CC BY
163
DOI https://doi.org/10.18551/rjoas.2018-12.13
THE EFFECT OF ASSET STRUCTURE, LIQUIDITY, SALES GROWTH AND CAPITAL STRUCTURE ON PROFITABILITY
Putra Nyoman Agus Kusuma*, Sedana Ida Bagus Panji
Economic and Business Program, University of Udayana, Bali, Indonesia *E-mail: [email protected]
ABSTRACT
This study aims to determine the structure, liquidity, growth and capital structure of profitability in companies listed on the Indonesia Stock Exchange. The study also aims to develop the structure, liquidity and sales growth of profitability through the capital structure. The research population is companies listed on the Stock Exchange during 2010-2016 and the issuance of financial statements for the 2009-2016 period. This study uses a census with a sample of 28 companies. Research uses secondary data in the form of financial report data obtained through the IDX website. The method used to predict the relationship of exogenous variables with endogenous variables. The results of the study found that the asset structure did not have a significant effect on profitability. Liquidity, growth and capital structure are significant to profitability. Research also finds structure, liquidity and growth that have a significant effect on capital structure. Capital structure can be used as a mediating variable in influencing structure, liquidity and sales growth on profitability.
KEY WORDS
Asset structure, liquidity, sales growth, capital structure, profitability.
Brigham and Daves (2010: 265) define profitability as the end result of various company policies and decisions. Profitability is one indicator that shows the company's operational effectiveness and the combined impact of liquidity, asset management and the end result of the use of corporate debt (Brigham and Daves, 2010: 265). Andawasatya et al. (2017) stated that profitability is one of the capitals besides debt to maintain the sustainability of the company.
Yazdanfar (2013) states that companies face greater challenges in obtaining profitability due to increased competition in product prices and company efficiency. These conditions encourage the determinants of profitability to be a priority that is considered very well for researchers and practitioners such as managers, investors, creditors and policy makers. Isik and Tasgin (2017) stated that a determinant analysis of the profitability of a company in an industry is very important related to the economic conditions and industrialization of the country.
Niresh (2012) stated that liquidity has a close relationship with profit because liquidity indicates the amount of working capital needed by the company to fund operational activities. Liquidity planning and supervision is very important for the company to avoid the company from the risk of not meeting the payment of short-term obligations and the excess of current assets (Niresh, 2012). Barus and Leliani (2013) state that companies with too high liquidity are not good because they show the amount of idle funds or uncollectible accounts. The amount of idle funds or uncollectible receivables can ultimately reduce the ability to generate profits because it reduces the opportunity for investment companies.
The company's ability to generate profits is also related to sales growth. Barus and Leliani (2013) state that there is a close and dynamic relationship between sales growth and profitability. Companies with improved performance reflected in net sales growth will encourage greater gross profit (Barus and Leliani, 2013). The increase in gross profit encourages the growth of corporate profitability with the practice of operational process efficiency (Yoo and Kim, 2015). Yoo and Kim (2015) revealed that companies will make investments based on this year's earnings rather than estimates of next year's earnings,
companies with high sales growth tend to reinvest profits to support their operational activities.
Mule and Mukras (2015) and Mehari and Aemiro (2013) research found that asset structure has a significant positive effect on profitability. Companies with large fixed assets tend to have high profitability due to an increase in the value of assets in the future (Mule and Mukras, 2015). This opinion is contrary to Pratheepan's research (2014), Boadi et al. (2013) and Asimakopoulos et al. (2009) who found asset structure to have a negative effect on profitability. Pratheepan (2014) found that companies with large fixed assets tend to be less innovative in improving human resources that can create long-term investment opportunities.
Isik and Tasgin (2017) research on the effect of liquidity on profitability found a significant positive relationship, the greater the company's liquidity ratio, the higher its profitability. These findings are in line with the research of Rehman et al. (2015), Boadi et al. (2013) and Mehari and Aemiro (2013). Rehman et al. (2015) found managers of companies listed on the Saudi Arabian Stock Exchange trying to design strategies to achieve optimal liquidity ratios in order to maximize profits.
The study of capital structure was initiated by David Durand in 1952. David Durand developed a capital structure theory based on investor behavior, then Franco Modigliani and Merton Miller (MM) introduced mathematical capital structure theory and based on 1958 research (Sartono, 2014: 230) . MM's theory assumes that capital markets are perfect, investors have homogeneous expectations, there are no taxes and transaction costs so the capital structure is not relevant in determining the value of the company (Ghazouani, 2013).
