The Effect Of Working Capital And Leverage On The Profitability Of Automotive Companies Listed On The Indonesia Stock Exchange

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The Effect of Working Capital and Leverage on the Profitability of Automotive Companies Listed on the Indonesia Stock Exchange

Introduction

The automotive industry is a significant contributor to the economy of Indonesia, with many companies listed on the Indonesia Stock Exchange (IDX). However, the profitability of these companies can be affected by various factors, including working capital and leverage. This study aims to investigate the effect of working capital and leverage on the profitability of automotive companies listed on the IDX.

Background

Working capital, which reflects the efficiency of a company in managing current assets and short-term obligations, is an essential aspect in running an automotive business. Leverage, which shows the proportion of debt to total assets, provides an overview of the financial risk faced by a company. However, the relationship between working capital, leverage, and profitability is complex, and previous studies have yielded mixed results.

Methodology

This study uses a quantitative approach with a causal type, focusing on three variables: working capital, leverage, and profitability. Working capital is measured by working capital turnover, leverage is measured by debt to total assets, and profitability is measured by return on assets. The sample consists of 18 automotive companies listed on the IDX from 2006 to 2008, resulting in 54 samples. The selection of samples is done by the purposive sampling method, and the data used is secondary data taken from the website www.idx.co.id.

Data Analysis

After collecting the data, a classic assumption test is carried out before continuing to hypothesis testing. Hypothesis testing in this study uses multiple linear regression with T and F tests. The results showed that partially, both working capital and leverage had no significant effect on company profitability. When tested simultaneously, both working capital and leverage also did not have a significant effect on profitability. The R square value obtained is 0.095, which shows that 9.5% of variations in profitability can be explained by the independent variables in this study. Meanwhile, the residual value of 90.5% is determined by other factors that are not included in this study.

Additional Analysis and Explanation

Working capital and leverage are important elements in financial management, but they may not be the only factors that affect profitability. The characteristics of the automotive industry itself, such as fluctuations in raw material prices, changes in government regulation, and macroeconomic conditions, can affect greater profitability compared to working capital and debt management. Additionally, 90.5% of profitability variations that cannot be explained by this study indicate the need for further research that includes other variables, such as management quality, product innovation, and marketing strategies.

Conclusion

In conclusion, although working capital and leverage are important elements in financial management, automotive companies in Indonesia must consider various other factors to increase profitability. This study provides valuable insight for managers and investors to evaluate their financial strategies in facing dynamic market challenges. The findings of this study suggest that a more holistic approach needs to be applied to understand the factors that contribute to profitability.

Recommendations

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

  1. Further research: Further research is needed to investigate the effect of other variables, such as management quality, product innovation, and marketing strategies, on profitability.
  2. Holistic approach: A more holistic approach needs to be applied to understand the factors that contribute to profitability.
  3. Financial management: Automotive companies in Indonesia must consider various other factors to increase profitability, in addition to working capital and leverage.
  4. Investor evaluation: Managers and investors need to evaluate their financial strategies in facing dynamic market challenges.

Limitations

This study has several limitations, including:

  1. Sample size: The sample size is limited to 18 automotive companies listed on the IDX.
  2. Time period: The study only covers the period from 2006 to 2008.
  3. Variables: The study only focuses on three variables: working capital, leverage, and profitability.

Future Research Directions

Future research directions include:

  1. Investigating the effect of other variables: Investigating the effect of other variables, such as management quality, product innovation, and marketing strategies, on profitability.
  2. Applying a more holistic approach: Applying a more holistic approach to understand the factors that contribute to profitability.
  3. Examining the effect of industry characteristics: Examining the effect of industry characteristics, such as fluctuations in raw material prices, changes in government regulation, and macroeconomic conditions, on profitability.

References

  • [List of references cited in the study]

Appendix

  • [Appendix containing additional tables, figures, and data]

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Q&A: The Effect of Working Capital and Leverage on the Profitability of Automotive Companies Listed on the Indonesia Stock Exchange

Introduction

In our previous article, we discussed the effect of working capital and leverage on the profitability of automotive companies listed on the Indonesia Stock Exchange (IDX). In this article, we will answer some frequently asked questions (FAQs) related to the topic.

Q: What is working capital, and how does it affect profitability?

A: Working capital is the amount of money a company has available to meet its short-term financial obligations. It includes current assets such as cash, accounts receivable, and inventory, minus current liabilities such as accounts payable and short-term debt. A company with good working capital management can increase its profitability by reducing costs and improving cash flow.

Q: What is leverage, and how does it affect profitability?

A: Leverage refers to the use of debt to finance a company's operations. It can be measured by the debt-to-equity ratio or the debt-to-total-assets ratio. A company with high leverage may have higher profitability in the short term, but it also increases the risk of default and bankruptcy.

Q: How does the automotive industry affect the relationship between working capital, leverage, and profitability?

A: The automotive industry is a capital-intensive industry with high fixed costs and variable costs. Companies in this industry need to manage their working capital and leverage carefully to maintain profitability. Fluctuations in raw material prices, changes in government regulation, and macroeconomic conditions can affect profitability more than working capital and debt management.

Q: What are some other factors that affect profitability in the automotive industry?

A: In addition to working capital and leverage, other factors that affect profitability in the automotive industry include:

  • Management quality: Effective management can improve profitability by reducing costs and improving efficiency.
  • Product innovation: Companies that innovate and develop new products can increase profitability by capturing market share and reducing competition.
  • Marketing strategies: Companies that have effective marketing strategies can increase profitability by attracting customers and increasing sales.
  • Industry characteristics: Fluctuations in raw material prices, changes in government regulation, and macroeconomic conditions can affect profitability more than working capital and debt management.

Q: What are some recommendations for automotive companies in Indonesia to increase profitability?

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

  • Improve working capital management: Automotive companies in Indonesia should improve their working capital management by reducing costs and improving cash flow.
  • Manage leverage carefully: Companies should manage their leverage carefully to avoid default and bankruptcy.
  • Focus on management quality: Effective management can improve profitability by reducing costs and improving efficiency.
  • Invest in product innovation: Companies that innovate and develop new products can increase profitability by capturing market share and reducing competition.
  • Develop effective marketing strategies: Companies that have effective marketing strategies can increase profitability by attracting customers and increasing sales.

Q: What are some limitations of this study?

A: This study has several limitations, including:

  • Sample size: The sample size is limited to 18 automotive companies listed on the IDX.
  • Time period: The study only covers the period from 2006 to 2008.
  • Variables: The study only focuses on three variables: working capital, leverage, and profitability.

Q: What are some future research directions?

A: Future research directions include:

  • Investigating the effect of other variables: Investigating the effect of other variables, such as management quality, product innovation, and marketing strategies, on profitability.
  • Applying a more holistic approach: Applying a more holistic approach to understand the factors that contribute to profitability.
  • Examining the effect of industry characteristics: Examining the effect of industry characteristics, such as fluctuations in raw material prices, changes in government regulation, and macroeconomic conditions, on profitability.

Conclusion

In conclusion, the effect of working capital and leverage on the profitability of automotive companies listed on the IDX is complex and influenced by various factors. This study provides valuable insights for managers and investors to evaluate their financial strategies in facing dynamic market challenges.