INTRODUCTION

Background

Companies through financial managers must be able to perform its functions in managing finances properly and efficiently as possible. Firm value is used for measure the success of a financial manager in managing the company’s finances. The purpose of the company is to increase firm value by increasing the value of the company’s stock price. Basically the company has other goals besides maximizing stock price. However, maximizing the stock price is the most important destination for large companies especially companies that go public. The high value of the company to be the desire of the owners of the company, because with high scores indicating high prosperity stockholders. Investor perception of the value of the company is on firm performance and is often associated with a stock price that is indicated by the Price to Book Value (PBV). Firm value is reflected on company’s stock price is stable and long-term increase. The higher the stock price, the higher the value of the firm (Cahyaningsih: 2010).

In this article the factors that may affect firm value is the leverage ratio and profitability ratio. Leverage ratio is the ratio to determine a company’s ability to pay its obligations if the company is liquidated. The higher the leverage ratio, then the risk higher too. High leverage ratio indicates that the company is not solvable, meaning that the total debt is greater than the total assets (Analisa: 2011), it can cause harm to investors. Profitability ratio is the ratio to determine the company’s ability to obtain profits. With high profitability ratios owned, a company will attract investors to investing in the company. With many investors who buy shares of the company, it will raise the company’s stock price and also increase the firm value. According to Sari (2009), profitability is partially have no significant effect on firm value, while according Nurmawanti (2008), profitability is partially have significant effect on firm value. According to Cahyaningsih (2010), leverage is significantly have negative effect on firm value, as well as research Fitriani (2010) that leverage partially have no significant effect and have negative effect on firm value. While Analisa (2011) leverage is partially no significant effect and have positive effect on firm value.

Problems

Is leverage ratios and profitability ratios simultaneously have effect on firm value in cigarette industries?

Article Purpose

Knowing the effect of leverage ratio and profitability ratio have effect on firm value.

Advantage

1. For companies, this study can be considered to determine the company’s policy in order to maximize its value.

2. For investors, this study can be considered for investment decision making.

3. For an academic, as a reference for subsequent research related to leverage, profitability, and shareholder value.

DISCUSSION

The financial report is an overview of the financial situation of a company at a certain period. Financial statement analysis is an analysis of the financial condition of a company involving the balance sheet and income statement (Harjito & Martono, 2011:51). Financial statement analysis is the process of determining the characteristics of a company’s finances and operations derived from accounting data and other financial reports (Husnan, 1998:51).

Thus, financial statement analysis is the analysis of the financial condition and operations of the acquired company financial statements of the company. The purpose of financial statement analysis is to determine the condition and achievements of the company, which is illustrated by the records and financial statements (Husnan, 1998:51). Through financial analysis, author can measure how the level of liquidity, profitability, or other indicators that show whether the company has been run in a rational and orderly

Solvency ratio is the ratio to determine the company’s ability to pay its obligations before the company was liquidated (Darsono & Ashari, 2005:54). Leverage ratio measures the ratio of funds provided by the owner of the funds borrowed from the company’s creditors (Husnan, 1998:55). Thus, the leverage ratio is the ratio of owner funds and funds from lenders to determine the company’s ability to pay its obligations before the company is liquidated. Usually leverage ratio is measured by:

• Debt to Assets Ratio

The ratio of total debt to total assets expressed as a percentage. This ratio measures what percentage how much assets is spend by debt (Harjito & Martono, 2011:59). The high value of the ratio indicates an increase in risk to creditors in the form of the company’s inability to pay all of its obligations and will result in higher interest payments, which in turn reduces its dividend payment (Darsono & Ashari, 2005:54).

Debt to Assets Ratio = Total Debt/ Total Assets

• Debt to Equity Ratio

This ratio indicates the percentage of the provision of funds by shareholders ato the creditor (Darsono & Ashari, 2005:54). The higher the ratio, then the corporate funding provided by the shareholder is lower. From the perspective of long-term ability to pay, the lower the ratio the better the company’s ability to pay for long-term liabilities.

Debt to Equity Ratio = Total Debt/ Total Equity

With higher leverage ratio indicates the amount of funds provided by creditors (Mahduh and Hanafi: 2005). It will make investors cautious to invest in companies that leverage ratio is high because the higher the leverage ratio, the higher the investment risk (Weston and Copeland, 1992). With high leverage ratio indicates that the company is not solvable, meaning that the total debt is greater than the total assets (Analisa, 2011). In the study Fitriani (2010) and Cahyaningsih (2010), leverage is partially negative and significant effect on firm value, and in the study Analisa (2011) leverage and no significant positive effect on firm value.

