ANALYSIS OF THE EFFECT OF FINANCIAL LEVERAGE AND LIQUIDITY TOWARDS STOCK
VALUE AND PROFITABILITY AS THE INTERVENING VARIABLE IN TRADING COMPANIES LISTED
AT INDONESIA STOCK EXCHANGE 2010-2014
Haunan Damar, Umar Farouk, Winarto
Business Administration Department, Semarang State
Polytechnic
ABSTRACT
This research
aims to investigate the effect of financial performance variables
of Debt to Equity Ratio (DER) and Current Ratio (CR) to the Stock Price with
Return On Equity (ROE) as the intervening variable. The study is conducted to
wholesale and retail companies that are listed in Indonesia Stock Exchange
within 2010-2014 periods.
The samples are
chosen by using Purposive Sampling Method, where 15 companies in Wholesale and
Retail trading sub-sector are selected. There are two independent variables in
this research, they are Debt to Equity Ratio (DER) and Current Ratio (CR), one
dependent variable which is Stock Price as well as one intervening variable,
Return on Equity (ROE). Analysis
methods used in this research are multiple linear regression, simple linear
regression and through path analysis.
The result shows
that both Debt to Equity Ratio (DER) and Current Ratio (CR) have simultaneous
positive and significant influence towards Return on Equity (ROE). Additionally,
Return on Equity (ROE) variable positively and significantly affects
the Stock Price. It can also be concluded that Debt to Equity Ratio (DER) and
Current Ratio (CR) have an effect towards Stock Price with Return on Equity
(ROE) as its intervening variable. It was found that DER has a coefficient of
0,318 to the Stock Price through ROE, whereas CR has indirect effect of 0,2415
towards Stock Price with ROE as intervening variable.
Keywords: Debt to Equity
Ratio, Current Ratio, Return on Equity, Stock Price
INTRODUCTION
For
the past several years, Indonesia experienced positive impact of economic
growth and political stability which makes the investors interested to invest whether for short term, medium as well as long term in
the country’s stock market. The Indonesian market has
become more attractive with a wider selection of companies that decided to go
public and look for funding from the investors. Wholesale and retail trading is
one of the sub-sectors of companies listed at the Indonesian Stock
Exchange which is commonly known as Bursa Efek Indonesia. Investment climate of trading sector
is expected to have a good prospect in the future due to increased consumerism
in the region.
One
of the most important objectives of a company in a stock market is to have
their firm’s share traded in a reasonable price. This is mainly because a
public limited company is owned by a board of stockholders who would like to
gain return from money they have invested.
According to Brau and Fawcett (1997:425), companies are motivated to go
public as it could help them to reduce the cost of capital and it is one of the
firm’s strategy to increase the value of the company.
To
achieve this objective, the management has to operate efficiently while
providing high quality goods and services at the lowest possible cost. High
quality goods and services means better sales which leads to profitability as
well as increase in stock price. Financially, profitability is affected by many
factors, like the ability of the firms to pay its liabilities and utilize its
assets efficiently.
Fundamental ratio which is done
by analyzing a company’s financial report is often used by the investors as
well as the management to measure the fitness of a firm. The ratio
analysis also provides indicators that could measure profitability rate,
liquidity, corporate’s income, asset turnover and company’s obligation.
The
financial ratio variables used in this
research are
financial leverage and liquidity towards stock value through profitability. The leverage variable
is represented by Debt to Equity Ratio (DER), liquidity by Current Ratio (CR)
and profitability variable is represented by Return on Equity (ROE) whereas
stock value can be seen from the stock price.
Ardiatmi
(2014: 6) finds out that Debt to Equity Ratio (DER) has positive and
significant correlation towards Return on Equity (ROE). Whereas Aminatuzzahra
(2010: 3) discovers that Debt to Equity Ratio (DER) has negatively significant
effect towards profitability that is projected through Return on Equity (ROE).
Another research which results in negative correlation between DER and ROE
belongs to Shubita and Alsalwalhah.
Vieira
(2010) in his research finds that the average profitability of companies with
high liquidity was much higher than that of lower liquidity. This finding is
supported by another study conducted by Aminatuzzahra (2010: 4), where it was
found that Current Ratio (CR) has a positive and significant effect towards
Return on Equity (ROE) of go public manufacturing companies in year 2005-2009.
However, a
different result was obtained from a study done by Ardiatmi (2014:3). She finds
out that Current Ratio (CR) has a negative and significant effect towards
Return on Equity. Another research by Sri Nurdianti (2009:2) indicated a
negative correlation between liquidity and profitability at PT. Telekomunikasi
Indonesia.
