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The impact of financial leverage to profitability study of non-financial

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European Journal of Economics, Finance and Administrative Sciences
ISSN 1450-2275 Issue 32 (2011)
© EuroJournals, Inc. 2011
http://www.eurojournals.com

The Impact of Financial Leverage to Profitability Study of

Non-Financial Companies Listed in Indonesia Stock Exchange

Arif Singapurwoko
Faculty of Economics, Universitas Islam Indonesia
Tel: +62 818 043 53019
E-mail: arif_singa_uii@yahoo.com

Muhammad Shalahuddin Mustofa El-Wahid

Faculty of Economics, Universitas Islam Indonesia
E-mail: moestofa@yahoo.com

Abstract
Debt is used by many companies to leverage their capital and profit. However, debt is not
the only factors that effect to leverage capital and profit. There are several factors that can
affect the companies’ profitability. This research uses operational decision factor,
macroeconomics factor, firm size factor, and industry factors to help understand the effect
of debt to profitability. Operational decision factor is proxy by total assets turnover to
explain how well the companies able to utilize their assets to generate profit. Firm size
factor is proxy by assets to measure the companies’ power to generate profit. While macro
economics factor is proxy by BI rate because it can represent the inflation effect and the
impact to the bank’s interest rate. The uniqueness of this research is to add industry factor
to compensate the other factors in determining the companies’ profitability. The result
indicates that in uncategorized (not categorized into different industries) data, debt, firm
size, and operational decision effect positively significant, and macroeconomics effect
insignificantly towards profitability. In addition, industry factor is found to affect
companies’ profitability.

Keywords: Profitability, debt, operational decision, firm size, macroeconomics, industry,

equity multiplier, total assets turnover (TATO), assets, BI rate

1. Introduction
Debt is one of the tools used by many companies to leverage their capital in order to increase profit.
However, the affectivity of debt to increase profitability varies between companies. The ability of the
company’s management to increase their profit by using debt indicates the quality of the management’s
corporate governance. Good corporate governance shows the companies’ performance on their use of
debt to increase their profit (Maher and Andersson, 1999).
One method that can be use to measure the effectiveness of debt to maximize the profit is by
using Du Pont chart analysis. Du Pont chart analysis can describe the relationship between profitability
and the use of debt as reflected by return on equity ratio of a company. The proper use of debt can raise
the return on equity ratio. This means that the company’s management can make use of the debt to
increase the profit. It also can indicate the ability of company’s management to maximize its operation
on assets in making profit (Brigham and Ehrhardt, 2005).
137 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

However, profitability might not only be affected by debt. Other factors might affect the
profitability of the companies whether they are internal factors or external factors. Internal factors are
reflected by operating decisions and companies’ size, while external factors are reflected by the type of
industry that the companies run its business and the macro factors that might affect directly to the
companies’ performance.
Profitability can be affected by operating decisions when the assets are used effectively to
increase profit. Operating decisions can indicate the effectiveness of the companies’ management in
making the profit from the assets used. Therefore operational efficiency can be achieved by dividing
sales or revenue with total assets (Sari, 2007).
However, to increase the assets to generate more profits, companies might use leverage. One
type of leverage that companies use is debt. When debt is used to expand the companies by adding
more operational assets, then it can generate more cash flows which are expected to increase the value
of return on equity ratio (Brigham and Ehrhardt, 2005).
Moreover, return on equity can also be useful in comparing the profitability of the company to
the other company in the same industry (www.investopedia.com). This is important because different
industry might produce different profitability. As it is explained by Michael Porter that industry
presents different pattern of profitability due to different forces that the industry exposed to such as
concentration, entry barriers, and growth (Spanos, Zaralis, and Lioukas, 2004).
In addition, industry also might be affected by macro factors. Such macro factors that might
affect the industry and company’s profitability are Bank Indonesia interest rate, inflation, Gross
Domestic Product, government policy, political condition, and natural environment condition.
However, it might not be possible to take into account all of the macro factors to be included in the
analysis. The factors that can be valued in scale are Bank Indonesia interest rate, inflation rate, and
Gross Domestic Product. Bank Indonesia interest rate, inflation rate, and Gross Domestic Product
factor are related to each other. If the Gross Domestic Product increases, then there is possibility that
the inflation rate will also increase. Then if the inflation rate increases, the government will try to
suppress it by increasing the Bank Indonesia interest rate (Chen, and Mahajan, 2008).
Therefore, the appropriate factor to represent the external factor is the Bank Indonesia interest
rate. One of the strong reasons is that Bank Indonesia interest rate directly affects the profitability of
the company by reducing the operating profit before taxes.