MM again developed his study in 1963 by including corporate tax in the study of capital structure. MM assumes that companies tend to use debt as a source of funding to get tax savings from debt interest. Miller (1977) refuted previous studies that overestimated the benefits of taxes from debt but did not consider individual taxes and the absence of bankruptcy fees. Miller (1977) found that bankruptcy costs limit the potential benefits of interest tax protection and the amount of debt. These conditions encourage the development of trade-off theory. Other modern capital structure theories then develop such as signaling theory, pecking order theory, free cash flow theory and market timing theory.
LITERATURE REVIEW
The last measurement of profitability ratio is with return on equity (ROE). ROE measures the company's ability to generate net income based on certain capital (Hanafi, 2013: 42). The ROE ratio is a measure of profitability seen from the perspective of shareholders. High ROE ratio indicates high profitability. Hanafi (2013: 43) states that the ROE ratio does not take into account dividends and capital gains for shareholders so that the ROE ratio is not to measure the actual shareholder return.
Brigham and Houston (2010: 124) stated that companies with adequate asset structure or fixed assets have a greater ratio than current assets tend to use external funding sources in the form of long-term debt. This condition is caused by companies being able to use fixed assets as collateral for debt. The asset structure can be used to determine how much long-term debt a company can get. Brigham and Houston (2010: 126) stated that companies that have large amounts of assets in the form of accounts receivable and inventory that are highly dependent on permanence the level of profitability of each company will depend more on short-term financing.
The calculation of the quick (acid ratio) ratio will issue the inventory component of current assets. Inventories are considered as the most illiquid assets compared to cash or trade receivables (Hanafi, 2013: 37). Inventories are also considered to have a high risk of uncertainty because of the large possibility of inventory value falling. Decrease in inventory value can be due to the presence of damaged products or decreased quality. Based on these two reasons, inventory is removed from the calculation of the current ratio. Quick ratios are calculated by dividing current assets less inventory with current debt (Hanafi, 2013: 38). A high quick ratio reflects high liquidity and vice versa.
Sales growth will encourage increased investment in company assets and ultimately require the provision of funds for asset purchases (Helfert, 2000). Helfert (2000) states that the growth rate is based on the company's financial ability. The level of growth that is determined by only looking at financial capabilities can be divided into two, namely the level of growth on one's own strength and the level of sustainable growth (Helfert, 2000). The rate of growth on one's own strength is the level of growth achieved by the company without external funds but comes from the addition of retained earnings. The sustainable growth rate is the level of growth that can be achieved by maintaining the balance between debt and capital. Machek and Machek (2014) stated that sales growth is an important indicator of market acceptance of company products and services. Companies are required to have the right strategy to win the market. Positive sales growth reflects an increase in the company's performance where the company's sales after the year exceeded the previous year's sales.
Hanafi (2013: 150) states that there are several criteria that can be used to evaluate the investment plan, namely the payback period, discounted payback period, accounting rate of return, net present value, internal rate of return and profitability index. Payback period is used to find out how long investment can return. The shorter the payback period for investment, the better an investment will be. The Discounted payback period method calculates the time value of money in the investment return period. Only the net present value method, internal rate of return and profitability index that takes into account the time value of money, focuses on cash flow and calculates all relevant cash flows.
Determination of optimal capital structure is an important decision because it is closely related to the value of the company. Paramasivan and Subramanian (2009: 49) argue that optimal capital structure is a capital structure in which the average capital cost is weighted minimum and obtains maximum firm value. An optimal capital structure is a capital structure or a combination of debt and equity that leads to the maximum value of the company (Paramasivan and Subramanian, 2009: 49). The capital structure decision has two important objectives, namely maximizing the value of the company and minimizing the overall cost of capital.
Hypotheses:
H1: Asset structure has a significant positive effect on profitability;
H2: Liquidity has a significant positive effect on profitability;
H3: Sales growth has a significant positive effect on the structure of profitability;
H4: Capital structure has a significant positive effect on profitability;
H5: Asset structure has a significant positive effect on capital structure;
H6: Liquidity has a significant positive effect on the capital structure;
H7: Sales growth has a significant positive effect on the capital structure.
METHODS OF RESEARCH
The research population is mining companies listed on the Stock Exchange during the period 2010 - 2016. Determination of the research sample using census method is to use the entire population to be analyzed. There were 28 mining companies that were consistently registered throughout 2010 - 2016. This study used path analysis techniques to determine the effect of exogenous variables, namely asset structure, liquidity and sales growth and endogenous variables, namely capital structure and profitability. Data collection with non-participant observation is observing documents relevant to the topic or problem being studied. The published annual financial report data can be obtained through the official website of the IDX (www.idx.co.id).
