Analysis Of The Effect Of Capital Structure On Profitability In Manufacturing Companies Listed On The Indonesia Stock Exchange

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Introduction

The capital structure of a company plays a crucial role in determining its financial performance and profitability. In the context of manufacturing companies listed on the Indonesia Stock Exchange (IDX), the relationship between capital structure and profitability is a topic of great interest. This study aims to investigate the effect of the Debt To Equity Ratio (DER) variable on Return on Equity (ROE) in manufacturing companies listed on the IDX. The research methodology uses purposive sampling techniques with certain criteria, namely: First, companies included in the manufacturing sector and are registered on the IDX, as well as presenting financial statements with years ended December 31 during the 2007-2011 observation period. Financial data is taken from the Indonesian Capital Market Directory (ICMD) and Annual Report. Second, the company under study must be registered at the beginning of the observation period and not experienced delisting until the end of the period. Third, financial statements must include the value of the financial ratio to be studied, including ROE and DER. In this study, 21 samples were obtained from 11 companies operating in the textile and garment sectors for five years.

Research Methodology

The research methodology used in this study is a multiple linear regression with the Ordinary Least Square (OLS) method. The hypothesis test was conducted using T and F statistics with a significance level of 5%. In addition, a classic assumption examination that includes data normality tests, heteroscedasticity tests, and autocorrelation tests to ensure the validity of the research model. The results showed that the DER variable had a significant negative effect on the ROE of manufacturing companies listed on the IDX in the 2007-2011 period, with a significance level of 5% (p = 0.004). The DER variable can explain 38.7% of ROE variations, as shown by Adjusted R Square, while the remaining 61.3% is influenced by other factors that are not included in the research model.

Results and Discussion

The negative influence between DER and ROE shows that higher increased debt has the potential to reduce the profitability of shareholders. This can be caused by increased financial risks when the company relies too much on debt to finance its operations. When a company has a high debt, interest costs and other financial liabilities can affect overall financial performance. Therefore, the company must carefully consider its capital structure in order to maintain a balance between debt and equity to support sustainable long-term growth.

In the context of the manufacturing sector in Indonesia, companies need to formulate appropriate strategies in managing capital structure. For example, companies can choose to increase equity through reinvestment of retained earnings rather than increasing debt, to reduce the risk of bankruptcy in the future. In addition, management must also conduct an in-depth analysis of the investment and financing carried out, in order to find an ideal balance point between profitability and risk.

Implications and Recommendations

From the results of this study, it is important for investors and stakeholders to realize that disproportionate capital structures can have a negative impact on company profitability. In other words, wise debt management and flexible financial strategy adjustments can be the key to improving the company's financial performance and ROE. With a better understanding of the effect of capital structure on profitability, companies will be better prepared to make more strategic decisions in their financial management, and can adapt to the dynamics of changing market. This will certainly have a positive impact on the economic growth and competitiveness of the manufacturing industry in Indonesia.

Conclusion

In conclusion, this study provides evidence that the DER variable has a significant negative effect on the ROE of manufacturing companies listed on the IDX. The results of this study have implications for investors, stakeholders, and management of manufacturing companies in Indonesia. It is recommended that companies formulate appropriate strategies in managing capital structure, and conduct an in-depth analysis of the investment and financing carried out, in order to find an ideal balance point between profitability and risk.

Limitations and Future Research Directions

This study has several limitations, including the use of a purposive sampling technique, which may not be representative of all manufacturing companies listed on the IDX. Future research directions may include investigating the effect of capital structure on profitability in other industries, and examining the impact of other factors, such as market conditions and economic trends, on the relationship between capital structure and profitability.

References

  • Indonesian Capital Market Directory (ICMD)
  • Annual Report of manufacturing companies listed on the IDX
  • Financial statements of manufacturing companies listed on the IDX

Appendices

  • List of companies included in the study
  • Financial data used in the study
  • Results of data analysis and hypothesis testing

Abstract

This study investigates the effect of the Debt To Equity Ratio (DER) variable on Return on Equity (ROE) in manufacturing companies listed on the Indonesia Stock Exchange (IDX). The results show that the DER variable has a significant negative effect on the ROE of manufacturing companies listed on the IDX in the 2007-2011 period. The study provides evidence that disproportionate capital structures can have a negative impact on company profitability, and recommends that companies formulate appropriate strategies in managing capital structure, and conduct an in-depth analysis of the investment and financing carried out, in order to find an ideal balance point between profitability and risk.

Q: What is the purpose of this study?

A: The purpose of this study is to investigate the effect of the Debt To Equity Ratio (DER) variable on Return on Equity (ROE) in manufacturing companies listed on the Indonesia Stock Exchange (IDX).

Q: What is the research methodology used in this study?

A: The research methodology used in this study is a multiple linear regression with the Ordinary Least Square (OLS) method. The hypothesis test was conducted using T and F statistics with a significance level of 5%.

Q: What are the implications of this study?

A: The results of this study have implications for investors, stakeholders, and management of manufacturing companies in Indonesia. It is recommended that companies formulate appropriate strategies in managing capital structure, and conduct an in-depth analysis of the investment and financing carried out, in order to find an ideal balance point between profitability and risk.

Q: What are the limitations of this study?

A: This study has several limitations, including the use of a purposive sampling technique, which may not be representative of all manufacturing companies listed on the IDX. Future research directions may include investigating the effect of capital structure on profitability in other industries, and examining the impact of other factors, such as market conditions and economic trends, on the relationship between capital structure and profitability.

Q: What are the recommendations of this study?

A: The recommendations of this study are as follows:

  • Companies should formulate appropriate strategies in managing capital structure.
  • Companies should conduct an in-depth analysis of the investment and financing carried out, in order to find an ideal balance point between profitability and risk.
  • Investors and stakeholders should be aware of the potential negative impact of disproportionate capital structures on company profitability.

Q: What are the implications for investors and stakeholders?

A: The results of this study have implications for investors and stakeholders, as they should be aware of the potential negative impact of disproportionate capital structures on company profitability. Investors and stakeholders should carefully evaluate the capital structure of companies before making investment decisions.

Q: What are the implications for management of manufacturing companies?

A: The results of this study have implications for management of manufacturing companies, as they should formulate appropriate strategies in managing capital structure, and conduct an in-depth analysis of the investment and financing carried out, in order to find an ideal balance point between profitability and risk.

Q: What are the future research directions?

A: Future research directions may include investigating the effect of capital structure on profitability in other industries, and examining the impact of other factors, such as market conditions and economic trends, on the relationship between capital structure and profitability.

Q: What are the conclusions of this study?

A: The conclusions of this study are as follows:

  • The DER variable has a significant negative effect on the ROE of manufacturing companies listed on the IDX.
  • Disproportionate capital structures can have a negative impact on company profitability.
  • Companies should formulate appropriate strategies in managing capital structure, and conduct an in-depth analysis of the investment and financing carried out, in order to find an ideal balance point between profitability and risk.

Q: What are the references used in this study?

A: The references used in this study include:

  • Indonesian Capital Market Directory (ICMD)
  • Annual Report of manufacturing companies listed on the IDX
  • Financial statements of manufacturing companies listed on the IDX

Q: What are the appendices of this study?

A: The appendices of this study include:

  • List of companies included in the study
  • Financial data used in the study
  • Results of data analysis and hypothesis testing