2. Previous Research
Profit is defined as the excess of the amount of sales and other income after deducted by all costs.
Profit is the term used as the net income performed by the company. Profit can be classified into
several categories such as:
• Sales or revenues used to show the income gained before it is subtracted by costs.
• Earning before interest, tax, depreciation, and amortization (EBITDA) which shows the
operational income before it is deducted by other non operational costs.
• Earning before interest and tax (EBIT), one of the commonly used to reflect the operational
income instead of EBITDA. EBIT is usually used by most financial companies to measure the
ability of a company to pay the liabilities.
• Earning before tax (EBT), that is usually used to compare with EBIT to measure the amount of
interest cost contributed to the net income.
• Net income, that is the bottom line of income after it is deducted by all costs that enjoyed by the
equity holders.
The best category of profit that will be used in this research is net income. For net income is the
profit that is enjoyed by the equity holders, and it shows the ability of the company to give them
returns (Brigham and Houston, 2007).
There are different ways of analyzing net income, and it depends on the ratios used. For
example, in calculating the profitability ratio, net income is commonly used to measure the
138 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

performance of the company in using its assets, equity, investment, and to compare with the sales that
the company can achieve (Brigham and Ehrhardt, 2005).
One of the ways to measure the profit enjoyed by shareholders is by using return on equity
(ROE) ratio. The reason is that ROE ratio is comparable between one companies to the other and can
indicate the profitability of one industry with the other (Helfert, 2001).
Return on equity (ROE) ratio indicates the profitability of the company. ROE measures the rate
of return on common stockholder’s investment.
Net Income
ROE = (1)
Common Equity
According to Brigham and Ehrhardt (2005), the value of ROE is affected by profit margin ratio,
total assets turnover and equity multiplier or so called asset to equity ratio. Equity multiplier ratio is
one of the financial ratios that can describe the availability of debt in making profit.
ROE = Profit margin × Total AssetsTurnover × Equity multiplier (2)
Therefore, one way to increase ROE is by increasing total assets turnover. The equation also
explains that if equity multiplier increases, while the other factors are constant, ROE will increase. This
means that the change in the value of total assets turnover will positively change the value of ROE.
Debt on the other hand is usually defined as a contractual obligation to make a fixed payment
or to make series of payments (Williams, Smith, and Young, 1998). Therefore, debt can also be
defined as the liabilities mentioned in the balance sheet.
Debt is used in many companies to leverage its financial performance. The companies increase
its financial performance by using debt to finance the companies’ operation. The increase in
companies’ operation is expected to increase the net income. The increase in net income will impact on
the increase of return on equity. Therefore, the equity holder expected that by using more debt, it will
increase the return on equity (ROE) (Brigham and Houston, 2007).
There are several previous researches regarding the effect of debt to the value of ROE. One of
them is Husnan (2001) that described that the use of debt statistically significant to the change in the
value of non-multinational companies ROE, while it is not significant to the multinational companies.
However, the research made by Harjanti and Tandelilin (2007) to all manufacture companies listed in
Jakarta Stock Exchange from 2000 to 2004 indicated that profitability which was proxy by ROE, basic
earning power (BEP), and gross profit ratio had negative significance to leverage.
Equity multiplier describes the value of all assets compare to the value of equity of the
company. It can also be considered as the amount of debt used over the total assets that the company
has. The formula for equity multiplier is:
Total Assets
Equity Multiplier = (3)
Total Equity
It can also be:
Total Debt
Equity Multiplier = 1 + (4)
Total Equity
The debt indicates all the current liabilities and long term debt. While the assets which is used
in calculating debt ratio, are the total assets mentioned on the balance sheet. This ratio indicates the
size of debt in accordance to the assets owned. Theoretically the increase in the value of debt ratio will
also trigger the increase value of ROE ratio (Brigham and Ehrhardt, 2005).
Total assets turnover indicates the operational decision made by the management. It is
measured by dividing sales with total assets. Total assets can show the management’s performance
based on the amount of sales that they can produce by investing into several amount of assets.
Total Sales
TATO = (5)
Total Assets
The research made by Listiadi (2007) on PT. Merck Tbk. annual report between 2003 and 2004
found that TATO ratio gives direct impact to ROE. This shows that operational decisions have direct
impact to company’s profitability.
139 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

