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The Effect of Profitability, Working Capital, Capital
Structure, and Assets Utilization on Earnings per Share
of Listed Telecommunication Company in Indonesia
SKRIPSI
By
Andrew Sabe
008 2010 000 08
Presented to
The Faculty of Business, President University
In partial fulfillment of the requirements
for
Bachelor Degree in Economics, Major in Accounting
PRESIDENT UNIVERSITY
Cikarang Baru – Bekasi
Indonesia
2014
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PANEL OF EXAMINERS APPROVAL SHEET
Herewith, the Panel of Examiners declares that the skripsi entitled “The Effect of
Profitability, Working Capital, Capital Structure, and Assets Utilization on
Earnings per Share of Listed Telecommunication Company in Indonesia”
submitted by (name of the student), Accounting Study Program, Faculty of
Business, has been assessed and proved to pass the Oral Examination on March
7, 2014
Chairman Panel of Examiner,
Drs. Umar Subandijo, MBA
Examiner 1
Dr. Fachruzzaman, SE, MDM, AK, CA
Examiner 2
Dr. Sumarno Zain, MBA, Ak
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RECOMMENDATION LETTER OF SKRIPSI ADVISER
The skripsi prepared and submitted by
N a m e : Andrew Sabe
Student ID : 008 2010 000 08
F a c u l t y : Business
Study Program : Accounting
Field of Study :
Skripsi Title : The Effect of Profitability, Working Capital, Capital
Structure, and Assets Utilization on Earnings per Share of
Listed Telecommunication Company in Indonesia period
2010-2012
has been reviewed and found to have satisfied the necessities for Oral Defense as
partial fulfillment of the requirements for Bachelor Degree in Business - Major in
Accounting.
Cikarang, Indonesia, 24 January 2014
Acknowledge Skripsi Advisor,
Dr. Sumarno Zain, MBA, Ak Dr. Sumarno Zain, MBA, Ak
Head, Accounting Study Program Advisor
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DECLARATION OF ORIGINALITY
I hereby declare that the skripsi entitled “(The Effect of Profitability, Working
Capital, Capital Structure, and Assets Utilization on Earnings per Share of
Listed Telecommunication Company in Indonesia period 2010-2012)” is
originally written by myself based on my own research and has never been used
for any other purpose before.
I, therefore, request for Oral Defense of the Skripsi.
Cikarang, Indonesia 24 January 2014
Researcher,
Andrew Sabe
(008201000008)
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The Effect of Profitability, Working Capital, Capital
Structure, and Assets Utilization on Earnings per Share
of Listed Telecommunication Company in Indonesia
period 2010-2012
ABSTRACT
The aim of this research is to analyze the effect of profitability which is
measured by net profit margin and return on equity, working capital which is
measured by current ratio, capital structure which is measured by debt to
equity, and assets utilization which is measured by asset turnover on earnings
per shares.
The research used a purposive sampling method. Samples in this research
are listed telecommunication company in Indonesian Stock Exchange, period
2010 until 2012. This research used descriptive statistic, explanatory research,
and hypothesis testing. In explanatory research, the research used panel
regression and classical assumption to analyze the data.
The result of the research shows that net profit margin, return on equity,
current ratio, debt to equity, and total assets turnover simultaneously affect
earnings per share.
Key word: assets turnover, assets utilization, capital structure, current
ratio, debt to equity, descriptive research, earnings per share, explanatory
research, hypothesis testing, net profit margin, panel regression,
profitability, return on equity, working capital
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ACKNOWLEDGEMENT
The writer would like to express my special appreciation and thanks to Jesus
Christ for his blessing that this research is done on time.
Then special thanks to Mr Josep Ginting for being such tremendous lecturer,
a good advisor and a kind person. His support helps the writer through the process
of this research.
Other than that, the writer would like to give thanks to all of the lecturers in
President University, especially Accounting Lecturers. Without their help, this
research is not going to be done right on time. Then to the writer families who
have given the best support anybody could ever had.
The writer acknowledge that this research have many flaws. Therefore, he
encourages the next researcher to improve it from quality, duration, sampling, and
methodology.
In the end, the writer gives his gratitude for this research, and may this
research become useful in the future.
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Table of Content
Title of Research ........................................................................................................... i
Panel of Examiner and Approval Sheet` ...................................................................... ii
Recommendation Letter of Research Adviser ............................................................ iii
Declaration of Originality ........................................................................................... iv
Abstract ........................................................................................................................ v
Acknowledgement....................................................................................................... vi
Table of Content ......................................................................................................... vii
List of table ................................................................................................................. ix
List of figures ............................................................................................................... x
Chapter I : Introduction
I.1 Research Background ........................................................................... 1
I.2 Problem Statement and Identification .................................................. 4
I.3 Research Objectives ............................................................................. 4
I.4 Research Scope and Limitation ............................................................ 5
I.5 Research Benefits ................................................................................. 6
Chapter II : Literature Review
II.1 Financial Statement ............................................................................. 7
II.2 Financial Ratio Analysis ..................................................................... 9
II.3 Prior Research Result ........................................................................ 18
II.4 Hypothesis Development .................................................................. 24
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Chapter III : Methodology
III.1 Research Method ............................................................................. 25
III.2 Operational Definitions .................................................................... 25
III.3 Sampling Design .............................................................................. 28
III.4 Data Analysis ................................................................................... 29
Chapter IV : Research Methodology
IV.1 Research Object ............................................................................... 37
IV.2 Data Analysis ................................................................................... 39
IV.3 Panel Regression .............................................................................. 43
IV.4 Interpretation ................................................................................... 49
Chapter V : Conclusion and Recommendations
V.1 Conclusion ................................................................................... 55
V.2 Recommendations ............................................................................. 56
References .................................................................................................................... oo
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LIST OF TABLES
Prior Research .......................................................................................... 18
Dependent Variable and Independent Variable ....................................... 27
Kolmogorov-Smirnov .............................................................................. 41
Autocorrelation Criterion......................................................................... 43
Panel Regression ...................................................................................... 44
Descriptive Statistic ................................................................................. 44
Panel Regression – result of C ................................................................. 45
Panel Regression – result of Std error and t-stat...................................... 47
Panel Regression – result of R2, probability, and f-stat .......................... 48
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LIST OF FIGURES
Hypothesis development .......................................................................... 24
P-plot ....................................................................................................... 40
Scatterplot ................................................................................................ 42
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CHAPTER I
Introduction
I.1. Research Background
As been stated in IAS 1, 2011, the objective of financial statement is to
provide information about the financial position, financial performance, and cash
flow of an entity that is useful to a wide range of users in making economic
decisions.