Profitability is the net profit level that can be achieved by the company during the course of operation (Soliha & Taswan:2002). Ratio is a measure of the profitability of the company’s ability to generate earnings (Prawironegoro, 2010:58). Profitability is the company’s ability to earn profits (Saidi:2004).

So, profitability is the company’s ability to obtain profits preformance during the course of operation. Profitability ratios can be measured by:

• Return On Assets

This ratio illustrates the company’s ability to generate profits from every single rupiah assets used (Darsono & Ashari, 2005:56). Knowing this ratio, we can assess whether the company is efficient in utilizing its assets in the company’s operations.

Return on Assets = Net Profit/ Total Assets

• Return on Equity

This ratio shows the success rate of management in maximizing the return to shareholders (Darsono & Ashari, 2005:57). The higher this ratio the better because it gives a higher level of return on shareholders.

Return on Equity = Net Profit/Total Equity

Profitability is one that can affect the value of the company. High profitability reflects the company’s ability to generate high returns for shareholders. With high profitability ratios owned a company would attract investors to invest in the company. With many investors who buy shares of the company will raise the company’s stock price so that will increase the value of the company. So, there will be a positive relationship between profitability and stock price where high stock prices will affect the value of the company (Analisa, 2011). In the study Fitriani (2010), profitability is partially significant positive effect on firm value is not. According to research Sari (2009), profitability is partially no significant effect on firm value, while according Nurmawanti (2008), profitability is partially significant effect on firm value.

The fim value is calculated based on the financial risk borne by the firm and relationship variants of a particular property investment market with variant results (covariance) (Prawironegoro, 2010:378). Value of the company in some literature referred to by several terms including:

1. Price to Book Value is the ratio between the share price and book value of the stock.

2. Market Book Ratio is the ratio of the current stock price and book value per share

According Bringham and Gapensi in Susanti (2010), the value of the company is very important because with the high value of the firm will be followed by higher shareholder wealth. The higher the value the higher the stock price of the company. The high value of the company to be the desire of the owners of the company, because with high scores also showed higher shareholder wealth. Shareholder and the company presented by the market price of the shares is a reflection of the investment decision, financing, and asset management.

Usually enterprise value is indicated by price to book value. Price to book value is higher will make the market believe the company’s future prospects. Price to book value or PBV describe how big the market appreciates the value of shares in a company’s books (Analisa:2011). The higher this ratio means the market believes the company’s prospects. PBV can be measured by:

Price to Book Value = Market Price Per Share Share/ Book Value Per Share Share

PBV values more than 1 is said to be overvalued, which may mean that stock companies are rated higher than its book value. PBV values were less than 1 is said to be undervalued which means that the company’s stock was rated lower than its book value. PBV value equal to 1 means that the company’s stock equal to the assessed value of his book.

If the market price is more than the assessed value of the company, then the stock price in the future will decline (Darsono & Ashari, 2005:111). Whereas if the stock price is less than the assessed value of the company, then the stock price in the future will increase.

There are few previous studies that related to the factors that affect the value of the company, which is as follows:

Study by Samuel Dossugi (2004) entitled “Analysis of Factors Affecting the Value Creation of Firms in the Jakarta Stock Exchange”. The results showed that the opportunities for value creation in the future have a positive and significant correlation with the profitability factor. In addition, the creation of corporate value is also influenced by the size of the company’s size. The larger the company the greater the opportunities for value creation.

Study by Akbar Reinaldy Ariesha (2009) titled “The Effect On Probability, Financial Leverage, and Firm Value Activity on the Indonesia Stock Exchange Listed Property Sector Year 2003-2007”. From the results of the regression analysis found that the three financial ratios simultaneously have a significant influence on the PBV while partial, variables that significantly affect the PBV just TATO. This research resulted in R Square of 18.8% while the rest, 71.2% is explained by other variables outside the model equations. This suggests that financial ratios are not the only information that can be used as a consideration in the determination of the value of the company.

Thesis by the Yangs Analisa (2011) titled “The Effect of Firm Size, Leverage, Profitability and Value Dividend Policy of the Company (Studies in Manufacturing Companies Listed in Indonesia Stock Exchange in 2006-2008)”. These results indicate that firm size has a positive and significant impact on firm value, leverage has a positive and insignificant effect on firm value, profitability has a positive and significant impact on firm value, and dividend policy has no significant negative effect on firm value. Simultaneously all the independent variables in this study have a significant effect on firm value. Then the regression estimation results demonstrate the predictive ability of the four independent variables on firm value by 61%, while the remaining 39% is influenced by other factors beyond the models that are not included in this analysis.