Firm size indicates the value of assets that the company has. When a company has more assets
than the other related company it indicates not only it is bigger than the other one but also it has better
production capacity. When a company has better production capacity than the other related company,
then it has potential to generate more profit better than other related company. However, at a certain
amount of assets, the productivity will might reach its maximum to meet the demand.
As Kotany (1922) research found that every different industry presents its optimum size such as
shoe manufacturing and tanning industry. They have optimum size when the companies have capital or
assets in the value between $ 100,000 and $ 250,000. While for meat packing industry the optimum
size is between $ 10,000,000 and $ 25,000,000. This research is strengthened by Ammar, Hanna,
Nordheim, and Russell (2003) findings that for electrical contractor industry the profitability of a
company drops as it grows larger than $ 50,000,000 in sales.
To determine the effect of debt to the company’s profitability there should be external factors
that needed to be considered which affect the management decision on debt. BI rate is one factor that
can influence directly to the company’s profitability. BI rate can influence the bank’s interest rate and
the lending decision. The greater the BI rate, the greater the bank’s interest rate. This factor will
influence the value of net income in the company and the borrowing decision for their capital structure.
The higher the interest rate, the more the company is avoiding borrowing more loans.
Moreover, BI rate can indicate the macroeconomic conditions. It is written in www.frontier-
economics.com that nominal interest rates have strong positive correlation with inflation. This is
strengthened by the statement made in www.bi.go.id that Bank Indonesia will raise the BI rate if future
inflation is forecasted ahead of the current inflation target. This might explain when inflation rate
increase, BI rate will also increase.
Therefore, based on the explanation above, the value of BI rate can indicate the macroeconomic
condition that might affect the company’s financial performance. As stated in www.bi.go.id that BI
rate reflects the movement in the interbank overnight rate and acts as the reference for bank deposit and
lending rate.
Different industry presents different profitability. One of the old researches by Kotany (1922)
found that different industry generates different level of profitability. Each industry requires different
amount of capital and generates different amount of return such as the rates of profit in shoe
manufacturing industry is greater than tanning, commercial wheat flour mill, meat packing, milk and
milk products, and agriculture industry.
This is supported by Helfert (2001) on his book that financial performance measures and its
meanings vary by industry segments. Type of industry indicates risk, and tenacity to economic and
political condition that affect the companies’ profitability. Therefore different industry might presents
different rate of profitability.
The research on the use of Du Pont analysis to measure the profitability of a company has been
used by many researchers. One of them is Listiadi (2007) who described that Du Pont analysis to
investigate the company’s profitability that uses return on equity analysis is best used to measure the
return on stockholder’s capital.
Chen and Mahajan (2008) investigated the effects of macroeconomic conditions on corporate
liquidity in 45 countries from 1994 to 2005. The results show that macroeconomic variables such as
gross domestic product growth rate, inflation, short term interest rate and government deficit affect
corporate cash holdings. Company tends to hold more cash when the macroeconomy is developing,
and reduce the cash for investment when the macroeconomy is declining. This means that when the
macroeconomic condition is declining, then the value of return on equity ratio will also decline because
the cash is used for investment.
The other findings made by Lawrence, Diewert, and Fox (2004) describe that firm’s profit is
affected by the change in productivity, price, and firm’s size. Their research founds that when the
companies increase their size to increase their productivity, the shareholders will enjoy higher return
even though the product price decreases. This means that when the companies size increase, the profit
of the companies will also increase.
140 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