According to Khaldoun (2011), Shares‟ prices deviated at times from
financial statements and gravitated slowly toward fundamental values. That is
why financial ratios were important, because it could discover values that are not
reflected by share prices.
Financial reportwas one of the tools to measure the condition of the
company. The financial report provides important information related to financial
performance of the company. The information that provided in the financial report
can be used to give the relevant information about of company‟s health. It can be
seen through profitability ratio, working capital ratio, capital structure ratio, and
assets utilization ratio.
The expectations of all investors are same. Their benefit should exceed
their invested fund. Unfortunately, only a few investors in Indonesia read
Statement of Financial Position before investing. Most of the time, investors
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invested their money on well-known company. The rest of the investors invest
speculatively.
The objective of this research is to help investors to understand better in
making economicaldecision based on information provided by statement of
financial position, using five independent variables: Net Profit Margin, Return on
Equity, Current Ratio, and Debt to Equity, and Total Assets Turnover.Those five
can be used to forecast future earnings per share.
The sample of this research is the financial statement from listed
Telecommunication Company in Indonesia from 2010 until 2012 (Bakrie
Telecom, Indosat, InovisiInfracom, Smarfren Telecom, Telekomunikasi
Indonesia, XLAxiata)
This research is a replica from Accounting Journal, Khaldoun M. Al-Qaisi
(2011) that used financial ratio to predict profit per share.
This research differs from previous research in three points. They are:
1. Research‟s Variables
Previous research, Khaldoun M. Al-Qaisi (2011), used financial ratio,
economic ratio, commercial ratio, working capital ratio, and rapid cash ratio on
profit per share, while this research use net profit margin, return on equity, current
ratio, debt to equity, total assets turnover, cash flow/sales ratio, and price to book
ratio on profit per share.
Variables that replace previous research variable are taken from
KhalafTaani and HasanHamed (2011) research about the effect of financial ratios,
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firm size, and cash flows on earning per share, which is the other name of profit
per share.
The Writer appliesearnings per share as the dependent variable based on
the indication of how much each shares investor‟s own earned. According to Ellio
D‟Amato (2010), whilst there are not many truisms, and EPS is in fact can be
deceptive, one is that if earning rise consistently over the long term, then the share
price will follow.
In Ralf Becker, Junsoo Lee, and Benton E. Gup research (2012), they
believe that high price earnings ratios relatively will be followed by slow growth
in stock prices and/or high earnings growth. But given the fact that improper
modeling of structural changes can lead to incorrect statistical interference. That is
why the writer uses strong structural companies as the samples.
2. Sample
In previous research, Haman Hased, KhalafTaani andKhaldoun used the
samples from companies in industrial sector in Amman that listed in Amman
Stock Exchange Market. This research takes samples from Indonesian
Telecommunication Company that listed in Indonesia Stock Exchange.
3. Years of research
In HasanHamed and KhalafTaani research, the researchers took sample
from 2000 until 2009. Khaldoun take sample from 2005 until 2010. This research
takes sample through 2008 until 2012.
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I.2. Problem Statement and Identification
The problemsproposed in this research are:
1. Did net profit have effect on earnings per share?
2. Did return on equity have effect on earnings per share?
3. Did current ratio have effect on earnings per share?
4. Did debt to equity have effect on earnings per share?
5. Did total assets turnover have effect on earnings per share?
6. Did net profit margin, return on equity, current ratio, debt to
equity, and total assets turnover have effect on earnings per
share?
I.3. Research Objectives
The objectives of this research according to problem statement are:
1. Obtain empirical evidence about the effect of net profit margin
ratio on earnings per share.
2. Obtain empirical evidence about the effect of return on equity
ratio on earnings per share.
3. Obtain empirical evidence about the effect of current ratio on
earnings per share.
4. Obtain empirical evidence about the effect of debt to equity
ratio on earnings per share.
5. Obtain empirical evidence about the effect of total assets
turnover ratio on earnings per share.
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6. Obtain empirical evidence about the effect of net profit margin,
return on equity, current ratio, debt to equity, and total assets
turnover, simultaneously, on earnings per share.
On the other hand, predicting profit per share is considered important for
investor‟s decisions. The indication is being able to predict earnings per share can
be used to make good investing decisions.
I.4. Research Scope and Limitation
This research elaborates on multiple pieces of information available from
firm‟s statement of financial position to predict future excess of return, by
determining the return itself by predicting earnings per share.
This research provides a financial view of Indonesia Telecommunication
Company from their profitability, working capital, capital structure, and assets
utilization.
As it is not a new topic, relatively, many researches have been done; this
research is a follow-through with different samples. The premises for follow-
through previous research are:
1. Limited time: Looking from the tight schedule, researcher
given about three months. To mitigate this problem, researcher
obtained data from internet, and take sample only from
telecommunication companies listed in Indonesia Stock
Exchange.
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2. Limited budget: Due to limited budget, all the information is
acquired from internet, in printed-out form. Researcher does
not have access to primary data.
3. Information gathered for this research is limited to three years
period, from 2010 until 2012 to obtained more up to date result.
I.5. Benefit of the Research
The writer generally hopes that this research can be useful, especially for:
1. Investor to predict the expected return on their investment
reliably.
2. Company‟s management to improve their work.
3. Next research about financial analysis ratio can be based on
this research.
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CHAPTER II
Literature Review
II.1. Financial Statement
A Financial Statement is a formal record of the financial activities of a
business, persons, or other entity. Apart from stating the financial position of an
organization, it provides other information such as the value added, changes in
equity if any and cash flows of the enterprise within a defined period time to
which it relates (Iyoha and Faboyede, 2011).
Relevant financial information is presented in a structured manner and in a
form easy to understand. The complexity of the statement depends on the size of
the entity and their activity.
According to Palepu, Healy, and Bernard (2004), accounting information
from financial reports can describe firms‟ condition. The financial reports are
affected by two factors, firms‟ activities and accounting system adopted by the
firm.
The general purpose of Financial Statement are those intended to meet the
needs of users who are not in a position to require an entity to prepare reports
tailored to their particular information needs (IAS 1, 7) and The objective of
financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of
users in making economic decisions. Financial statements also show the results of
the management‟s stewardship of the resources entrusted to it(IAS, 9).
