Relationship Analysis Between Profitability Ratio And Economic Value Added In Measuring The Financial Performance Of Manufacturing Companies That Go Public On The Indonesia Stock Exchange

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Relationship Analysis between Profitability Ratio and Economic Value Added in Measuring the Financial Performance of Manufacturing Companies that Go Public on the Indonesia Stock Exchange

Introduction

The financial performance of a company is a crucial aspect that determines its success and sustainability in the market. In recent years, the Indonesia Stock Exchange (IDX) has seen a significant increase in the number of manufacturing companies going public, which has led to a growing interest in understanding the financial performance of these companies. One of the key indicators of a company's financial performance is its profitability ratio, which measures the company's ability to generate profits from its assets. However, profitability ratio alone may not be sufficient to measure a company's financial performance, as it does not take into account the company's ability to create economic value for its shareholders. This is where Economic Value Added (EVA) comes into play, which measures the company's ability to create economic value in excess of its cost of capital.

The Importance of Profitability Ratio and Economic Value Added

Profitability ratio, measured by Return on Assets (ROA), is a widely used indicator of a company's financial performance. It measures the company's ability to generate profits from its assets, which is a critical aspect of a company's financial health. However, profitability ratio alone may not be sufficient to measure a company's financial performance, as it does not take into account the company's ability to create economic value for its shareholders. This is where EVA comes into play, which measures the company's ability to create economic value in excess of its cost of capital.

EVA is a more comprehensive measure of a company's financial performance, as it takes into account the company's ability to create economic value for its shareholders. It is calculated by subtracting the company's cost of capital from its net operating profit after taxes (NOPAT). A positive EVA indicates that the company is creating economic value in excess of its cost of capital, which is a critical aspect of a company's financial health.

Research Methodology

This study aims to determine the relationship between ROA and EVA in measuring the financial performance of manufacturing companies that go public on the Indonesia Stock Exchange. The research method used is hypothesis research to identify correlational relationships between these variables. The population in this study are manufacturing companies listed on the IDX. From this population, the sample taken was 41 manufacturing companies selected by the random sampling method. The data used in this study are quantitative data sourced from the annual report published for the 2006-2008 period and from the 2008 Indonesian Capital Market Directory. Data collection techniques are carried out with documentation, while data analysis is carried out using product moment correlation techniques and t tests.

Results and Discussion

The results showed that the Product Moment correlation value between the Asset Returning Ratio (ROA) and the Economic Value Added (EVA) in the period 2006 and 2008 was greater than 0, which showed a positive relationship between the two variables. That is, an increase in the ROA ratio tends to be related to an increase in EVA, which indicates that companies are not only able to generate profits, but also create economic value more than their capital costs. However, in 2007, the correlation value showed poor results, which is less than 0, indicating that the relationship between the two variables weakened that year.

In addition, the T test shows that the T value is greater than T table. This indicates that there is a significant influence between ROA and EVA in measuring financial performance. These results illustrate that the ratio of good profitability, measured through ROA, can be an indicator that is relevant in the company's financial performance appraisal, as well as reflecting the company's ability to create added value for shareholders.

Conclusion

This analysis shows the importance of understanding the ratios of profitability and economic value produced by the company. For investors and stakeholders, information about the relationship between ROA and EVA can be an important consideration in making investment decisions. By knowing that the company's financial performance can be measured not only from profits but also from the ability to create economic value, investors can be more careful in assessing the potential growth of the company.

Through this research, it is hoped that company managers can pay more attention to the performance of profitability and added value produced to increase the competitiveness of the company in the market. Thus, the company does not only focus on achieving short-term profit but also on the creation of long-term economic value that is sustainable.

Recommendations

Based on the findings of this study, the following recommendations are made:

  1. Company managers should pay more attention to the performance of profitability and added value produced to increase the competitiveness of the company in the market.
  2. Investors and stakeholders should consider the relationship between ROA and EVA when making investment decisions.
  3. Further research should be conducted to explore the relationship between ROA and EVA in other industries and countries.

Limitations of the Study

This study has several limitations that should be noted. Firstly, the sample size is relatively small, which may limit the generalizability of the findings. Secondly, the data used in this study are only from the 2006-2008 period, which may not reflect the current market conditions. Finally, the study only focuses on manufacturing companies listed on the IDX, which may not be representative of other industries and countries.

Future Research Directions

This study provides several avenues for future research. Firstly, further research should be conducted to explore the relationship between ROA and EVA in other industries and countries. Secondly, the study should be replicated using a larger sample size and more recent data to reflect the current market conditions. Finally, the study should be extended to explore the relationship between ROA and EVA in other financial metrics, such as return on equity (ROE) and return on investment (ROI).
Frequently Asked Questions (FAQs) about the Relationship between Profitability Ratio and Economic Value Added

Q: What is the main objective of this study?

A: The main objective of this study is to determine the relationship between Return on Assets (ROA) and Economic Value Added (EVA) in measuring the financial performance of manufacturing companies that go public on the Indonesia Stock Exchange.

Q: What is the significance of this study?

A: This study is significant because it provides insights into the relationship between ROA and EVA, which are two important financial metrics used to measure a company's financial performance. By understanding this relationship, investors and stakeholders can make more informed investment decisions.

Q: What is the methodology used in this study?

A: The methodology used in this study is hypothesis research, which involves identifying correlational relationships between ROA and EVA. The population in this study are manufacturing companies listed on the Indonesia Stock Exchange, and the sample taken was 41 manufacturing companies selected by the random sampling method.

Q: What are the key findings of this study?

A: The key findings of this study are that there is a positive relationship between ROA and EVA, which indicates that companies are not only able to generate profits, but also create economic value more than their capital costs. However, in 2007, the correlation value showed poor results, which is less than 0, indicating that the relationship between the two variables weakened that year.

Q: What are the implications of this study?

A: The implications of this study are that company managers should pay more attention to the performance of profitability and added value produced to increase the competitiveness of the company in the market. Investors and stakeholders should also consider the relationship between ROA and EVA when making investment decisions.

Q: What are the limitations of this study?

A: The limitations of this study are that the sample size is relatively small, which may limit the generalizability of the findings. The data used in this study are only from the 2006-2008 period, which may not reflect the current market conditions. Finally, the study only focuses on manufacturing companies listed on the Indonesia Stock Exchange, which may not be representative of other industries and countries.

Q: What are the future research directions?

A: The future research directions are to explore the relationship between ROA and EVA in other industries and countries. The study should be replicated using a larger sample size and more recent data to reflect the current market conditions. Finally, the study should be extended to explore the relationship between ROA and EVA in other financial metrics, such as return on equity (ROE) and return on investment (ROI).

Q: What are the practical implications of this study?

A: The practical implications of this study are that company managers should use ROA and EVA as complementary metrics to measure a company's financial performance. Investors and stakeholders should also consider the relationship between ROA and EVA when making investment decisions.

Q: What are the theoretical implications of this study?

A: The theoretical implications of this study are that it provides insights into the relationship between ROA and EVA, which are two important financial metrics used to measure a company's financial performance. The study contributes to the existing literature on financial performance measurement and provides a framework for future research.

Q: What are the policy implications of this study?

A: The policy implications of this study are that it highlights the importance of using ROA and EVA as complementary metrics to measure a company's financial performance. The study also suggests that company managers should pay more attention to the performance of profitability and added value produced to increase the competitiveness of the company in the market.