McGahan and Porter (1997) used 72,724 observations or an average of 5,196 business
segments per year from 1981 to 1994 on their research. It was found that the results of the research
provide strong support for the idea that industry membership has an important influence on
profitability. Their research represents all economic sectors other than finance and indicates that
manufacturing industry accounts for a smaller of profit variance than lodging/entertainment, service,
wholesale/retail trade, and transportation industry.

3. Hypotheses Development
Based on the explanation above there are several hypotheses that are needed to be proved. Since the
main reason of this research is to find out the impact of financial leverage to profitability, then the first
hypothesis will be:
H1: Debt positively affects companies’ profitability.
Since profitability is not only affected by debt itself and this research uses Du Pont equation
model to support the research, total asset turnover is used to give more insight on how companies profit
is generated from assets (Helfert, 2001). Therefore the second hypothesis is:
H2: Total assets turnover positively affects companies’ profitability
To give more insight on factors that affect profitability, other factors outside the Du Pont
equation model might need to be considered. Based on previous research that firm size has positive
effect on company’s profitability, it is considered to be included in this research to give more insight
on the factors that affect profitability. Therefore the third hypothesis is:
H3: Firm size positively affects companies’ profitability.
However, according to previous research that profitability can be affected by external factors.
Chen and Mahajan (2008) describe that interest rate affect investment decisions, and this will affect the
value of return on equity. Moreover, interest rates that proxy by Bank Indonesia rate can indicate the
macroeconomic condition that might affect company’s profitability (www.bi.go.id). Therefore, the
fourth hypothesis is:
H4: Bank Indonesia rate negatively affects company’s profitability.
The other external factor that might affect profitability is type of industry. As previous research
such as McGahan and Porter (1997) indicated that each industry generates different form of
profitability. Therefore, the fifth hypothesis is:
H5: The type of industry affects the companies’ profitability.

4. Research Methodology
The idea of writing this research is to know the impact of the use of debt to companies’ profitability.
However, based on the theory mentioned on section two, debt and profit cannot be compared directly.
Debt and profit should be associated with return on equity (ROE), equity multiplier, total assets
turnover (TATO), firm size, industry, and Bank Indonesia (BI) rate. Afterwards it can be found the
relationship between debt and profitability.
Therefore the test uses regression equation model with dummy variable to know the effect of
using debt and the influence of profit to the level of ROE, equity multiplier, TATO, firm size, the
industry and BI rate. In the regression model, equity multiplier, TATO, firm size, the industry and BI
rate will be the independent variables, while the dependent variable will be ROE. The dependent one
then will be regressed to show the relationship between each independent variables influencing the
dependent variable, and combine independent variables influencing the dependent variable at the same
time.
Profitability = f (equity multiplier ,TATO, macro economics, industry )
However, since industry is qualitative measures, then industry variable will be treated as
dummy variable or will be categorized and tested in each industry by regression. The reason is that to
know whether the presence or absence of industry variable can affect the profitability.
141 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