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There is a rule for when an entity plans to issue financial statements to
outside users (such as investors or lenders), the financial statements should be
formatted in accordance with one of the major accounting frameworks, such as
GAAP or IFRS. These frameworks allow for some leeway in how financial
statements can be structured, so statements issued by different firms even in the
same industry are likely to have somewhat different appearances. But when the
financial statements are issued strictly for internal use, there are no guidelines,
other than common usage, for how the statements are to be presented.
There are four important aspects in financial statement and a note to the
financial statement to disclose more information in financial statement (McGraw-
Hill, 2009). The four aspects are:
1. Statement of financial position
The purpose of statement of financial position is to report the amount of
assets, liabilities, and stockholder‟s equity at a particular point in time.
2. Statement of comprehensive income
The purpose of statement of comprehensive income is to present
accountants‟ primary measurement of performance of business from profit/loss
point of view.
3. Statement of changes in equity
Statement of changes in equity provides details in changes of entity‟s
equity, by presenting the movement of its composition (preferredshares, common
shares, retained earnings, revaluation surplus, and more).
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IAS 1, statement of changes in equity must show: total comprehensive
income for the period, showing separately amounts attributable to owners of the
parent and to non-controlling interests, the effects of retrospective application,
when applicable, for each component, reconciliations between the carrying
amounts at the beginning and the end of the period for each component of equity,
separately disclosing, profit or loss, each item of other comprehensive income,
transactions with owners, showing separately contributions by and distributions to
owners and changes in ownership interests in subsidiaries that do not result in a
loss of control
4. Statement of cash flow
Statement of cash flow is the presentation of information about the
historical changes in cash and cash equivalents of an entity. It classified cash
flows during the period according to operating, investing, and financing activities.
II.2. Financial Ratio Analysis
Financial statement analysis is the judgmental process that aims to evaluate
the current and past financial positions and the result of operations of an
enterprise, with the primary objective of determining the best possible estimates
and prediction about the future conditions and performance.
Financial ratio analysis is a subset looks at a company‟s financial
statements, management, health and position in the competitive landscape to
determine a share price evaluation. Financial ratios are tools to help with the
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interpretation of results and to allow for comparison to previous years or to other
companies.
The key components of the financial statements are the income statement,
balance sheet, and statement of cash flows. These statements are designed to be
taken as a whole, to present a complete picture of the financial condition and
results of a business. A case can be made for each of the financial statements
being the most important, though the ultimate answer depends on the needs of the
user.
Financial statement analysis might be undertaken for many purposes.
Examination of the information and needs distinguish the user into six categories
(Leopold A. Bernstein, 1989). They are:
1. Credit grantors.
Credit grantors tend to attach very conservative values to fixed and
other assets, to make allowance for all possible future contingencies. It is
because their nature of business it to lend funds in many forms and variety
purposes.
2. Equity investors.
When an enterprise prospers, the equity owner stand to reap all the
gains above the fixed amount of senior capital contributors‟ claim and,
conversely, the equity owners will be the first one to absorb loses should
the enterprise flounder.
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3. Management.
Financial data analysis can be undertaken by management on
continuous basis because it has unlimited access to internal accounting and
other records.
4. Acquisition and merger analyst
In many respects, the objective of acquisition and merger analyst is
similar to equity investor except that the analyst of acquisition and merger
must go further and stress the valuation of assets and liabilities.
5. Auditors
The application of financial statement analysis best undertaken at
the very beginning of audit because such analyst can reveal the areas of
greatest change and vulnerability, areas which the auditor would want to
direct a major part of his attention.
6. Other interest group
Finally, financial statement analysis can serve the needs of many
other users. It can be used for checking reasonable and reported amounts of
tax return for various governmental regulatory, for lawyer to investigate
legal work, and many more.
Elio D‟Amato (2010) stated that formost investors, fundamental
analysisoffers a sound, intellectual frameworkfor making informed share
investmentdecisions.Within the broad discipline offundamental analysis, financial
ratioanalysis offers the clearest,easiest and most logical set of indicatorsfor a
sharemarket investor.
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II.2.1. Working Capital Ratio
Working capital is a well-known measure of liquidity and short-term
financial health. The basic concept is relatively simple. It is the excess of current
assets over current liabilities.
Working capital used in this research is:
Current Ratio
The basic reason why current ratio is considered as a working
capital ratio is because it is a widespread ratio to measure liquidity.
According to Leopold A. Bernstein, 1989, first, current ratio measure the
degree to which current assets cover current liabilities. The higher the
amount of current assets in relation to current liabilities, the greater the
assurance that these liabilities can be paid out of such assets.
Secondly, the excess of current assets over current liabilities
provides a buffer against losses that may be incurred in the disposition or
liquidation of the current assets other than cash. The more substantial such
a buffer is the better for creditors. Thus, the current ratio measures the
margin of safety available to cover any possible shrinkage in the value of
current assets.
Finally, current ratio use to measure the reserve of liquid funds in
excess of current obligations that is available as a margin of safety against
uncertainty and the random shocks to which the flows of funds in an
enterprise are subject. Random shocks, such as strikes, extraordinary
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losses, and other uncertainties, can temporarily and unexpectedly stop or
reduce the inflow of funds. (Leopold A. Bernstein, 1989)
According to Leopold A. Bernstein, the formula is as follow:
Disregarding the reasons of obviousness of current ratio as liquidity
ratio, there are some limitations to which current ratio is subject as
liquidity ratio, while quick ratio is more preferable (ElioD‟amato, 2010)
In „Financial Statement Analysis: Theory, Application, and
Interpretation.” By Leopold A. Bernstein, he wrote that liquidity depends to
some extent on cash or cash equivalents balances and to a much more
significant extenton prospective cash flow. There is no direct or established
relationship between balances of working capital items and the pattern that
future cash flows are likely to assume. Then managerial policies directed at
optimizing the levels of receivables and inventories are oriented primarily
toward efficient and profitable assets utilization and only secondary
liquidity.
That was why current ratio is more preferable as a working capital
ratio to measure safety and buffer against losses rather than as liquidity
ratio.
II.2.2. Capital Structure Ratio
Capital structure ratio is a simple measure of financial risk in an enterprise.
This can be done by constructing a common-size statement of the liabilities and
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equity. Capital structure ratio generally showed that the higher the proportion of
debt, the greater the likelihood of insolvency during protracted periods of earnings
decline(Leopold A. Bernstein, 1989).
