How to Make Your Company Insane Profit Monster? Like Keyence

Keyence is the 4th largest company in Japan. It is really profitable, selling factory inspection solutions. For example, think about a company that makes pet bottles – they want to make sure there is no hole on any bottle it makes. So they buy a high-quality sensor from Keyence and put it on a plant belt conveyor line, checking the products’ flaws automatically.

Keyence is making various products, but the main product is a sensor. The sensor checks product flaws efficiently and fast. Let’s look at the USP (unique selling proposition). If you don’t know how to analyze USP, please read my Toys‘R’Us article.

Target clients: Manufacturers whose products must be standardized, and they have to make the process faster to make the company more profitable or make it before the deadline.

The problem: A product inspection sensor often causes malfunction. They pass the products with flaws. If that happens, they lose their reputation and can’t get orders anymore. To avoid that, inspectors have to double-check it manually. Labor cost and production time increase. Often, their conventional sensor can’t recognize when a situation is a little bit irregular, so people have to check that manually. That will stop the line. It is frustrating and irritating, especially when they are just before the deadline. They need to adjust settings to adapt to irregularities, and this process takes time. Now, manual checks seem way faster, even though they have an “automatic checking sensor” that they paid a lot for.

The ideal situation for the target: The process line streams fast without annoying errors. Their sensor is so reliable that even when they are just before the deadline, they can rest assured and sleep well. The sensor is very durable, so no sudden line stops anymore. They don’t have to do complicated preparation, as the machine checks products automatically. No stress.

That can reduce manual labor and cut costs. The line goes faster, making more products and increasing the plant’s profitability. They get a good reputation from clients that if they leave it to the company, they will certainly meet the deadline.

The company’s USP: Their products will not stop the line.

Their products are durable because Keyence does thorough durability testing. The products will not break while the line is operating.

Their sensors are so accurate that they can identify flaws that normal sensors can’t recognize. And their sensors handle irregular situations very well, like when the product is tilted or has dirt – they still recognize it because the products are combined with AI, which has been trained to do that.

These products are made by an organization whose members go to clients’ factories, listen to their problems, and try to solve the problems directly. The company members are the best of the best, as it is the highest-salary-paying company in Japan. From the conversations with clients, Keyence develops products very frequently, new concept products that nobody else is selling yet.

This USP is so great, that the company’s gross profit rate ((sales-cost of sales)/sales) in 2023 was insane at 82%, and the net profit rate (net profit /sales) was 39%! The rival company Omron’s (a Japanese electronics company) gross profit rate was 45%.

That level of high net profit rate is very rare. They accomplish it by these steps:

They eliminate dealers. They sell directly to clients, so the profit margin is high.

Rather than simply selling goods, they prioritize identifying the underlying issues of clients by listening to clients directly and proposing solutions, which creates high value.

Having a small number of employees keeps costs low, but they still have the best talents by paying the highest salaries.

Keyence outsources production. It focuses on selling and making efficient products. So they have a minimal number of employees, around 10,000. The sales per employee (sales/the number of employees) was $0.6 million for Keyence in 2023, compared to $0.2 million for the rival company Omron. This shows how good Keyence is at creating value.

it does not have machines and a plant since it outsources production, so its ROA (return on assets) is 13.7% for Keyence compared to 7.4% for rival Omron. ROA is calculated by dividing net profit by total assets. A higher ROA is better because it means the company is making better profit with smaller assets, which shows the company uses its assets efficiently.

Keyence’s ROA is high, because they don’t need many assets, the most valuable assets are the talented employees’ brains, which are not on the balance sheet.

Keyence is so profitable that they keep accumulating cash, and they put the money mainly into bonds, even though the interest or capital gain is low, as the portfolio is really defensive.

They don’t need money because they have a lot of it already, the money is generated from operations like a spring. So they give a lot of credit to their clients, which makes buying from the company more attractive. That contributes to a high gross profit margin. DSO (the period between selling products and collecting the receivables (If you don’t know what CCC is, please read my Li Auto article)) of Keyence was 3.8 months in 2023. For Omron, it was 2.4 months. Keyence’s is 57% longer, usually longer DSO is not good, but to a company with plenty of cash, it is OK.

They don’t have to keep that amount of cash, if they reduce their assets by buying their own stock or paying high dividends, they would have an even higher ROA.

Just piling up cash does not enhance a company’s value. A company’s ultimate goal is getting future cash flow. To enhance the possibility of higher future cash flow, a company must invest the cash earned from the operation into something, which generates more cash than the investment.

For example, buying own stock when the stock price is low is one of the investments for future cash flow. Buying out prominent companies is also an investment. Investing in AI research to enhance products’ ability is a good way to use money.

If they can’t find a way to use money, just paying excessive cash as dividends may increase the company value too. Instead, this company kept buying boring bonds and got a tiny amount of gain from it, that is not what a great company does. This is why Keyence is the Japanese champion, but not the world champion like Microsoft. I mean Keyence’s market value was only $100 billion in Apr 2024 even though it has great skill and know-how. Take a risk.

The company’s sales have grown. In 2021, it was $3.6 billion, and in 2023, it became $6.2 billion. This is because, in the COVID-19 era, automation investment increased all over the world.