Earnings per share also remained high, showing that Komatsu continues to maintain the earnings power needed to support shareholder returns (Figure 5).
At Komatsu, we view corporate value through the lens of Price-to-Book Ratio (PBR) and manage the underlying drivers of PBR to enhance corporate value. We break PBR down into Price-earnings Ratio (PER) and Return on Equity (ROE) to identify management priorities. PER is analyzed in terms of the cost of capital and expected cash flow growth rate, while ROE is broken down into net income ratio, total asset turnover, and financial leverage (Figure 6).
Our Strategic Growth Plan sets five financial objectives based on this framework: growth, profitability, efficiency, retail finance, and shareholder returns. These objectives are designed to ensure that every initiative aimed at enhancing corporate value is covered within our management framework (Figure 6).
Komatsu made solid progress in capital efficiency in fiscal 2025, with ROE exceeding the target of 10%. Free Cash Flow (FCF), however, remained below plan, mainly due to the impact of tariffs (Figure 6). Looking ahead, we will work to improve profitability and strengthen cash generation, including through more appropriate working capital management.
I expect uncertainty to remain high in fiscal 2026, driven by U.S. tariffs and geopolitical developments in the Middle East. Net sales are expected to reach a record high as global demand for construction equipment remains resilient.
While we continue to pursue price improvement, operating profit will likely decline, driven by the growing impact of U.S. tariffs (Figure 1).
Achieving steady improvements in corporate value in this environment will require continued improvements in profitability and capital efficiency. This makes resilience, our ability to respond effectively to external change, an increasingly important source of corporate value.
Portfolio optimization and strategic focus
In the 1990s, the construction equipment market was widely viewed as having limited growth potential as markets in Japan, the United States, and Europe matured and demand stagnated. Like many of our peers, Komatsu pursued growth through diversification and new businesses. We fundamentally shifted our strategy in the early 2000s to one that focused on the construction, mining and utility equipment business and the industrial machinery and others business, where we saw clear potential for synergies. This shift not only strengthened profitability but also enabled us to concentrate resources on our areas of competitive strength and improve management efficiency.
Overseas sales expansion
While concentrating our business portfolio on areas of competitive strength, Komatsu also built a business foundation that does not rely excessively on any single market.
Today, overseas markets account for around 90% of our sales. Until the 1960s, nearly all of our sales were generated in Japan. In the 1970s, we began full-scale efforts to expand into overseas markets. We leveraged M&A while broadening our product lineup and expanded sales outside of Japan. Exports from Japan initially drove this expansion, but rising overseas demand and the appreciation of the yen accelerated our shift toward local production in the 1980s. As a result, our overseas sales have consistently exceeded domestic sales since the 2000s (Figure 7).
Today, our high sales ratio outside of Japan is not only the result of this growth but also a foundation for stable business performance.
Geographically diversifying our businesses enables us to reduce the impact that slower demand or currency fluctuations in any single region can have on consolidated performance, making us better equipped to respond to changes in the business environment.
Aftermarket business expansion driven by growth in the mining equipment business
Establishing a profit structure less susceptible to fluctuations in demand has been an important management priority in the construction and mining equipment markets, where demand for new equipment fluctuates significantly. Komatsu has addressed this challenge by increasing the share of sales generated by the mining equipment business. Unlike construction equipment, mining equipment is designed for long periods of continuous operation. As a result, the mining equipment business generates recurring aftermarket revenue from parts and services, in addition to initial equipment sales. Growth in our mining equipment business has therefore also expanded our aftermarket business for parts and services.
The sales mix of the mining equipment business, including equipment, parts, and services, increased between fiscal 2010 and fiscal 2025. The sales composition of parts and services within construction, mining and utility equipment also rose during this period (Figure 8). I believe these changes in our business portfolio have made our profit structure less dependent on fluctuations in demand for new equipment.