RESULTS AND DISCUSSION
The first hypothesis states that the asset structure has a significant positive effect on profitability. Based on the results of regression of the effect of asset structure (X1) on profitability (Y) obtained a beta coefficient of 0.087 with a significance of 0.222. The results show the significance value is greater than 0.05 and the beta coefficient is positive, it means
that the asset structure has no significant positive effect on profitability. The research findings are in line with previous studies by Mule and Mukras (2013) and Mehari and Aemiro (2013) who found no significant positive effect on asset structure on profitability.
The second hypothesis states that there is a significant positive effect on liquidity on profitability. The results of liquidity effect regression (X2) on profitability (Y) obtain a beta coefficient of 0.218 with a significance of 0.003. The results show the significance value is less than 0.05 and the positive beta coefficient indicates that liquidity has a significant positive effect on profitability. The research findings are in line with the results of previous studies by Isik and Tasgin (2017), Rehman et al. (2015) and Boadi et al. (2013) which states that there is a significant positive effect on liquidity on profitability.
Table 1 - Hypothesis Result
Standardized Coef. Beta Standard Error t Sig.
Xi ^Y 0,087 0,044 1,225 0,222 Not. Sig.
X2 ^Y 0,218 0,001 2,974 0,003 Sig.
X3 ^Y 0,237 0,008 2,778 0,006 Sig.
X4 ^Y 0,334 0,026 2,387 0,040 Sig.
X1 ""^X 0,175 0,033 3,075 0,002 Sig.
X2 0,255 0,022 4,481 0,000 Sig.
X3 0,579 0,018 1,374 0,000 Sig.
Source: Primary Data, 2018
The third hypothesis states that sales growth has a significant positive effect on profitability. Based on the regression results of the effect of sales growth (X3) on profitability (Y) obtained the beta coefficient of 0.237 with a significance of 0.006. The results show a significance value less than 0.05 and a positive beta coefficient, it means that sales growth has a significant positive effect on the capital structure. Research findings are in line with the results of previous studies by Isik and Tasgin (2017), Fareed et al. (2016) and Yazdanfar
(2013) which states that there is a significant positive effect on sales growth on profitability.
The fourth hypothesis states that there is a significant positive effect on the capital
structure on profitability. The results of regression of the effect of capital structure (X4) on profitability (Y) obtain a beta coefficient of 0.334 with a significance of 0.040. The results show the significance value is less than 0.05 and the positive beta coefficient indicates that liquidity has a significant positive effect on the capital structure. Research findings are in line with the empirical research by Negasa (2016), Salehi and Moradi (2015) and Fosu (2013) who found a significant positive effect on capital structure on profitability.
In the fifth hypothesis, the asset structure has a significant positive effect on the capital structure. Table 1 shows that the beta coefficient of the regression of the effect of the asset structure (X1) on the capital structure (X4) is 0.175 with a significance of 0.002. The results show that the significance is less than 0.05 and the beta coefficient is positive so that the asset structure can be interpreted to have a significant positive effect on the capital structure. Significant positive effect of asset structure with capital structure in line with empirical research by Nhung et al. (2017), Shambor (2017), Berkman et al. (2016), Thippayana
(2014), Handoo and Sharma (2014), Mostarac and Petrovic (2013) and Matemilola et al. (2013) who found that asset structure had a significant positive effect on capital structure.
The sixth hypothesis states that liquidity has a significant positive effect on the capital structure. The regression results show that the beta coefficient of the effect of liquidity regression (X2) on the capital structure (X4) is 0.255 with a significance of 0.000. The results show the significance value is less than 0.05 and the beta coefficient is positive, so the regression results show that liquidity has a significant positive effect on the capital structure. Significant positive effect of liquidity on capital structure in line with research by Pujiharjanto et al. (2014) and Cekrezi (2013).
The seventh hypothesis states that sales growth has a significant positive effect on the capital structure. Based on the regression results of the effect of sales growth (X3) on the capital structure (X4) obtained the beta coefficient of 0.579 with a significance of 0.000. The
results show the significance value is less than 0.05 and the beta coefficient is positive, so the regression results show that sales growth has a significant positive effect on the capital structure. Significant positive effect of sales growth on capital structure is in line with previous empirical research by Enakirerhi and Chijuka (2016), Pratheepan and Banda (2016), Rehman and Rehman (2016), Thippayana (2014), Proenca and Laureano (2014) and Daskalis et al . (2014).
Table 2 - Direct Effect, Indirect Effect and Total Effect
Correlation Direct Indirect Total
Xi-Y 0,087 0,058 0,145
X2-Y 0,218 0,085 0,303
X3-Y 0,237 0,193 0,430
X4-Y 0,334 - 0,334
X1-X4 0,175 - 0,175
X2-X4 0,255 - 0,255
X3-X4 0,579 - 0,579
Source: Primary Data, 2018.
