Management Research Studies Journal

Volume -, Number - (- 2023), ISSN: -

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Effect of Profitability and Leverage on Company Value

(Case Study on Banking Sector Companies Listed in LQ45
Period 2018-2022)
Anugrah Hutami Putri1 ; Sri Aulia Khalifa 2

1)
Anugrahutami99@gmail.com, Faculty of Economics & Business, Universitas Mercubuana, Jakarta
2)
sriauliakhalifa@gmail.com, Faculty of Economics & Business, Universitas Mercubuana, Jakarta

Article history

Received: Abstract
dd-mm-yyyy
Accepted: The purpose of this study was to test and analyze the effect of profitability and leverage ratio on
dd-mm-yyyy
Published: company value. This study uses secondary data form annual reports of companies in LQ45 from
dd-mm-yyyy August 2022 until January 2023. The sample of this study is banking company that included in LQ45
which is 7 companies. Based on the completeness of the data, only 6 companies were sampled with
the observation period 2018-2022. The method used in this research is multiple linear regression
analysis. The results showed that Profitability has a positive and significant effect on Company
Value. and Leverage also has a significant effect on company value.

Keywords: Profitability, Leverage dan Company Value

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INTRODUCTION
The banking industry has a very important role in encouraging economic development to
improve the welfare of the wider community. In addition to its role in managing the flow of payments
and its role as an intermediary, banking is also a means of transmitting monetary policy. According to
Detik Finance (2013) Banking companies are the only companies that get guarantees from the
government for their business activities. This is because banking companies receive serious attention
from the government because this company involves funding collected from the public as the main
foundation for the company's operations. Banks are closely supervised by Bank Indonesia as the
central bank of Indonesia, because bank business activities involve many parties in society. Therefore,
a good understanding and management of banking will certainly encourage the creation of a good
financial system. A healthy financial system will have a positive impact on bank performance.
Indonesia's economic situation in 2020-2021 is not going well. The Covid-19 pandemic that
emerged in the past two years has caused a lot of confusion in the economic field, and the government
has implemented various policies. For example: the implementation of restrictions on people's
movement (PPKM), lockdowns, work from home (WFH) and the closure of some tourist areas have
had an impact on national economic growth. As a result, economic activity fell and many people lost
their jobs due to layoffs. Employment (layoffs) and investment allocation through development
projects are disrupted and consequently impact the company's competitive advantage less sustainably
and cause shocks to the company's economic fundamentals.
The following is presented in the form of a graph of the average Banking Company Value in 2018-
2022,
Figure 1.1

Company Value
6.00%
4.00%
2.00%
0.00%
2018 2019 2020 2021 2022

PBV

Source : IDX (Processed data) 2022

Based on the value of the company above, it can be seen from 2018-2022 experiencing
fluctuations. In 2018 it was worth 2.48%, but in 2019 it increased to 4.68%, then from 2020 to 2022
it experienced a fluctuating increase and decrease. The high share value indicates that banking
companies in 2019 have good prospects. This can increase investor interest in choosing several
banking stocks for them to buy. The lowest average company value is 2020 and 2022, the low value
of the Company illustrates that the level of market value is lower than the company's book value.
Basically, there are many factors that can affect the value of the company, but investors and
creditors will first look at the financial statements to see the performance and value of the company.
Profitability and Leverage ratios can be used as a measure of whether a company's value is good or
bad, profitability is a variable measuring the profit or profit achieved by the company. In accordance
with what is stated as the ultimate goal of a company, namely maximizing profit value (Putri, 2015).
Profitability is the ability of a company to generate profits in a certain period. Chumaidah and
Priyadi (2018) reveal that if the profitability value of a company is in good condition, stakeholders
consisting of suppliers, creditors, and investors will see the extent to which the company is able to
generate profits from sales and investment. Sucuahi and Cambarihan (2016) reveal that profitability
can increase a company's value. This is supported by research conducted by Qomariyah (2021),
Wibowo (2021), and Anggraeni and Sulhan (2020) which state that profitability has a positive effect
on company value. This is different from the research conducted by Zuraida (2019) which shows that
profitability has a negative and insignificant effect on company value.