Retail finance business expansion
Komatsu established the current three-segment structure in 2016 by separating retail finance business from construction, mining and utility equipment. The retail finance business, which provides financing solutions to customers purchasing Komatsu products, originated in 1988 with the establishment of a joint venture with Dresser in the U.S. and the acquisition of the company’s finance subsidiaries.
Komtrax (equipment operation management system) subsequently became standard equipment on Komatsu products used as collateral. This shift enabled us to gradually expand the business beyond the U.S. beginning in 2004. The retail finance business has grown as an important sales tool for construction and mining equipment by using Komtrax technology to monitor machine location and operating status and improve the effectiveness of credit protection. In recent years, we have continued to expand the geographic reach of the business. We began offering financing in the U.K. in fiscal 2025, and our finance subsidiary in South Africa is scheduled to commence operations in fiscal 2026 (Figure 9).
SVM control introduction
Komatsu began adopting international management accounting practices through acquisitions of companies outside of Japan in the 1970s. These practices differed from Japan’s traditional full-cost accounting approach. Following the Asian financial crisis in 1997, reviewing our fixed cost structure became an urgent priority as sales declined sharply and exposed our high ratio of selling, general and administrative expenses as a competitive weakness. We reviewed our traditional full-cost accounting approach, under which product costs fluctuate with production volume, and introduced the concept of direct costing, widely used overseas. This change aligned with Komatsu’s shift to a business strategy focused on business selection and concentration during this time. Komatsu refers to this management accounting system as Standard Variable Margin (SVM) control. We fully introduced SVM control in 2002 after standardizing the definitions of variable costs and fixed costs across our global operations.
Introducing SVM control made it possible to compare profitability across regions worldwide and understand variable costs and fixed costs using a common standard. This method also makes it easier to see the level for fixed costs to secure profit ratios, helping us take action quickly in response to sales fluctuations. SVM control also played an important role in significantly reducing fixed costs through factory closures and other structural reforms during the global financial crisis.
Global cross-sourcing initiatives
Komatsu established a global cross-sourcing system to strengthen our ability to respond to exchange rate risks, such as the rapid appreciation of the yen in 2011, as well as sharp fluctuations in demand (Figure 10). This system allows multiple production sites around the world to manufacture products to the same specifications and quality standards. As a result, we can shift production to the most appropriate location in response to changes in exchange rates, demand, and production loads, helping maintain profitability while improving investment efficiency.
SVM control played a key role in making this cross-sourcing network work effectively. SVM control enables us to evaluate profitability across production sites using a common framework, making it easier to determine the most appropriate production location and quickly reallocate production in response to changes in exchange rates and demand.
Free Cash Flow (FCF) management introduction
Although Komatsu emphasizes ROE on a consolidated basis, ROE is not suitable as a common management indicator for subsidiaries. This difference is due in part to differences in business characteristics and local regulatory requirements that result in different capital levels. Further, asset efficiency is important in construction, mining and utility equipment, where demand fluctuates significantly and assets include accounts receivable and inventories. To this end, we introduced Return on Invested Capital (ROIC) in fiscal 2017 to complement SVM control, which focuses on profitability management. However, ROIC is a ratio-based indicator, making it difficult for business divisions to directly recognize the impact of improvement efforts.
We therefore introduced FCF as a management indicator for all group companies in fiscal 2023 to improve consolidated ROIC. FCF enables each company to understand asset efficiency in monetary terms rather than as a ratio, making improvement priorities easier to identify. We also break down the sources of FCF generation into four components: 1) profit, 2) working capital, 3) fixed assets (depreciation and amortization minus capital expenditures), and 4) M&A. In doing so, we clarify areas requiring improvement and the monetary impact, helping maximize future cash flows (Figure 11).
Global cash management system introduction
Komatsu introduced a global cash management system in fiscal 2007 for operations spanning multiple currencies and locations. Global cash management systems help reduce external borrowing while improving capital efficiency by providing a centralized view of cash balances and cash inflows and outflows across group companies worldwide, allowing surplus cash and funding needs to be managed within the Group.
When Komatsu introduced this system in 2007, global cash management systems were not yet widely adopted by Japanese companies. Most companies managed funds only within Japan or on a regional basis.
