Effect of financial performance on firms’ value of cable companies in Indonesia

Accounting 6 (2020) 1103–1110 Contents lists available at GrowingScience Accounting homepage: www.GrowingScience.com/ac/ac.html Effect of financial performance on firms’ value of cable companies in Indonesia Irwan Mangara Harahapa, Ivana Septiania, and Endri Endria* Universitas Mercu Buana, Jakarta, Indonesia CHRONICLE ABSTRACT a Article history: Received May 15 2020 Received in revised format May 16 2020 Accepted July 6 2020 Available online July 12 2020 Keywords: Firm value Financial performance Price book value Panel regression model The study aims to analyze the effect of current ratio (CR), return on equity (ROE), net profit margin (NPM), total asset turnover (TATO) and debt to asset ratio (DAR) on firms’ value. The sample of the research is the 4 cable sub-sector companies from the manufacturing industry which are listed on the Indonesia Stock Exchange (IDX) for the 2014-2018 period and they are analyzed using panel data regression method. Empirical findings of the study indicate that ROE had a negative influence on firm value, while NPM, TATO, and DAR had positive effects on firm value. However, the CR ratio had no effect on firm value. Taken together all financial performance variables affect the value of the company. The results of the study have implications that the value of the company can be improved if the company still maintains a balanced capital structure between debt and equity, provided that debt is used to finance assets that are productive and efficient so that they can generate profits. © 2020 by the authors; licensee Growing Science, Canada 1. Introduction The existence of a cable company in Indonesia plays an important role in supporting the country's infrastructure development program. However, fluctuations in prices of copper raw materials make companies engaged in the cable sector less profitable. This is a challenge for each investor in determining the best performance choices in cable companies, and how good performance can reflect the company's performance and the company's value that can affect the investor's decision (Endri, 2019). The company has a responsibility to maintain sustainability and growth to provide hope of profits to investors and the company can continue to exist in carrying out wheel activities in accordance with the wishes and investors can feel extraordinary profits. This is a priority for companies to maximize the value of the company that provides prosperity to investors. Increasing company value has an impact on the increase in the company's stock price, so that it will provide full welfare to shareholders and is shown in the increasing market value (Sugianto et al., 2020). This is in line with what was said by Sharif et al., (2015) who said that investment opportunities that affect market value based on rising share prices will shape the value of the company. This opportunity will illustrate the company's success due to positive future changes created by the company's success in increasing the value of its shares. According to Jatmiko (2015) to get Price to Book Value results there are several steps that can be used among other things: Price Earnings Ratio and Price / Cash Flow Ratio. The author will take the PBV variable as the dependent variable used as the value of the company because PBV has an important role that is used to measure stock prices and is used as a guide in determining the purchase of shares in shares to be bought and the ups and downs in the PBV ratio are equivalent to changes and fluctuations in the value of shares (Putra et al., 2007). In addition, PBV is used to compare the value of shares with the price of books while describing how valuable the market can value the value of an issuer's book. Price To Book Value embodies the capital invested in relationship with the value of the company. This means that if the shareholder value goes up due to the company, the higher Price To Book value is shown (Endri & Fathony, 2020). * Corresponding author. Tel.: +628129204067 E-mail address: (E. Endri) © 2020 by the authors; licensee Growing Science, Canada doi: 10.5267/j.ac.2020.7.008 1104 Empirical studies conducted by Rinnaya et al., (2016) revealed partially showing that TATO as an activity ratio influences the value of the company, but related to the explanation of Liquidity revealed by Daeli and Endri (2018) that a high liquidity ratio actually reduces the value of the company since it is considered that the company has unused funds or is called idle funds. According to Hasibuan et al., (2016) DR had a positive and significant influence on the value of the company as well as ROE affecting the value of the company comparable to research conducted by Putri et al., (2016) which stated that ROE had a significant negative effect and Net Profit Margin has a positive effect on company value which means that if the value of ROE goes down, the value of the company will increase, if Return On Equity goes up, the value of the company will go down, this is in line with what Sari and Endri (2019) who said that ROE is influenced by 3 factors: Net Profit Margin, total asset turnover and debt ratio. This illustrates that the greater the use of debt in the company resulting in the growth of interest, the greater the impact on the level of profits obtained by investors, the greater the ROE the greater the use of debt results in and this brings a negative impact on price of investors. Meanwhile they added that there is a characteristic relationship between leverage ratios and profitability ratios where profitability is considered a major goal in the company and is considered important because the company can pay all its obligations from the results of profits, but on the other hand many companies use their debt to increase all activities used to get profits or its profitability. This is what drives researchers in measuring company value (PBV) as an independent or independent variable by using the ratio of Return On Equity, Net Profit Margin, Debt Ratio, Total Asset Turn Over, and Current Ratio as Dependent Variables. The following PBV data obtained from the Indonesia Stock Exchange in the 2014-2018 cable industry and its financial performance. 2. Literature Review High Price to Book Value (PBV) illustrates that a company in prospects will experience progress going forward, this is what underlies the confidence of a market. And it is a priority for shareholders or investors because the rising PBV reflects the triumph of the owner of the company which is automatically felt by shareholders and other investors. Then the owner of the company in making decisions must pay attention to the results and returns that will be obtained as well as think about and predict everything that can produce profits. This is in line with what was conveyed by Putra et al., (2007) which stated that a good prospect is a company that is able to provide positive information in increasing the value of the company, so that the prospect of (...truncated)