4.1. The Equation

From the profitability function described above, it can be put into equation as follows:
ROE =∝ + β1EM + β 2TATO + β 3lnTA − β 4 BIrate (6)
Where as:
• β1 indicates the coefficient value of equity multiplier, and expected to be positive.
• β 2 indicates the coefficient value of total assets turnover, and expected to be positive.
• β3 indicates the coefficient value of logistic total assets, and expected to be positive.
• β 4 indicates the coefficient value of Bank Indonesia rate, and expected to be negative.
The equation six above will test the first until forth hypothesis. While to test the fifth
hypothesis, dummy variables could be used in the regression equation above to represent the industry
factor. However, based on the trial that pre-tested on SPSS and Eviews statistical program, the model
cannot be done. The system recommends excluding one of the eight dummy variables to enable the
equation to run. Therefore, the regression equation using eight dummy variables to examine the effect
of industry cannot be done.
The other method that can be done is by calculating the mean of ROE to the whole samples
(which will be called uncategorized data) and to samples that are categorized based on the industry.
Therefore, to test the fifth hypothesis Kruskal-Wallis test that uses chi square test and median test is
applied.
The observed mean is the mean of ROE that will be acquired from each industry. The expected
mean is the mean of ROE that will be acquired from the whole samples or uncategorized data.

4.2. Sampling Method

The samples of companies will be acquired from Indonesian stock exchange (IDX) that exist from
2003 to 2009 and based on the three most highest and lowest ROE value in each eight different
industries. The test will be made to each industry listed in (IDX) and to the whole 48 chosen
companies listed which have 24 highest numbers of ROE and 24 lowest numbers of ROE from eight
different industries. Therefore there will be six companies for each industry. To examine the
performance, each company will be taken from year 2003 report to 2009 report. The reason is to
minimize the biases of analyzing the affect of debt to profitability. To examine the affects of the
independent variables to ROE based on industry, the equation above will be used to each industry.
There will be 6 companies and 42 samples in each industry from 2003 to 2009.
However, in this thesis the finance industry is not examined. Finance industry is considered to
have higher number of debt compare to other industries that might affect the overall value of the
equation. This might cause biases to the equation value and might not represent the overall industry.

4.3. Scope of the Research

The list of industry will be taken from the Indonesian Stock Exchange, and it will be used to group the
companies to meet the desired results. The idea of using the industry as one of the external variables is
to know that using debt to increase income is affected by the industry which the company in.

4.4. Samples
The samples are the non-financial companies from 2003 to 2009, and there were 228 existing
companies that listed in Indonesian Stock Exchange. Then, the list was reviewed to eliminate those
companies that had negative equity record and ranked based on the industry which they were in and
based on the three highest and three lowest ROE that they had in 2009. The result shows that there are
48 companies such as follows:
I. Agriculture industry:
1. PT. Astra Agro Lestari Tbk
142 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