Capital structure ratio used in this research is:
Debt to Equity Ratio (DER)
The debt to equity ratio provides an indication of a company‟s
capital structure and whether the company is more reliant on borrowings
(debt) or shareholder capital (equity) to fund assets and activities.
Debt meant a commitment to pay fix charges in the form of interest
and principal repayments. While certain fixed charges can be postponed in
times of cash shortage, those associated with debt cannot be postponed
without adverse repercussion to the ownership and also to the creditor
groups.
The formula according to Leopold A. Bernstein is as follow:
Contrary to many believe, debt sometimes is not necessarily a bad
thing. Debt could be positive, provided it is used for productivity purposes.
Debt to equity indicates the risk in volatile earnings, depends on the
number. The higher the number means greater debt can result in volatile
earnings.
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II.2.3. Profitability Ratio
Profitability ratios measure a company‟s performance and provide an
indication of its ability to generate profits. As profits are used to fund business
development and paid dividends to shareholders.Efficiency in profitability is an
important consideration for shareholders.
Profitability ratios used in this research are:
Net Profit Margin
Net profit margin meanwhile indicates what percentage of a
company‟s sales revenue would remain after all costs have been taken into
account(Leopold A. Bernstein, 1989).
Declining net profit margin can be used to assume that there might
have been a margin squeezed, possibly due to rising cost or tight
competition.
Return on Equity
Return on equity, commonly referred to as ROE, is another
measurement of management performance. ROE can be disaggregated into
the following elements:
In detail, the equation will be as follow:
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*NI = Net Income
*PD = preferred dividend
*ASE = Average stockholders‟ equity
*ATA = Average total assets
Net income margin represents the portion of the sales dollar that is
left for the common shareholders after providing for all costs and claims.
The assets turnover was the measure of asset utilization. The Stockholder
Leverage ratio measures the extent to which total assets are financed by
stockholders equity (Leopold A. Bernstein, 1989).
Simplifying calculation above, the formula become:
ROE tells the investors about how well the company has used the
capital gained from its shareholder to generate profit. Similar to return on
assets, higher ROE indicates a higher level of management performance.
II.2.4. Assets Utilization Ratio
The intensity of utilizing assets is measured by means of assets turnover
ratios. It is possible that the level of given assets category changes significantly
during the period for which the turnover is computed. So it is necessary to use
averages of assets levels in computation.
Assets Utilization ratios used in this research is:
Asset Turnover
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A consistently high return on assets is the earmark of an effective
management and can distinguish a growth company from one experiencing
merely a seasonal pick up in business (Leopold A. Bernstein, 1989).
Assets turnover may indicate pricing strategies, i.e. companies with
high profit margin tend to have low assets turnover, and vice versa. Or if
the number appears to be low, it might indicate that the management
should consider to disposed the assets or sell them.
II.2.5. Earnings per Share
The determination of the earnings level of an enterprise is relevant to the
purpose of the analyst us a complex analytical process. This earnings figure can
be converted into earnings per share (EPS) amount that is useful in the evaluation
of the price of common stock (Leopold A. Bernstein, 1989). In other words, EPS
allowed investor to measure earnings in relation to every share on issue.
In Khaldoun research (2011), the predictability of earning per shares is
considered important for the investor‟s decision. Moreover, convincing studies
have shown a long-term return effect (Ralf Becker, Junsoo Lee, Benton E. Gup,
2012 and Hasan Hamed and Khalaf Taani, 2011). In Ralf Becker research, he
indicated that earning per shares could fall if current prices are higher than current
earnings, or vice versa.
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II.3. Prior Research Results
The five researches which are similar with this research are:
No
Researcher /
Year
Research Title Variable Research Data Analysis Result
1 Khalaf
Taani and
Hasan
Hamed /
2011
The Effect of
Financial
Ratios, Firm
Size, and Cash
Flows from
Operating
Activities on
Earnings per
Share
Independent:Return on
Equity, Price to Book
Value,
Cash Flow from
Operation Activites,
Debt to Equity, Total
Assets Turnover,
Current Ratio
Dependent: Earnings
per Share
Stepwise
regression
analysis,
Descriptive
analysis
ROE, PBV, Cash
Flow from
Operation
Activities, and
DER significantly
influenced
Earnings per
Share.
2 Greg Slavin
/ 2007
Aggregating
Earnings per
Share Forecast
Independent: Age,
Frequency, Number of
Companies, NTOP 10
(dummy variable, work
with top ten brokerage
or not), firm
experience, number of
industries, Forecast
Least square
regression
Earnings per share
forecast made by
research analyst
can be combined in
many ways. One of
the most common
methods in
practices is to
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error
Dependent:
proportional mean
absolute forecast error.
equally weight
each analyst‟
forecast to create a
consensus forecast.
3 Hazem B.
Al-khatib
and Alaa
Al-Horani /
2011
Predicting
Financial
Distress of
Public
Companies
Listed in
Amman Stock
Exchange
Independent: Current
ratio, Current liabilities
to total fixed assets,
current liability to
equity, working capital
to equity, logarithm of
total assets, pre-tax
profit to total assets, net
profit margin, book
value per share, return
on assets, return on
equity, dividend per
share, after tax profit to
working capital,
retained earnings to
total assets, equity to
total assets, equity to
total liabilities, debt
Multiple
discriminate
analysis and
logistic
regression
It appears that
return on equity,
pre-tax profit to
total assets, current
liabilities to equity,
retained earnings
to total assets, and
fixed assets to
equity can predict
financial distress.
However, ROE is
the strongest
variable that
distinguished
successful
companies from
failed companies.
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ratio, debt to equity,
long-term debt to
equity, fixed assets to
equity, assets turnover,
sales to equity, sales to
working capital,
receivables turnover,
logarithm of assets
turnover
Dependent: average
earnings per share
4 Ali
AbusalahEl
mabrok
Mohammed
, Ng Kim-
Soon / 2012
Using Altman‟s
Model and
Current Ratio to
Assess the
Financial Status
of Companies
Quoted in
Malaysian
Stock Exchange
Independent: working
capital/total assets,
retained earnings/total
assets, earnings before
interest and taxes/total
assets, market value
equity/book value of
total debts, sales/total
assets
Dependent: financial
health measured by
Multiple
regression
Study conclude
that Edward
Altman model and
current ratio are
useful tools for
investor to predict
financial failure of
companies
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Altman‟s Model (1968)
5 Khaldoun
M. Al-Qaisi
/ 2011
Predicting
Profit per Share
Using Financial
Ratios
Dependent: working
capital, profit per share,
liquidity preemptory,
rapid cash, exchange
ratio, commercial
profit, economical
profit, financial profit
Independent:
accomplished earnings
per share
Linear
regression
Predicting profit
per share is
considered one of
the motives of
financial markets.