From the previous researches,
we could see that there are research gaps between each research. This research
aims to provide an alternative perspective on the impact of leverage and
liquidity towards stock price with profitability as intervening variable. The
factors that distinguish this research from previous studies is that
profitability act as intervening variable. Another difference is the sector of
the companies being used as the object of the sample are wholesale and trading
companies sub-sectors listed in Indonesia Stock Exchange.
PROBLEM FORMULATION
1) Do Debt to Equity Ratio (DER) and Current
Ratio (CR) simultaneously influence Return on Equity (ROE) of wholesale and
retail trading companies listed at
Indonesia Stock Exchange year 2010-2014?
2) Does Debt to Equity Ratio (DER) partially
influenceprofitability that is projected through Return on Equity (ROE) of trading
companies listed at Indonesia Stock Exchange year 2010-2014?
3) Does
Current Ratio (CR) partially influenceprofitability that is projected through
Return on Equity (ROE) of trading companies listed at Indonesia Stock Exchange
in year 2010-2014?
4)
Does profitability that is projected
by Return On Equity (ROE) affect the Stock Price of trading companies listed at
Indonesia Stock Exchange year 2010-2014?
5) Does Debt to Equity Ratio (DER) influence
Stock Price through intervening variable of Return on Equity (ROE)?
6) Does Current Ratio (CR) influence Stock
Price through intervening variable of Return on Equity (ROE)?
HYPOTHESIS
Theoretical Framework
The theoretical framework in
this research acts as empirical model that explain the relationship between
each variables, which can be formulated as Figure 1.
Figure
1: Theoretical Framework
The Figure
1 shows that independent variables consist of DER (X1)
and CR (X2) whereas ROE (Y1) act as intervening variable
with dependent variable of Stock Price (Y2).
Hypothesis Formulation
Based on the problem
formulation, theoretical reviews, previous research as well as empirical model,
the writer could make hypothesis as follow:
1. The Effect of DER and CR towards ROE
Based on the supporting
theories, we can make a hypothesis for simultaneous testing of DER and CR
towards ROE as follows:
DER and CR simultaneously and
significantly influence ROE
2. The Effect of DER towards ROE
Solvability
or leverage ratio shows the amount of debt compared to the assets a company
has. A high DER ratio illustrates that a company is operating with debt as its
capital. When used correctly, a company’s debt can be generated to profits
compared to operating by using its own equity. This shows that there is
positive correlation between DER towards profitability.
The
above theory is supported by research done by Ardiatmi (2014) and Ulupui (2011)
where they find a positive correlation between the independent variable towards
dependent variable. Therefore, we can conclude a following hypothesis:
Debt
to Equity Ratio (DER) partially, positively influence ROE
3. The Effect of CR towards ROE
Each company
has its own capability in paying its obligation or short-term debt. Sawir
(2009) in Ardiatmi (2014:40) stated that low liquidity ratio shows that there
is problem of liquidation within a company, whereas a liquidity that is too
high indicates that there is a high amount of money unused which may
potentially decrease the company’s profitability.
Ardiatmi
(2014) and Aminatuzzahra (2010) find that CR has negative effect towards ROE.
However, Vieira (2010) and Ulupui (2011) in their research claimed that there
is positive correlation between liquidity and profitability. According to the
explanations, we can assume that high or low CR has an effect towards
profitability. From the above summary, a hypothesis can be made as follows:
Current
Ratio Partially and Significantly Influence Return on Equity
4. The effect of ROE towards Stock Price
Return
on Equity is the ratio used to measure how much profit is owed to the owner of
equity (Kurnianto, 2013:61). ROE also give information to the investors about
the return rate of a company from its performance in making profit.
In
general, higher profit means higher return for the investors. According to
Signaling Theory, which states that when a company sends a good signal to the
market in the form of information, the market will be able to determine which
companies has good performance. The statement is supported by the research of
Kurnianto (2013) and Panggabean (2005) which find that Return on Equity (ROE)
has a positive and significant effect towards stock price. Therefore, a
hypothesis is made as follows:
ROE
has positive and significant effect towards Stock Price
RESEARCH METHODS
Research Objects
In conducting this research, the writer focuses on the
financial reports of wholesale and trading companies sub-sector which are
listed as public limited corporations in Indonesia Stock Exchange in year 2010
to 2014. The data type used by the writer is secondary data.
The
criterias in which the data is sorted out are: (1) The number of companies
being researched are 15; (2) The companies
are listed in Indonesia Stock Exchange; (3) The companies
are categorized as trading company in wholesale or retail sub-sector; (4) The companies have been in the stock market at least
since 2009; (5) The value of Debt to Equity Ratio and Current Ratio
cannot be negative; (6) The companies are still listed in Indonesia Stock
Exchange in recent economic year (2015).