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The second factor that affects firm value is leverage. Leverage is used to measure the
company's ability to meet its short-term and long-term obligations (Wiagustini, 2010 in Lestari, et al
2022). Companies must consider well when determining leverage because it can pose a burden and
risk to the company if the company is in a bad condition, because the use of debt will affect the
company's value. If the company cannot pay off the debt, the company's image will also deteriorate
(Lestari, et al 2022). Leverage is the use of financial resources with the expectation that it will provide
additional benefits that are greater than the fixed costs so that it will increase the profits available to
shareholders, with greater profits, the company's value will increase (Sartono, 2010). Research
conducted by Wibowo (2021), Anggraeni and Sulhan (2020), and Salainti (2019) states that leverage
has a positive effect on firm value. This is different from the research conducted by Kolamban, et al
(2020) which shows that leverage has a negative and significant effect on firm value. The objectives
to be achieved from this research are as follows:
1. To prove the effect of profitability on firm value in Banking companies. in 2018-2022.
2. To prove the effect of leverage on firm value in Banking companies in 2018-2022.

LITERATURE REVIEW
Signaling Theory. According to (Sholichah et al., 2021) Signalling Theory is a theory that
arises from the imbalance of information owned or information asymmetry between management
(agent) and shareholders (principal). Basically, signal theory shares a reflection of how the signals
given by the industry are able to have an impact on investor behavior in the capital market which has
an impact on the rise and fall of stock prices.

Company Value. Company value is the inves tor's opinion of the company. Based on the
opinion (Wiyono & Kusuma, 2017), company value is usually related to stock prices. Shareholders
certainly have high expectations for the value of the company, a high value reflects the level of
prosperity of shareholders. Company value is the price that prospective buyers are willing to pay if
the company is sold (Husnan, 2014 in Yanti and Darmayanti, 2019). Company value will be used as
a measure of the success of a company's management so that it can increase trust for shareholders and
the fulfillment of the welfare of shareholders reflects the high value of the company. The company's
value will be reflected in the stock price seen in the capital market. The higher the company's share
price, the better the company's value. This will invite investors to invest in the company. The wealth
of shareholders and companies is presented by the stock price which is a reflection of investment,
financing and asset management decisions (Yanti and Darmayanti, 2019). Tobin's Q is a ratio that can
be used to consider the potential development of a company's share price. This ratio is considered
capable of providing the best information, because it can explain various phenomena of company
activities, such as cross- sectional differences in investment decision making and diversification. If
the results formulated using the proxy of Tobin's Q to measure the value of the company show a
number greater than one, it indicates that the company is able to provide good value to its shareholders
(overvalued). Conversely, if the number resulting from the Tobin's Q measurement is less than one, it
indicates that the company does not have good company value (undervalued). Firm value can be
formulated in the following way:

Profitability Profitability. is a ratio used to show how a company is able to generate profits
or profits (Kasmir, 2019). A company with a large profit income can mean that the company has good
capabilities. This will provide a signal to investors that means management is able to realize the
efficiency of asset turnover in the company. The existence of this information can result in the value
of the share price of the company increasing due to the attractiveness of investors who increase due to

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positive signals. The greater the power of the company in fighting for profit results, the greater the
assets that the company must return. A large return on assets is an aspect of investor interest in buying
shares (Muliawati & Sugiyono, 2022). According to Cashmere (2019) in measuring Return on Asset
can be formulated in the following way:

Net Profit
𝑅𝑂𝐴 =
Total Asset

Based on research conducted by Qomariyah (2021), Wibowo (2021), and Anggraeni and Sulhan
(2020), it is stated that profitability has a positive effect on firm value. This is different from the
research conducted by Zuraida (2019) which shows that profitability has a negative and insignificant
effect on firm value. Based on the theory and results of previous research, a hypothesis can be
formulated, namely H1 : Profitability has a positive effect on firm value.

Leverage. Leverage is a description of the use of debt by a company in order to finance the
company's operational activities (Rudangga and Sudiarta, 2016). In other words, leverage can be
referred to as a ratio used to measure how much of a company's debt burden is borne in fulfilling assets
or the extent to which these assets are covered by debt. Wulandari and Wiksuana (2017) reveal that
leverage has a positive influence if the company is able to reflect on the debt to improve its operational
activities. leverage is utilized by companies to expand their capital to build benefits. A high leverage
value illustrates that the organization is not viable, which implies full liabilities are more prominent
than all of its resources (Investigation, 2011 in Ranti and Pertiwi, 2022). According to Cashmere
(2019) in measuring leverage using the Debt to Asset Ratio can be formulated in the following way:

Total Debt
𝐷𝐴𝑅 =
Total Asset

Research conducted by Wibowo (2021), Anggraeni and Sulhan (2020), and Salainti (2019)
states that leverage has a positive effect on firm value. This is different from the research conducted
by Kolamban, et al (2020) which shows that leverage has a negative and significant effect on firm
value. Based on the theory and results of previous research, a hypothesis can be formulated, namely:
H2 : Leverage has a positive effect on firm value.