Profit per
Share is expected
to be affected by
financial ratios,
economical profit
and commercial
ratios.
II.3.1. Profitability Ratios and Earnings per Share
Greg Slavin (2007) expressed that earnings per share is a widely used
measure of firm profitability. There was evidence that shows ROE has a
significant impact over EPS. But in other ratios, Assets Turnover and Net Profit
Margin showed negative correlation with EPS.
In another research conducted by Hazem B. Al-khatib and Alaa Al-Horani
(2011) concludes that Assets Turnover did not seem to have a significant effect on
financial distress. A local research in Indonesia by Ulupui (2007), explained the
differentiation in opinion caused by the inability of Assets Turnover to predict
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one-year-forecast earnings, while the result will be different when used to predict
two-year-forecast. However, in this research, the writer use 3 years period to
predict the movement of earnings per share.
Based on regression result, Khalaf Taani and Hasan Hamed (2011)
concluded that ROE was the only ratio from profitability ratio that has significant
effect on earnings per share. This result supported by Greg Slavin (2007), using
discriminant analysis and logistic regression, within five years period of study, the
strongest variable that distinguished successful companies from financially failed
company is return on equity (ROE).
II.3.2. Assets Utilization and Earnings per Share
The intensity with which assets were utilized is measured by asset turnover
ratio. That utilization has as its ultimate measure the amount of sales generated
over the assets. It is considered important since sales are, in most enterprises, the
first and essential step to profits (Leopold A. Bernstein, 1989).
Asset turnover reflected efficiency in assets management to earn revenue
(Khalaf Taani and Hasan Hamed, 2011). Thus a higher Asset turnover means
benefit for the firm. A healthy firm indicates good earnings and prosper, which
will drew investor attention. Despite the negative result of asset turnover over
earnings per share, Khalaf Taani and Hasan Hamed believe that it might be caused
by risk diversification, dominant market position, better access to capital market,
and a belief that a big firm cannot increase their assets turnover easily.
57
II.3.3. Capital Structure and Earnings per Share
Leverage exists when an investor achieves the right to a return on capital
base that exceeds the investment which the investor has personally contributed to
the entity or instrument achieving return, (Wikipedia, November 2013).
In same article wrote by John Dobosz (2013), he put DER as one of ten
ratios that could make money for investors. The debt to equity ratio is a measure
of capital structure. DER shows investor the percentage of a company‟s assets
financed by debt.
In some point of view, lower number in DER are generally preferred, John
Dobosz (2013). Contrary to Dobosz‟s, ElioD‟amato (2010) belief that debt is not
necessarily a bad thing. Provided debt used for productive purposes, debt can be a
positive sign.
Khalaf Taani and Hasan Hamed (2011) conclude that DER has significant
effect on earnings per share. High DER suggests that the firm uses debt financing
aggressively. It indicates long-term growth for the firm so it can earn more profit.
II.3.4. Working Capital and Earnings per Share
Both researches, conducted by Ali Abusalah and Kim-soon (2012) and
Peter Back (1992) agreed on Current Ratio as an effective ratio to predict the
bankruptcy of a company within one to two years prior to bankruptcy.
On the other hand, according Khalaf Taani and Hasan Hamed (2011),
Current Ratio has no significant impact on EPS. The differ in conclusion might
derived from different data, in which other research focused more on distress
58
company, while Khalaf Taani and Hasan Hamed (2011) focused on manufacturing
companies.
II.4. Hypothesis Development
Build upon problem statement and identification, the hypothesis of
research can be simplified as follow:
Build upon literature review on prior researches above, hypothesis
has been developed into:
H1 : Net Profit Margin has effect on earnings per share.
H2 : Return on Equity has effect on earnings per share.
H3 : Current Ratio has effect on earnings per share.
H4 : Debt to Equity has effect on earnings per share.
H5 : Total Assets Turnover has effect on earnings per share.
H6 : Net Profit Margin, Return on Equity, Current Ratio, Debt to
Equity, and Total Assets Turnover have effect on earnings per
share.
Earnings per Share
Return on Equity
Net Profit Margin
Debt to Equity
Current Ratio
Total Assets Turnover
NPM, ROE, CR, DER,
TOTA
59
CHAPTER III
Methodology
III.1. Research Method
Secondary sources can be various - company records, archives, trade union
materials, census data and government sources. Much economics research is
performed as secondary data analysis of the multitude of time series data sets that
most governments maintain. Secondary data occur as raw data or processed. If
raw data is available, then the data can be reworked. More often, however, only
published reports are available. For international studies, secondary data analysis
is the most common type of study performed. Similarly, many longitudinal studies
involve secondary data analysis. (The President and Fellows of Harvard College,
2013)
This research obtained the data, summary of annual report, from Bursa
EfekIndonesia within period 2010 until 2012 (idx.co.id).This research also used
data from Annual Report of the companies to complete missing ratios in the
summary provided by IDX.
III.2. Operational Definitions
Using the quantitative analysis, this research‟s purpose is to find out
whether the independent variable influencing the dependent variable.
60
There are five different types of ratios (Profitability, Working Capital,
Capital Structure, and Assets Utilization) used as independent variables and one
dependent variable (Profitability Ratio).