Table 2 shows the indirect coefficient of effect of asset structure variables on profitability through a capital structure of 0.058. This means that the asset structure indirectly through the capital structure has a positive effect on profitability. It can also be seen that the indirect effect coefficient of liquidity variable on profitability through the capital structure is 0.085. This means that indirectly liquidity through the capital structure has a positive effect on profitability. The coefficient of indirect effect of sales growth variables on profitability through the capital structure is 0.193. This indicates that indirect sales growth through the capital structure has a positive effect on profitability.
Table 2 also shows the total effect coefficients for the relationships between variables. Total effect is calculated by adding up between direct and indirect effects. The coefficient of the total effect of the asset structure on profitability through the capital structure is 0.145. The coefficient of the total effect of liquidity on profitability through the capital structure is 0.303. The coefficient of the effect of the total sales growth on profitability through the capital structure is 0.430. The coefficient of the effect of the total asset structure, liquidity and sales growth on the capital structure is respectively 0.175; 0.255 and 0.579. The total effect coefficient is the same as the direct effect because there is no intermediate variable.
Table 3 - Sobel Testing Result
Correlation Indirect Standard Error t statistic
X1-Y 0,0585 0,0282 2,0744
X2-Y 0,0085 0,0099 8,5913
X3-Y 0,1934 0,0162 11,9250
Source: Primary Data, 2018.
Table 3 shows the results of the t statistics calculation. The significance of indirect influence can be known by comparing the t statistics with t tables (Ghozali, 2011: 255). The value of t table is for the significance level of 0.05 with where df = 191 is 1.960. Table 5.10. shows the asset structure, liquidity and sales growth variables have a significant effect on profitability through the capital structure because the t value of the statistics is greater than the value of t table.
CONCLUSSION AND SUGGESTIONS
Based on the results of data analysis and the previous discussion it can be concluded as follows:
• The effect of asset structure is not significant on profitability. Changes in asset structure will not affect the profitability of mining companies in Indonesia.
• Liquidity has a significant positive effect on profitability. Increased liquidity can increase the profitability of mining companies in Indonesia.
• Sales growth has a positive effect on profitability. Increased sales growth can increase the profitability of mining companies in Indonesia.
• Capital structure has a significant positive effect on profitability. Improving capital structure will increase the profitability of mining companies in Indonesia.
• Asset structure has a significant positive effect on capital structure. The increasing structure of the company's assets will improve the capital structure of mining companies in Indonesia. The results of the research are in line with the perspective of the trade-off theory.
• Liquidity has a significant positive effect on the capital structure. Increased liquidity can improve the capital structure of mining companies in Indonesia. The research results are in line with the pecking-order theory perspective.
• Sales growth has a significant positive effect on the capital structure. Sales growth can improve the capital structure of mining companies in Indonesia. The positive influence of sales growth is in line with the perspective of the pecking order theory.
• Capital structure can function as a mediating variable in the influence of asset structure, liquidity and sales growth on profitability.
Suggestions that can be submitted by researchers are as follows:
• For issuers. Mining companies should pay attention to the influence of liquidity, sales growth and capital structure on profitability because changes in the three variables can affect the company's ability to generate profits. Mining companies also need to consider the effect of asset structure, liquidity and sales growth on the capital structure. Policy changes related to asset structure, liquidity and sales growth can affect the capital structure which in turn affects profitability. Mining companies are required to have an investment strategy in conditions of low international demand and low prices of mining commodities.
• For investors and creditor. Investors are expected to pay attention to changes in liquidity ratios, sales growth and capital structure because it affects the opportunity of issuers to generate profits. The company's ability to generate profits reflected in the profitability ratio is an indicator of the company's financial performance. Investors are advised to invest their capital in companies that have liquidity control, high sales growth and good asset investment strategies. Creditors need to pay attention to the capital structure policy of mining companies because the composition of the capital structure will affect the profitability of the company. Profitability has an important role in ensuring the payment of obligations by the company. Creditors also need to pay attention to variables that affect the capital structure of mining companies, namely asset structure, liquidity and sales growth.
• Further Research. It is recommended to use the same endogenous variables as different proxies. Research only uses return on assets (ROA) to measure profitability ratios. Return on equity (ROE) can also be added in future research to calculate profitability ratios. rOe is able to demonstrate the company's ability to generate net income with its own capital. The scope of the research can be expanded by extending the research period or adding issuers in different industries.
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