Data
Analysis Technique
The data analyzing technique
used in this research follows path analysis, the method is used to describe
the cause and effect relationship of each variables. To explain the theoretical framework, the method is to divide the
structure into two sub-structures (see
Figure 2 and Figure 3).
Figure
2: Diagram of Path Analysis Sub-Structure 1
Figure
3: Diagram of Path Analysis Sub-Structure 2
From the two sub-structures (Figure 2 and Figure 3), equations which is used to describe the relationship
between each regression models can be made.
RESULT AND DISCUSSION
|
X
|
Y
|
Value
|
Adjusted R2
|
Result
|
|||
|
ROE
|
Stock Price
|
F/t Test
|
Sig
|
||||
|
H1
|
DER & CR
|
Positive and Significant
|
-
|
Fcalculate = 16,960 > 3,119
|
0.000
|
0,301 (30,1%)
|
H1 is accepted
|
|
H2
|
DER
|
Positive and Significant
|
-
|
tcalculate = 5,524 > 1,666
|
0.000
|
-
|
H2 is accepted
|
|
H3
|
CR
|
Positive and Significant
|
-
|
tcalculate = 4,196 > 1,666
|
0.000
|
-
|
H3 is accepted
|
|
H4
|
ROE
|
-
|
Positive and Significant
|
Fcalculate = 27,718 > 3,968
|
0.000
|
0,265 (26,5%)
|
H4 is accepted
|
1. DER and CR simultaneously
and significantly influence profitability that is projected through ROE.
The
result of analysis show that liquidity and leverage have significant and
positive influence towards profitability when tested simultaneously. This is
based on the F test result which indicates Fcalculate =16,960 and
sig = 0,000 < 5%, the Fcalculate was higher than Ftable
(3,119). This
finding is hypothetically similar to previous research done by Vieira (2010).
2. DER partially
and significantly influences ROE
Debt
to Equity Ratio which is representation of leverage variable in the research
shows a positive correlation towards ROE. According to table 4. , DER has tcalculate = 5,524, which is more
than the ttable (1,666) with sig 0,000 < 0,05. It means that the
result shows a significant correlation. The value indicates that the higher DER
percentage a company has, the higher the Return on Equity. The result is consistent to research done by Ardiatmi (2014)
and Ulupui (2011) where they also find that Debt to Equity Ratio has positive
impact towards ROE.
3. CR partially and
significantly influences ROE
According
to the table, T test of current ratio towards stock price was tcalculate =
4,196> 1,666 with sig 0,00< 0,05. The result shows that current ratio
partially and significantly influences Return on Equity, it also has positive
correlation to the profitability variable. The result of this research is
consistent to the research done by Vieira (2010) where he found that a more
liquid company has higher profitability. However, the finding is contrasting to
Ardiatmi (2014) and Aminatuzzahra (2010) research where they both find Current
Ratio has negative correlation towards Return on Equity.
4. ROE partially
and significantly influence stock price
Return On Equity, which
measures profitability in this particular research has Fcalculate =
16,960 >3,119 with sig 0,00. In other word, profitability has positive and
significant correlation towards stock value. The result matches the writer’s
hypothesis and the previous research such as Panggabean (2005) and Kurnianto
(2013).
According to analysis result which has been explained in the previous
chapter, there are several conclusions that can be made for this research:
1.
The growth of
leverage ratio of wholesale and retail companies in 2010-2014 periods is
declining.
2.
The growth of
liquidity ratio of wholesale and retail companies in 2010-2014 periods is
declining.
3.
The growth of
profitability ratio of wholesale and retail companies in 2010-2014 periods is
declining.
4.
The growth of stock
value of wholesale and retail companies in 2010-2014 periods is declining.
5.
The regression
analysis shows that leverage and liquidity simultaneously has positive and
significant correlation towards profitability that is projected by Return On
Equity (ROE).
6.
Regression analysis
shows that leverage partially has positive and significant correlation towards
Return on Equity of wholesale and retail companies listed in Indonesia Stock
Exchange in 2010-2014 periods.
7.
Current Ratio or
liquidity variable shows partially positive and significant correlation towards
Return on Equity of wholesale and retail companies listed in Indonesia Stock
Exchange within 2010-2014 periods.
8.
The result of
regression analysis shows a positive and significant result between ROE and
share price.
9.
The path analysis
result shows that Leverage variable has indirect effect to Stock Price through
Profitability as much as 0,31815 or 31,8%.
10. Path analysis indicates that Liquidity variable has
indirect effect to Stock Price through Profitability as
much as 0,2415 or 24,15%.
Suggestions
Based on the
conclusions, it is better for wholesale and retail companies to utilize
loans efficiently so that the company could generate more profits. Writer also
suggests that the companies should be able to manage its capital structure as
well as possible so that costs of capital can be reduced, therefore, increasing
profitability which leads to increase in stock price.
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