Figure 2.1 Framework of Thought

Profitabilily (X1)
Company Value (Y)
Leverage (X2)

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RESEARCH
Type of Research and Research Population. This approach uses a quantitative approach, an
approach with data collection and using research instruments with statistical analysis with the aim of
testing predetermined hypotheses and variable relationships to the object under study are causal,
namely the type of research with problem characteristics in the form of a cause-and-effect relationship
of an event or event in a research object (Sugiyono, 2017). The population of this study are banking
companies listed on the Indonesia Stock Exchange in 2018-2022.

Sampling Technique. The sample is part of the population that has characteristics. Purposive
sampling is a technique used in sampling based on certain criteria or considerations (Sugiyono, 2017).
The criteria used by the authors in this study are:

Tabel 3.1
Sampling Criteria

No Kriteria Total
1 Banking companies listed in LQ45 from August 2022-January 2023 7
2 Banking companies that do not publish consecutive annual reports (1)
Number of samples that eligible 6
Number of samples that eligible in 2018-2022 30
Source: Bursa Efek Indonesia diolah, 2022

Data Collection Technique. The types of data used in this study are documentary data and
secondary data. The data is in the form of annual reports and financial reports of banking sector
companies for the period 2018-2022. The data source is obtained from the company's website directly.
The following are the names of the companies included in the research sample:

Tabel 3.2
No Stocks Code Name Of Company
1 BBCA PT. Bank Central Asia
2 BBRI PT. Bank Rakyat Indonesia
3 BBNI PT. Bank Negara Indonesia
4 BMRI PT. Bank Mandiri
5 BBTN PT. Bank Tabungan Negara
6 BRIS PT. Bank BRI Syariah

Descriptive Analysis. According to Sugiyono (2015) states that the statistical method used to
analyze data by describing or describing the data that has been collected as it is without intending to
make general conclusions or generalizations.

Panel Data Analysis. Panel data is a combination of cross section and time series data. Time
series data or time series data is a series of values taken at different times. While cross section data,
which is data consisting of one or more variables at the same time.

Panel Data Regression. According to Basuki (2016), to choose the most appropriate model
in managing panel data, there are several tests that can be done, namely:
1. The Chow test is a test to determine the most appropriate fixed effect or random effect model
used in estimating panel data.
2. The Hausman test is a statistical test to choose whether the fixed effect model or random effect
model is the most appropriate.

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3. The Lagrange Multiplier test is used to determine whether the random effect model is better
than the general effect model using the Lagrange multiplier model.
Hypothesis Testing.
a. Multiple Determination Coefficient (R²) Describes how far the regression model's ability to
explain variations in the independent variable affects the dependent variable. The greater the
R- squared result, the better because it identifies better independent variables in explaining
the variables.
b. The F statistical test (F test) basically shows whether all independent or independent variables
included in the model have a simultaneous influence on the dependent variable.
c. The t test is used to determine whether each independent variable partially has a significant
effect on the dependent variable, in other words, to determine whether each independent
variable can explain the changes that occur in the dependent variable significantly.

RESULTS AND DISCUSSION

Descriptive Analysis. Based on the results of data processing with Eviews 9, it can be seen
that the number of observation data is 30 companies. Company value calculated by the Tobin's Q
formula has an average of 1.058333, the mean value of more than one shows that the company value
is seen by investors as having good company performance. Then the standard deviation of 0.343542
is smaller than the average value which indicates good distribution data. The results of profitability as
measured using ROA, have an average of 1.64 still greater than the standard deviation of 0.962683,
so this shows that the data distribution is good. The results of Leverage as measured using DAR show
a standard deviation of 0.222654 which is still smaller than the average value of DER of 0.749,
therefore the DER distribution data is good.
Panel Data Regression Analysis. Based on the Commont Effect Model test results in table
4.1, the Company Value prediction can be entered into the following equation:
Firm Value (Y) = 0.156662 + 0.227738 ROA + 0.705182 DAR + e
Table 4.1