Such forward-looking initiatives have enabled Komatsu to achieve global visibility over cash positions and centralized cash management. Komatsu has also improved capital efficiency during normal operations while establishing a framework for securing liquidity quickly during times of crisis.
We have further integrated regional cash management systems with our global cash management system to create a unified framework across regions. We also improve capital efficiency by integrating newly acquired companies into the system and rapidly integrating their cash management following acquisitions.
International taxation effort enhancement
Komatsu expanded ownership interest in the joint venture established with Dresser Inc. (U.S.) in 1988 (now Komatsu America Corp.). Following this expansion, we began exploring the use of Advance Pricing Arrangements (APAs), under which taxpayers and tax authorities agree in advance on transfer pricing methodologies for transactions with subsidiaries outside of Japan. Beginning with the first Japan-U.S. APA agreement in 1996, Komatsu subsequently concluded APA agreements with Australia and Belgium, expanding APA coverage to approximately half of sales from Japan to subsidiaries outside of Japan. Such initiatives have reduced uncertainty surrounding transfer pricing while supporting the stable operation of overseas businesses and improving financial predictability.
Strategic shareholdings reduction
We began reviewing strategic shareholdings early in fiscal 2009 to reduce share price fluctuation risk and improve asset efficiency. As a result, we sold all listed shares held as strategic shareholdings by the end of fiscal 2017 (Figure 13). This reduction in strategic shareholdings also aligns with our current approach to cash allocation, which emphasizes capital efficiency and prioritizes the allocation of limited management resources to growth investments and shareholder returns.
Funding source diversification
Komatsu has also been working to diversify our funding sources.
As part of this effort, we issued our first green bond in July 2020 to finance environmentally beneficial investments. In fiscal 2022, we issued Japan’s first foreign currency-denominated sustainability-linked bond, under which the interest rate increases if sustainability targets are not achieved. In July 2026, we also issued a green bond to finance the rebuilding of the Komatsu headquarters building, which features high energy-efficiency performance (Figure 14).
These initiatives not only diversify our funding sources but also expand opportunities for dialogue with a broader range of investors who share an interest in our initiatives.
1) Geopolitical and trade policy risk measures
U.S. tariff policies, rising tensions in the Middle East, and other recent developments have significantly heightened uncertainty surrounding our business environment. We do not underestimate the potential impact of such external developments. Instead, we carefully assess available information, promptly reflect the expected impact in our earnings forecasts, and publicly disclose the updated forecasts. The key here is to identify uncertainty at an early stage, clearly communicate the assumptions underlying our forecasts, and provide stakeholders with sincere, transparent, and consistent explanations. Komatsu also continues to implement supply chain adjustments, selling price improvements, and other practical measures to mitigate the impact on earnings.
2) Non-financial impact quantification
Enhancing corporate value requires more than financial information. Understanding the value our business activities create for society and incorporating those insights into management are equally important. Our finance and accounting functions are taking on the challenge of quantifying the value created in non-financial areas.
As part of this effort, we turned our attention to the forestry machinery business, one of the priority areas in the Strategic Growth Plan. Circular forestry refers to balancing the preservation of forest functions with the sustainable use of timber resources. As the importance of this approach continues to grow, our forestry machinery business helps expand circular forestry by mechanizing and improving efficiency across a broad range of forestry operations. This business also helps address social challenges, including reducing the risk of workplace accidents and alleviating labor shortages.
Building on our previous work on Autonomous Haulage System (AHS), we used impact accounting* to estimate the monetary value of the benefits of mechanization in fiscal 2024 based on certain assumptions. The analysis suggests that these activities may have generated approximately ¥1.27 trillion in social impact worldwide during the same year (Figure 19).
Komatsu will continue to drive sustainable growth in corporate value by evolving our efforts to connect financial and non-financial value, leveraging those insights in management decision-making and dialogue with stakeholders.
* Analyses conducted jointly with ABeam Consulting Ltd.