Using panel regression method, this research uses two kind of variables,
they are:
1. The Dependent variable is the variable of primary interest to the
researcher (Sekaran and Bougi, 2009, p.70). Dependent Variable is the
variable that will be influenced by independent variable
2. Independent variable is one that influences the dependent variable in
either apositive or negative way (Sekaran and Bougi, 2009, p.72)
Variable operational use in this research is as follow:
Variable Concept Formula Scale
Dependent
variable
Earnings per
Share
This ratio used to
evaluate the price
of common stock
Ratios
Independent
variable
Current Ratio
A short term
measure of
financial health
Working Capital ratio
Ratios
Independent
variable
Debt to Equity
A simple measure
of financial risk in
an enterprise
Capital Structure Ratio
Ratios
Independent To measure the Assets Utilization Ratio Ratios
61
Variable
Assets
Utilization
intensity of
utilizing assets
Independent
Variable
Return on
Equity
A measurement of
management
performance
Profitability Ratio
1. Return on Equity can be disaggregated into:
The details can be seen at chapter II, while the simple
equation is as follow:
2. Net Profit Margin
%
Independent
Variable
Net Profit
Margin
Net Profit is an
indicator of the
percentage of
company‟s sales
revenue would
remain after all cost
have been taken
into account
%
Source: The Financial Statement Analysis by Leopold A. Bernstein, 1989
62
III.3. Sampling Design
The sample in this research is telecommunication companies listed in BEI
which are selected by purposive sampling. In choosing the sample, predetermined
criteria as follow:
1. The business operate in telecommunication area (exclude Wi-Fi
router‟s program and software)
2. The company published its complete financial statements
annually
3. The company‟s fiscal year-end is December
4. The company doesn‟t have negative equity
The purposive sampling with pre-determined criteria above resulted in 5
companies as sample. Khaldoun M. Al-Qaisi (2011) took sample for the period
2005-2010. In this study, the writer took sample for the period 2010-2012.
From all the criteria above, there are 5 listed companies chosen from
Indonesia Stock Exchange. They are:
1. PT. Bakrie Telekom
2. PT. Indosat
3. PT. Smartfrent
4. PT. Telekomunikasi Indonesia
5. PT. Xl Axiata
The method use to analyze is panel regression technique; a group of
Generalized Least Squares technique developed by econometricians to explore the
63
dynamics of change in both macro and micro panel data (Bruce Headey, 2006).
The equation created using the variable listed above as follow:
III.4. Data Analysis
This research use Eviews 6 and SPSS v.20 to analyze the data. The
statistical tools used in this research are Descriptive Research, Explanatory
Research (Panel Regression), Hypothesis testing, and classical assumption to
analyze the data.
III.4.1. Descriptive Research
As its name suggests, descriptive research seeks to provide an accurate
description of observations of a phenomena. The object of the collection of census
data is to accurately describe basic information about a national population at a
particular point in time. The objective of much descriptive research is to map the
terrain of a specific phenomenon. A study of this type could start with questions
such as: „What similarities or contrasts exist between A and B?‟, where A and B
are different departments in the same organization, different regional operations of
the same firm, or different companies in the same industry. Such descriptive
comparisons can produce useful insights and lead to hypothesis-formation (The
President and Fellows of Harvard College, 2013).
64
III.4.2. Explanatory Research
Explanatory studies look for explanations of the nature of certain
relationships. Hypothesis testing provides an understanding of the relationships
that exist between variables. Zikmund (1984) suggests that the degree of
uncertainty about the research problem determines the research methodology.
One of the methods of explanatory is panel regression (The President and
Fellows of Harvard College, 2013).
III.4.2.1. Panel Regression
Panel data, longitudinal or cross-sectional time series data, is a data set in
which the behaviors of entities are observed across time.Out-of-sample forecasts
of exchange rates in the late 1990s and 2000s generated by time series regression
models have fared poorly. These forecasts are typically dominated (in mean-
square error) by the driftless random walk. On the other hand, pooled regression
models estimated on panel data (allowing for fixed effects) have, in many
instances, performed much better than forecasts generated by time-series
regression models (Nelson C. Mark and DonggyuSul, 2011).
In analyzing panels, econometrician usually prefer to use Generalized
Least Squares „effect‟ models, either random effects or fixed effect (Baltagi,
1995).Under certain conditions, random effects models can introduce bias but
reduce the variance of estimates of coefficients of interest. Fixed effects estimates
will be unbiased but may be subject to high variance. For example, if one seeks to
65
make predictions about unobserved units, then the random effects estimator
should be employed.(Tom S. Clark and Drew A. Linzer, 2013).
Bruce Headey, 2006, wrote that the strength of panel regression analysis is
that it can make use of information about changes between each pair at time
points, and not just between the start and end points of a panel survey.
The implementations of Panel Regressions have a purpose to create
numeric data or mathematic model from the effect of Independent variable of this
research on Earnings per share. From that mathematic model we can measure how
significant the effect of Net Profit Margin, Current Ratio, Debt to Equity, Return
on Assets, and Total Assets Turnover to Earning per Share. The basic formula of
Panel Regression is as follow:
*Y = Dependent variable
α = Constanta
β = Vector from P (estimation result)
= Observation it from independent variables
It = Indices for individuals and time
ε = Error
III.4.3. Hypothesis testing
Hypothesis testing or significance testing is a method for testing a claim or
hypothesis about a parameter in a population, using data measured in a sample. In
this method, we test some hypothesis by determining the likelihood that a sample
66
statistic could have been selected, if the hypothesis regarding the population
parameter were true (The University of Alabama, 2013).
This research uses three tests to determine whether to reject or accept the
hypotheses. They are:
III.4.3.1. Coefficient Correlation testing
The purpose of this testing is to know how well the data fit the estimated
model.This study use cross section to find the significant effect between
dependent variable and independent variable. Coefficient correlation Testing can
be calculated using the Spearman equation.
The formula to calculate manually is as follow:
=
Where, R = Coefficients correlation
n = Total Sample
d = Differential
Criterions for coefficient correlation are:
1. If the value of R greater than 0.5, it means greater
correlation between independent variables and dependent
variable
2. If the value of R is lesser than 0.5, it means weaker
correlation between independent variables and dependent
variable
67
Next is coefficient determination. In this research, coefficient
determination should be between 0 – 1 (0≤KD≤1). The purpose of adjusted , or
coefficient determination is to determine the ability of the model to explain
variance in dependent variable (Ghozali, 2006).
The formula to calculate Adjusted R2 is as follow:
Where, = Coefficients determination
n = Total Sample
k = Total Independent Variable
III.4.3.2. t-statistic test
The purpose of this testing is to know the effect of each variable
independent to dependent variable, Ghozali (2006). A dependent variable has
significant effect upon the dependent variable if the t-statistic is below 5%, but if
the t-statistic greater than 5%, the dependent variable does not have significant
effect on dependent variable. The result varies for each independent variable.
t- Testing can be calculated using the equation below:
√
Where X = the of sample Mean
= The value of comparison standard
s = Standard deviation
n = Sample
Source: (Sekaran and Bougie, 2009, p. 339)
68
The criterion for testing is as follow:
1. Ho accepted and Ha rejected if , means
independent variable, partially, effect significantly to
dependent variable.