2. PT. Dharma Samudra Fishing Industries Tbk

3. PT. Inti Agri Resources Tbk / Inti Kapuas Arowana
4. PT. Bumi Teknokultura Unggul Tbk
5. PT. PP London Sumatra Tbk
6. PT. Tunas Baru Lampung Tbk
II. Mining Industry:
7. PT. Bumi Resources Tbk
8. PT. Petrosea Tbk
9. PT. Exploitasi Energi Indonesia Tbk
10. PT. Resource Alam Indonesia Tbk / Kurnia Kapuas Utama Glue Industries
11. PT. Cita Mineral Investindo Tbk / Cipta Panelutama
12. PT. Ratu Prabu Energy Tbk / Arona Binasejati
III. Basic Industry and Chemical Industry:
13. PT. Tembaga Mulia Semanan Tbk
14. PT. Budi Acid Jaya Tbk
15. PT. Aneka Kemasindo Utama Tbk
16. PT. Siwani Makmur Tbk
17. PT. Charoen Pokphand Indonesia Tbk
18. PT. Intanwijaya Internasional Tbk
IV. Miscellaneous Industry:
19. PT. Indomobil Sukses Internasional Tbk
20. PT. Indospring Tbk
21. PT. APAC Citra Centertex Tbk
22. PT. Prima Alloy Steel Tbk
23. PT. Century Textile Industry (Centex) Tbk
24. PT. Panasia Indosyntec Tbk
V. Consumer Goods Industry:
25. PT. Davomas Abadi Tbk
26. PT. Multi Bintang Indonesia Tbk
27. PT. Indofarma Tbk
28. PT. Taisho Pharmaceutical Indonesia Tbk/Bristol-Myers Squibb Indonesia
29. PT. Unilever Indonesia Tbk
30. PT. Kedaung Indah Can Tbk
VI. Property, Real Estate and Building Construction Industry:
31. PT. Bhuwanatala Indah Permai Tbk
32. PT. Bintang Mitra Semestaraya Tbk
33. PT. Citra Kebun Raya Agri Tbk /Ciptojaya Kontrindoreksa
34. PT. Indonesia Prima PropertyTbk
35. PT. Jakarta International Hotel and Development Tbk
36. PT. Adhi Karya (Persero) Tbk
VII. Infrastructure, Utilities and Transportation Industry:
37. PT. Perusahaan Gas Negara (Persero) Tbk
38. PT. INDOSAT Tbk
39. PT. Telekomunikasi Indonesia Tbk
40. PT. Berlian Laju Tanker Tbk
41. PT. Centris Multi Persada Pratama Tbk
42. PT. Pelayaran Tempuran Emas Tbk
VIII. Trade, Services and Investment Industry:
43. PT. Tunas Ridean Tbk
44. PT. Alfa Retalindo Tbk
45. PT. Fast Food Indonesia Tbk
143 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

46. PT. Jasuindo Tiga Perkasa Tbk

47. PT. Star Pacific Tbk / Lippo E-net
48. PT. Limas Centric Indonesia Tbk
However, based on the pre-test, some extreme values are considered to be excluded from the
analysis to reduce the biases due to large values. The excluded samples are PT. APAC Citra Centertex
Tbk and PT. Century Textile Industry (Centex) Tbk on 2008.

4.5. Source of Data

The data are taken from the financial report of the companies and from IDX performance summary of
listed companies. The ratios are calculated manually by taking the total equity, total assets, total sales,
and net income, while the BI rate is taken from Bank Indonesia annual report.

5. The Result of Hypothesis Testing

The relationship of equity multiplier, TATO, firm size, and BI rate with ROE can be seen
simultaneously in the correlation coefficient compound (multiple R) result that equal to 0.129. This
means that there is a relationship between equity multiplier, TATO, firm size, and BI rate, and ROE of
all companies simultaneously.
F test is used to see whether there is an influence of equity multiplier, TATO, firm size, and BI
rate simultaneously to ROE. The value of F statistic is equal to 12.233 and the significance level of F is
0.000. This indicates that there is a significant influence between equity multiplier, TATO, firm size,
and BI rate, and ROE. The four variables can only explain the variation of ROE that is equal to 12.9%.
The rest of 87.1% is explained by other variables that are not included in this research model.
ROE = −1.240 + 0.015 EM + 0.062 TATO + 0.075 lnTA + 1.861 BIrate

t value - 4.747 3.623 1.914 4.702 1.260

The equation above shows that equity multiplier, TATO and firm size have positive
relationship toward ROE simultaneously. This means that the higher the level of equity multiplier,
TATO and firm size, the higher the value of ROE. On the other hand, BI rate have positive relationship
toward ROE simultaneously. This indicates that the higher the values of BI rate will higher the value of
ROE. Moreover, the equation model indicates that simultaneously, the independent variable has the
value of t – 4.747 and it significantly affects ROE (sig. < 0.000). This shows that the independent
variables become the influencing factors toward ROE even though it has negative relationship.

5.1. The Result of H1

The relationship between equity multiplier and ROE is identified positive. This can be seen from the
table below.

Table 1: The Relationship of ROE to Equity Multiplier

Independent Variable t Sig.