Thesis compiled by Linda Fitriani (2010) titled “The Effect of Leverage, Company Size, Value and Profitability Against Pharmaceutical Company Public Listed in Indonesia Stock Exchange”. Based on the research that has been done shows that the variable leverage partially significant negative effect on company value, size persahaan partially significant positive effect on Firm Value, and Profitability partially positive effect is not significant to the firm value.

This study took 15 samples of financial statements of 3 the cigarette companies that listed on Indonesia Stock Exchange.

Coefficientsa

Model Unstandardized Coefficients Standardized Coefficients t Sig.

B Std. Error Beta

1 (Constant) -.621 1.319 -.471 .646

DER 1.106 1.155 .135 .958 .357

ROE .128 .021 .866 6.152 .000

a. Dependent Variable: PBV

Based on the results of multiple linear regression table, the regression equation is:

Y = – 0,621 + 1,106 X1 + 0,128 X2

Based on the regression equation above can be explained that the constant of -0,621 shows the constants of enterprise value (Y) by assuming the value of the independent variable, leverage (X1) and profitability (X2) is zero. Leverage regression coefficient of 1,106 was obtained for the states if leverage increases by 1 unit assuming profitability variable is zero then the value of the company will increase by 1,106. Regression coefficient of 0,128 was obtained for the profitability of the state if profitability increases by 1 unit assuming leverage variable is zero then the value of the company will increase by 0,128.

The partial test analysis results for the leverage variables obtained tvalue 0,958 and this result is smaller than tvalue significance that is equal to 2,179 with 0,357. Due to smaller tvalue and the level of significance is greater than 0,05 we can conclude leverage variable has no significant effect and positive impact on firm value.

The higher the leverage ratio will make investors cautious to invest in the company, because the higher the leverage ratio, the higher the investment risk. High leverage ratio indicates that the company is not solvable, meaning that the total debt is greater than the total assets (Yangs Analysis, 2011). In the study Fitriani Linda (2010) and Cahyaningsih (2010), leverage is partially negative and significant effect on firm value, whereas in the study Yangs Analisa (2011) leverage have no significant positive effect on firm value.

As for the profitability variable, obtained tcount 6,152 and the result is greater than ttable that is equal to 2,179 with a significance of 0,000. Because t is greater than ttable and the significance level is less than 0,05 so it can be concluded profitability variable has a significant and positive effect on firm value.

High profitability reflects the company’s ability to generate high returns for shareholders. With high profitability ratios owned a company would attract investors to invest in the company. With many investors who buy shares of the company will raise the company’s stock price so that will increase the value of the company. So, there will be a positive relationship between profitability and stock price where high stock prices will affect the value of the company (Yangs Analisa, 2011). In the study Fitriani Linda (2010), profitability is partially significant positive effect on firm value is not. According to research Sari (2009), profitability is partially no significant effect on firm value, while according Nurmawanti (2008), profitability is partially significant effect on firm value.

The anova or simultant test results, the value obtained Fvalue 19.242 and this result is greater than the F table is equal to 5.10 with a significance of 0.000. Because the value is greater than the Fvalue and significance level Ftabel less than 0.05 then the Ho is rejected so it can be concluded that the two independent variable, leverage and profitability has a significant and positive effect on firm value.

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .873a .762 .723 1.63598

a. Predictors: (Constant), ROE, DER

From the analysis of the coefficient of determination in the table above, it can be seen the value of the coefficient of determination (R Square) of 0.762. This suggests that the effect of leverage and profitability variables could explain any changes in variable values the company at 76.2% while the remaining 23.8% is explained by other variables that are not used in this study.

CONCLUSION

Conclusion

Based on the analysis that has been done can be concluded that:

1. Leverage ratio and profitability ratio simultaneously have significant and positive impact on firm value in the cigarette industry sector companies listed in Indonesia Stock Exchange.

2. Leverage and profitability ratio have 76,2% effect of any changes on firm value in the cigarette industry sector companies listed in Indonesia Stock Exchange.

Implication

1. Investors can rely on leverage ratios and profitability in determining the value of the company.

2. The results of this research has certain limitations, which only uses companies cigarette industry as the research sample. Therefore, further studies are expected to be added and the sample period of study is longer and not limited by the cigarette industry alone. This is to prove whether the leverage ratio as measured by the ratio of DER and profitability as measured by ROE positive and significant effect on firm value as measured by PBV on companies engaged in different industrial sectors.

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