III.4.3.3. F-statistic test
The purpose of this testing is to know the effect of independent variable
simultaneously with the dependent variable, Ghozali (2006).
The criteria for testing are as follow:
1. Ho accepted and Ha rejected if , means
independent variable as a whole have no effect significantly
to dependent variable.
2. Ho rejected and Ha accepted if , means
independent variable as whole have effect significantly to
dependent variable.
F statistic can be measure using the calculation as following below:
Where, R = Coefficients determination
n = Total research
k = Total variable
69
III.4.4. Classical Assumption
III.4.4.1. Normality test
The purpose of normality test is to know whether the data used in the
research normally distributed. To know whether the data is normal, this research
uses Kolmogorov Smirnov testing at 5% significance level.
The data is normally distributed when the significance value is greater than
the significance level (0.05).
The other way to determine whether the data distributed normally is by
using the ”P Plot Regression” graphic. The dots in the graph have to be near the
line. It might deviate for time to time, but not too far from the diagonal line.
III.4.4.2. Multicollinearity test
This testing can be done using scatter plot by plotting ZPRED (prediction
point) to SRESID (residual point). The best model gotten if there is no certain
pattern on graphic; such assemble in one point, narrow then to be wide, or wide
than to be narrow. In this research, multicollinearity test is not used, because the
Panel Regression is the solution to multicollinearity problem (Gujarati, 2003).
III.4.4.3. Heterocedasticity
From the assumption testing that should be fulfilled, the one of classical
theory chosen in this research is the heterocedasticity testing. The purpose of
heteroscedasity test is to know whether there is variance similarity from the
70
residual value in the regression model. A good regression model should not
contain heteroscedasticity.
III.4.4.4. Autocorrelation test
Autocorrelation test is a test to find repeating patterns. It is used to
calculate model with period t and with period t-1 or t+1, and determine whether
there are a patterns between two or three calculations.
To determine whether there is an auto-correlation or not, Durbin-Watson
test is used,at 5% significance level.
To value can be determined from Durbin Watson Table, where T equals to
total samples, and K equals to total independent variables.
71
CHAPTER IV
Analysis and Data Interpretation
From Literature Review and Methodology presented in chapter II and III
consecutively, this research able to generates samples and analyze them.Using the
entire sample criterion, this research chooses five out of six companies as the
object of research within three years period (2010-2012), resulting 15 samples.
Then, to analyze the sample, this research uses Classical Assumption and
Hypothesis Testing after process the sample through Explanatory and Descriptive
Research. The result is presented as follow:
IV.1. Research Object
From six companies, PT Telekomunikasi Indonesia, PT Smarfren, PT
Bakrie Telecom, PT Indosat, PT XL Axiata, and 3 Indonesia, which operate their
main business in telecommunication, only five of them are listed in Indonesia
Stock Exchange.Here are brief histories of the object of this research:
No Companies History
1. PT Bakrie Telecom Origin from PT Radio Telepon Indonesia, founded in 1993. Later in
2003, PT Radio Telepon Indonesia changed its name into PT
Bakrie Telecom.
In 2006, PT Bakrie Telecom lists their shares.
In 2012, PT Bakrie Telecom acquired PT Sampoerna
Telekomunikasi Indonesia.
72
Now, in 2013, PT Bakrie Telecom has four types of products (esia,
wifone, wimode, and aha)
2. PT Indosat Established in 1967.
In 1994, Indosat is registered in Indonesia Stock Exchange.
Up to 2013, Indosat has serve with their phone services (Indosat,
IM3, and Matrix), fixed voice service, fixed wireless, and fixed
telephone services.
3. PT Telekomunikasi
Indonesia
Founded in 1856, PT Telekomunikasi Indonesia is the oldest
telecommunication company in Indonesia.
First time its registered is in 1995 at Jakarta Stock Exchange and
Surabaya Stock Exchange.
Until now, Telkom has served with fixed line telecommunication,
mobile telephony, internet services, digital, and IT services.
4. PT Smartfren Smartfren is a CDMA provider, Natiional-range telecommunication
and internet service provider.
Act as subsidiary, Smartfren‟s parent and controller is PT Sinarmas
Group.
5. PT XL Axiata Founded in 1996, XL Axiata focused their service in
telecommunication services.
Origin from PT Grahametropoitan, 1989
Source:xl.co.id; telkomsel.com; bakrietelecom.com; indosat.com; smartfren.com
73
IV.2. Data Analysis
IV.2.1. Normality Test
The purpose of normality test is to know the data sampling of dependent
variable and independent variable have normal distribution or not. The normality
of the data can be detected by seen the histogram graph shape look like the bell
curve. The histogram graph of this research can be seen on the figure 4.1. as
follow:
4.2 Normality test, P Plot Regression
74
Based on the figure above, the sample spread alongside the line following the
diagonal linear. It means the data normally distributed.
Another version to test normality is by using Kolmogorov-Smirnoff test. To
obtain the data, the researcher ran it through SPSS. The result of Kolmogorov
Smirnoff is as follow:
4.3 Kolmogorov Smirnoff Table
One-Sample Kolmogorov-Smirnov Test
Unstandardiz
ed Predicted
Value
N 15
Normal Parametersa,b
Mean 215.0006667
Std.
Deviation
317.3032948
1
Most Extreme
Differences
Absolute .183
Positive .183
Negative -.104
Kolmogorov-Smirnov Z .404
Asymp. Sig. (2-tailed) .997
a. Test distribution is Normal.
b. Calculated from data.
According the table above, the data already distributed normal, because the
significance value is greater than . In this research Asymp. Sig. (2-tailed)
or the significance value is 0.697, means the set of data have already distributed
normally because 0.997 > 0.05.
75
IV.2.2. Heterosedasticity Test
This testing can be done using scatter plot by plotting SRESID (residual
point) to ZRESID (prediction point). If there is no certain pattern on the graphic,
thenthe model is safe. The result of the heteroscedasity is as follow:
4.4 Scatterplot Graph
The purpose of this testing is to find the differential variance of one
residual research to other researches. From graph above, the data (presented by
dots) spread above and below 0 in Y axis. To conclude, there is no
heteroscedasticity problem in the model.