Equity Multiplier 3.623 0.000
Source: Processed data

To test whether there is influence toward equity multiplier partially to ROE, t test is used.
Through the result from data processing, the value of t statistic obtained is equal to 3.623, and the level
of significance is 0.000 (sig.<5%). This shows that there is a significant effect between equity
multiplier and ROE. In conclusion, partially equity multiplier of all companies significantly affects
ROE and H1 is accepted.
144 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

5.2. The Result of H2

The relationship between TATO and ROE is identified positive.

Table 2: The Relationship of ROE to Total Assets Turnover (TATO)

Independent Variable t Sig.

Total Assets Turnover (TATO) 1.914 0.056
Source: Processed data

To test whether there is influence toward TATO partially to ROE, t test is used. Through the
result from data processing, the value of t statistic obtained is equal to 1.914, and the level of
significance is 0.056 (sig.<10%). This shows that there is a significant effect between TATO and ROE
in 90% confidence. In conclusion, partially TATO of all companies significantly affect ROE and H2 is
accepted at 10% significance.

5.3. The Result of H3

The relationship between firm size and ROE is identified positive.

Table 3: The Relationship of ROE to Firm Size

Independent Variable t Sig.

Firm Size 4.702 0.000
Source: Processed data

To test whether there is influence toward firm size partially to ROE, t test is used. Through the
result from data processing, the value of t statistic obtained is equal to 4.702, and the level of
significance is 0.000 (sig.<5%). This shows that there is significant effect between firm size and ROE.
In conclusion, partially firm size of all companies significantly affects ROE and H3 is accepted.

5.4. The Result of H4

The relationship between BI rates and ROE is identified positive.

Table 4: The Relationship of ROE to Bank Indonesia (BI) Rate

Independent Variable t Sig.

Bank Indonesia (BI) Rate 1.260 0.209
Source: Processed data

To test whether there is influence toward BI rates partially to ROE, t test is used. Through the
result from data processing, the value of t statistic obtained is equal to 1.260, and the level of
significance is 0.209 (sig.>5%). This shows that there is no significant effect between BI rates and
ROE. In conclusion, BI rate of all industries does not significantly affect ROE and H4 is rejected.

5.5. The Result of H5

This section will analyze the differences in ROE mean among the industries to determine whether there
are differences in profitability between one industries and the other. The means of ROE in each
industry are as follows:
145 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)
Table 5: Industries Descriptive Analysis

Industry Mean Std. Deviation

Agriculture -0.017 1.082
Mining 0.063 0.388
Basic Industry and Chemicals 0.083 0.620
Miscellaneous -0.049 0.329
Consumer Goods 0.280 0.590
Property, Real Estate, and Building 0.017 0.149
Construction
Infrastructure, Utilities, and Transportation 0.126 0.268
Trade, Services, and Investment 0.060 0.226
Uncategorized Mean (all data) 0.071 0.541
Source: Processed data

Based on the table 5, it can be seen that each different industry generates different profitability.
However, to prove that those industries are statistically different, further analysis is needed.
The best statistical analysis that can describe the differences in mean of industries’ ROE that
presented in table 5 is k-independent sample test. k-independent sample test uses chi square test to
determine the significant differences between one industry’s ROE with the other. The types of k-
independent sample test to ensure that there are differences in mean among the industries are Kruskal-
Wallis test and Median test.

Table 6: Chi Square Test

Kruskal-Wallis Test Median Test

X2 df. Asymp. Sig. N Median X2 df. Asymp. Sig.
ROE 32.800 7 0.000 334 0.052 29.948 7 0.000
Source: Processed data

Based on table 6 above, it can be concluded that there are differences in mean for every
different industries. This can be seen from the value of chi square from both Kruskal-Willis and
median test which are far from the critical value of 0.05 significant levels which is 14.067 or even from
0.01 significant levels which is 18.475.

