix and managing SG&A discipline as volumes scale. Outlook-wise, the conservative balance sheet provides flexibility to support growth initiatives, but low asset turnover suggests structural limits to velocity unless working capital efficiency improves. Given incomplete disclosures and half-year seasonality, extrapolating full-year growth should be done cautiously. Watch for H2 revenue trajectory, backlog/orders, and any pricing normalization that may compress margins.

Financial Health

Liquidity is very strong: current assets ¥10,732m vs current liabilities ¥843m produce a current ratio around 12.7x (~1,274%) and working capital of ~¥9,889m. Quick ratio appears identical due to inventory not being reported; actual quick liquidity may be lower if inventories are material. Solvency is robust with total liabilities of ¥1,881m vs equity of ¥12,885m, yielding a debt-to-equity ratio around 0.15x. Although the disclosed equity ratio is 0.0%, recalculation indicates ~86.5%, consistent with a net-cash, low-leverage balance sheet. Interest expense is shown as zero, implying negligible financial debt or effective hedging of financing costs. Capital structure is conservative, providing ample buffer against macro or demand shocks. The company has headroom for investment or shareholder returns, though actual cash balance is not disclosed in the feed.

Cash Flow Quality

OCF of ¥45m vs net income of ¥266m (OCF/NI 0.17) indicates weak cash conversion this half, likely driven by working capital outflows (receivables and/or inventory build; inventory not disclosed). Free cash flow is shown as zero due to undisclosed investing cash flows; thus, FCF cannot be reliably assessed from this dataset. EBITDA of ¥459m vs OCF ¥45m also highlights timing effects and working capital absorption. Without cash and investing details, it is not possible to confirm cash generation capacity beyond noting the earnings-based potential. For assessment, monitor changes in trade receivables, inventory, and payables in H2; normalization should lift OCF closer to net income if underlying demand is healthy.

Dividend Sustainability

Annual DPS is reported as ¥0.00 with a 0% payout, which likely reflects timing or undisclosed interim data rather than a definitive full-year stance. With net income of ¥266m in H1 and a strong equity base, the balance sheet could support dividends; however, weak OCF coverage in the period (and FCF not disclosed) limits visibility on near-term cash coverage. Financing CF outflow of ¥275m may include shareholder returns or debt repayments, but the breakdown is not provided. Payout ratio assessment is therefore inconclusive for the full year. Sustainability will depend on H2 cash generation and working capital normalization. Policy-wise, the low leverage and ample equity suggest capacity for stable payouts, but confirmation requires disclosed DPS guidance and full-year cash flow.

Risk Assessment

Business Risks:

• Margin normalization risk if pricing or product mix tailwinds fade
• Working capital intensity leading to volatile cash conversion
• Supply chain and lead-time risks affecting deliveries and costs
• FX exposure if products are imported and costs are foreign-currency linked
• H1/H2 seasonality potentially causing earnings volatility
• Customer concentration risk (not disclosed) typical in equipment/distributor models

Financial Risks:

• Cash flow shortfall versus earnings (OCF/NI 0.17) if working capital does not normalize
• Potential inventory obsolescence risk (inventory not disclosed)
• Non-operating income reliance to bridge ordinary vs operating income
• Information gaps in cash and investing flows limit visibility
• Tax rate variability given reported figures and quarterly timing

Key Concerns:

• Low asset turnover (0.268x) constraining ROE despite healthy margins
• Inadequate OCF relative to net income in the period
• Incomplete disclosures (cash, inventories, investing CF, share data) obscuring full assessment

Investment Implications

Key Takeaways:

• Strong H1 operating leverage: +9.8% revenue drove +59.9% operating income
• High gross margin (43.6%) and operating margin (~9.8%) signal favorable mix and cost control
• Low leverage and recalculated equity ratio ~86.5% underscore balance sheet strength
• ROE (2.06%) constrained by low asset turnover (0.268x) and conservative leverage (1.16x)
• Cash conversion lagged (OCF/NI 0.17), likely from working capital build
• Dividend visibility low in the dataset; financing outflow suggests some capital returns or repayments
• Data gaps (cash, inventory, investing CF) limit precision of FCF and liquidity analysis

Metrics to Watch:

• OCF/Net income and working capital movements (AR, inventory, AP) in H2
• Gross and operating margin sustainability versus prior year and plan
• Asset turnover improvement via inventory turns and receivables days
• Ordinary income versus operating income to assess non-operating reliance
• Equity ratio and leverage metrics using fully disclosed components
• DPS guidance, payout ratio, and buyback activity disclosure
• Order intake, backlog, and cancellations for demand visibility

Relative Positioning: Within Japan small-cap equipment/trading peers, Zao Sangyo exhibits above-average balance sheet strength and solid margins but lower asset turnover and a conservative leverage profile, which together temper ROE relative to peers emphasizing higher turnover or moderate leverage.

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