Hasil Output : Eviews 9

Based on the Fixed Effect Model test results in table 4.2, the Company Value prediction can be
entered into the following equation:
Firm Value (Y) = 0.017518 + 0.069331 ROA + 1.237799 DAR + e

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Table 4.2

Hasil Output : Eviews 9

Based on the Random Effect Model test results in table 4.3, the Company Value prediction can be
entered into the following equation:
Firm Value (Y) = 0.112231 + 0.090490 ROA + 1.065019 DAR + e
Table 4.3

Hasil Output : Eviews 9

Panel Data Regression Model Selection. The Chow Test results in table 4.4 show that the
probability value is 0.0000 / <0.05 so it can be concluded that H0 is rejected and H1 is accepted, or by
using the Fixed Effect Model. Because the Fixed Effect Model is selected, the next test will be the
Haustman Test.
Table 4.4

Hasil Output : Eviews 9

The Haustman test results in table 4.5 show that the probability value is 0.0157 / <0.05, it can be
concluded that H0 is rejected and H1 is accepted. So from several panel data model selection tests

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that have been carried out, the most appropriate model used is the Fixed Effect equation model for this
study, the regression equation is obtained as follows:
Company Value (Y) = 0.017518 + 0.069331 ROA + 1.237799 DAR + e

Table 4.5

Hasil Output : Eviews 9

Based on the equation above, it can be explained that:

a. The constant 0.017518 states that if ROA and DAR are 0, then the Tobin's Q value is
0.017518.
b. The ROA regression coefficient of 0.069331 states that every 1% addition of the ROA factor,
the amount of Tobin's Q will increase by 0.069331 with the assumption that the other ratios
are constant.
c. The DAR regression coefficient of 1.237799 states that every 1% addition of the DAR factor,
the amount of Tobin's Q will increase by 1.237799 assuming that the other ratios are
constant.

Coefficient of Determination Test Results (R2). Based on table 4.6, it can be seen that the
Adjusted R-squared is 0.971016 or 97.10% which indicates that ROA and DAR have an effect of
97.10% on Firm Value and the remaining 2.90% is influenced by other factors outside this research
model.
Table 4.6

Hasil Output : Eviews 9

F test. The F test is used to test whether the independent variables included in the model have
a joint influence on the dependent variable, with the following hypothesis:
Ho = Overall the independent variable has no significant effect on the dependent variable
Ha = Independent variables together have a significant effect on the dependent variable Hypothesis
testing is done by comparing the probability value of F statistics with the level of significance. The
decision-making criteria are as follows:
a. If the probability value of F statistic > α, α = 5% (0.05) then H0 is accepted.
b. If the Probability value of F statistic < α, α = 5% (0.05) then H0 is rejected.
From table 4.6 above, it can be seen that the probability value of F statistics is smaller than 0.05,
namely 0.0000. This shows that Ho is rejected and Ha is accepted, which means that the independent
variables, namely Profitability and Leverage together have a significant effect on Firm value.

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Uji T.

Table 4.7

Hasil Output : Eviews 9

Effect of Profitability on Company Value. Based on the t-test results in table number 4.7, it
can be seen that the t-statistic value is 2.699776> T table = 2.04840714 with a probability of 0.0131.
The probability value is smaller than the value = 0.05 (0.0131 <0.05) so this means that H0 is rejected
and it can be concluded that ROA has a significant effect on Firm Value. The ROA variable has a
coefficient of + 0.069331 which is positive, meaning that there is a positive relationship between ROA
and Firm Value.
Leverage effect on company value. Based on the t-test results in table number 4.7, it can be
seen that the t-statistic value is 4.234938> T table = 2.04840714 with a probability of 0.0003. The
probability value is smaller than the value = 0.05 (0.0003 <0.05) so this means that H0 is rejected and
it can be concluded that DAR has a significant effect on Firm Value. The DAR variable has a
coefficient of + 1.237799 which is positive, meaning that there is a positive relationship between DAR
and Firm Value.

CONCLUSIONS
Based on the results of research and testing that has been carried out on the effect of
profitability and leverage on firm value in the banking sector using ROA and DAR calculations with
Tobin's Q testing method, the following conclusions can be drawn:
1. Profitability has a positive and significant effect on firm value.
2. Leverage has a positive and significant effect on Firm Value.

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LITERATURE

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