5.6. Hypothesis Testing Summary

Based on the analysis described in section 5.1 to 5.5., it can be summarized as follow:

Table 7: Result of Hypothesis Testing

Hypothesis Statement Result

H1 Debt positively affects companies’ profitability Supported
H2 Total assets turnover positively affects companies’ profitability Supported*
H3 Firm size positively affects companies’ profitability Supported
H4 Bank Indonesia rate negatively affects companies’ profitability Not Supported
H5 The type of industry affects the companies’ profitability Supported
* Significant at 10%
Source: Processed data

The first hypothesis, it is clear that according to regression test it is supported because the value
is positively significant. However, equity multiplier found to have positive impact to ROE (see section
5.1.).
In second hypothesis, TATO is found not significant in α 5% but significant at α 10% therefore
hypothesis two is supported (see section 5.2.). While in the third hypothesis, firm size effects positively
146 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

significant to company’s profitability, therefore the third hypothesis is accepted (see section 5.3.). On
the other hand, the fourth hypothesis, BI rate is proved that it does not significantly affect ROE (see
section 5.4.). Based on section 5.5., it is clear that the fifth hypothesis is supported. It can be assumed
that the type of industry is one of the important indicators to measure the companies’ profitability.

6. Conclusion and Recommendation

This section will conclude, summarize and recommend based on the research findings and relate it with
the previous research findings.

6.1. Conclusion
Based on the results presented in section 5 and quick review related on the previous research, there are
several findings that support and contradict with the previous findings.
The research result in section 5 have answered the objective of the research and proved the
affect of debt towards companies’ profitability. This means that debt in general do significantly affect
the companies’ profitability. This finding is contradicts with Harjanti and Tandelilin (2007) research.
They found that leverage is negatively significant with profitability, and implies the companies that
have high profitability tend to have more internal funding than the smaller one. The companies that
have high profitability will use less debt because the capital used is achieved from retained earning.
TATO, on the other hand, is found to have significant affect to ROE. This research support
Listiadi (2007) research finding on PT. Merck Tbk that found TATO have significant effect to PT.
Merck Tbk. profitability. According to IDX categorization of industry, PT. Merck Tbk is categorized
in consumer goods industry. This also supports this research finding that in consumer goods industry
that TATO is positively significant to affect ROE.
Previous research by Lawrence, Diewert, and Fox (2004) found that as firm size increases the
production increases as well and that generate higher return. Lawrence et all (2004) finding is
consistent with this research finding that firm size do positively affects ROE significantly. However,
miscelaneous, and property, real estate, and building construction industry in contrary found to have
insignificant effect toward ROE.
Surprisingly macroeconomics factor found not significantly affect the company’s profitability
to the uncategorized data. This contradicts with Chen and Mahajan (2008) research findings.
Macroeconomics does not directly affecting companies’ profitability, it become effective when other
variables are considered as well. Chen and Mahajan (2008) research uses more than one
macroeconomic factors and uses dynamic panel data model which is quite different with this research
that uses one macroeconomic factor with simple multiple regression.
This research also supports McGahan and Porter (1997) research findings that different type of
industry affects the companies’ profitability. In table 5 in section 5.5., it is clear that companies in
different industry generate different ROE.

6.2. Recommendation
This research result can give insight to the investor and the companies themselves on measuring their
companies’ performance based on how well the companies manage their debt to increase profit. Even
though the result indicates that in different industry generate different relationship, one of the
important things is that the relationship between debt and profitability of all samples in average is
significant. Moreover, the relationship between firm size and profitability could be an additional
indicator of company’s profitability since the relationship indicates positively significant.
The research can also provides additional information to researchers that simultaneously all the
independent variables are significantly affects company’s profitability. However, the model can only
explain the affect to ROE for 12.9%. The rest 87.1% might need for further research.
147 European Journal of Economics, Finance And Administrative Sciences - Issue 32 (2011)

Type of industry is also finds significant to affect companies’ profitability. This is important to
investors and companies to set the strategies that suitable for them to have their optimum profit. While
for researchers, it is important for them to consider the type of industry in their research because it will
generate different results.

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