76
IV.2.3. Autocorrelation Test
The purpose of the autocorrelation testing is to test whether the correlation
happened in one period t with the previous period (t-1) or not. In this research the
researcher use the Durbin Watson test to determine whether there is any
autocorrelation or not on the data sampling. The result can be determined
according the table summary below:
Null Hypothesis Result If
No Positive Autocorrelation Reject 0 < d < d1
No Positive Autocorrelation No decision d1 du
No Negative Autocorrelation Reject 4-d1 < d < 4
No Negative Autocorrelation No decision 4-du < d < 4-di
No Positive and Negative Autocorrelation Accept du < d < 4-du
The result of autocorrelation from this study using Durbin Watson is
2.318903. The du is 1.97735 and di is 0.68519. According to the summary above,
the model that fit the summary is the no decision, no negative autocorrelation, as
in:
4-du < d < 4-di = 2.02265 < 2.318903 < 3.31481
d = 2.318903
di = 0.68519
du = 1.97735
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IV.3. Panel Regression (pool)
This study uses panel regression (pool) method to analyze the data. The
data information listed as below. The cross section data varies from 5 companies,
within 3 years of observation, resulting 15 samples. This regression uses EPS as
the dependent variable.
Dependent Variable: EPS?
Method: Pooled Least Squares
Sample: 1-3 (years)
Included observations: 3
Cross-sections included: 5
Total pool (balanced) observations: 15
IV.3.1. Descriptive Statistic
Using Spss v.20, the descriptive statistic is as follow
4.5 Descriptive Statistic for EPS, CR, DER, ROE, NPM, and TOTA
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
CR 15 21.52 116.04 55.3733 29.71179
DER 15 -38.53 4.53 -.8929 10.45860
NPM 15 -372.32 23.84 -48.8500 116.16006
ROE 15 -104.51 1141.39 74.4153 298.39026
TOTA 15 .08 .72 .4201 .23460
EPS 15 -102.63 912.10 223.6407 316.29306
Valid N (listwise) 15
The table above showed that the maximum value of CR is 116.04, while
the minimum value is at -21.52, resulting mean at 55.37 and at standard deviation
of 29.71179.
Then, the maximum value of DER is 4.53, while the minimum value is at -
38.53, resulting mean at -0.8929 and at standard deviation of 10.45860.
78
Then, the maximum value of NPM is 23.84, while the minimum value is at
-372.32, resulting mean at -48.850 and at standard deviation of 116.16006.
Then, the maximum value of ROE is 1141.39, while the minimum value is
at -104.51, resulting mean at 74.4153 and at standard deviation of 298.39026.
Then, the maximum value of TOTA is 0.72, while the minimum value is at
-0.08, resulting mean at 0.4201 and at standard deviation of 0.23460.
Then, the maximum value of EPS as the dependent variables is 912.1,
while the minimum is at -102.63, resulting mean at 223.6407 at standard deviation
of 316.29306.
IV.3.2. Coefficient, Standard Error, t-statistic
This study uses six variables, both cross-section and time series data, as the
independent variable and dependent variable. Each variable represented by its
initial in the result.
Then the result of panel regression, using pool, is as follow:
4.6 Panel Regression (pool) result
Variable Coefficient
C 503.4105
CR 0.601860
NPM 1.957369
ROE -9.253319
DER -278.3800
TOTA 529.8047
S.E. of regression 87.87313
79
III.3.2.1. Coefficient and Standard Error
From the table above, the equation become:
From the equation above, there are seven points to be noted, they are:
1. The value of C, which is 132 means that when all the variables
equals to zero, EPS will be equal to 132, give or take 111.493.
2. The coefficient value of NPM, which is -1.156397, means that for
every decreasing point in variable NPM will cause an increase value
of EPS, given that all the independent variables remain the same or
equal to zero. When the value of NPM increases, it will cause the
opposite, the value of EPS will fall, required that other independent
variables remain the same or equal to zero.
3. The coefficient value of CR, which is 3.549, means that for every
decreasing point in variable CR will cause EPS to fall, require that
other independent variables remain the same or equal to zero. When
the value of CR increase, the value of EPS will raise, given the
same requirement.
4. The coefficient value of DER, which is -50.148, means that for
every decreasing point in variable DER will cause an increase value
of EPS, given that all the independent variables remain the same or
equal to zero. When the value of DER increases, it will cause the
opposite, the value of EPS will fall, required that other independent
variables remain the same or equal to zero.
80
5. The coefficient value of TOTA, which is -229.182, means that for
every decreasing point in variable TOTA will cause an increase
value of EPS, given that all the independent variables remain the
same or equal to zero. When the value of TOTA increases, it will
cause the opposite, the value of EPS will fall, required that other
independent variables remain the same or equal to zero.
6. The coefficient value of ROE, which is -1.764, means that for every
decreasing point in variable ROE will cause an increase value of
EPS, given that all the independent variables remain the same or
equal to zero. When the value of ROE increases, it will cause the
opposite, the value of EPS will fall, required that other independent
variables remain the same or equal to zero.
7. The standard error means that, regardless the accuracy, the result of
this model can miss by 111.493 points.
III.3.2.2. t-Statistic
Next test is t-testing. The purpose of this testing is to know the effect of
each independent variable (NPM, ROE, CR, DER, and TOTA) on dependent
variable (EPS). The significant level used in this research is 5%. The data is as
follow:
81
4.6 Panel Regression (pool) result
Variable Std. Error t-Statistic Prob.
C 1117.173 0.450611 0.6828
CR 2.866665 0.209951 0.8472
NPM 1.783779 1.097316 0.3527
ROE 6.950974 -1.331226 0.2752
DER 208.2329 -1.336869 0.2736
TOTA 2926.182 0.181057 0.8679
After calculating the t-table, the value of t-table for this research is 2.262.
Based on criteria, the result is as follow:
First, Current Ratio, its t-statistic values is 0.209951 which is lower than t-
table, 2.262. It means current ratio did not influence earnings per share, partially.
Then, Net Profit Margin, its t-statistic values is 1.097316 which is lower
than t-table, 2.262. It means net profit margin did not influence earnings per share,
partially.
Then, Return on Equity, its t-statistic values is -1.331226 which is lower
than t-table, 2.262. It means return on equity did not influence earnings per share,
partially.
Then, Debt to Equity, its t-statistic values is -1.336869 which is lower than
t-table, 2.262. It means debt to equity did not influence earnings per share,
partially.
Then, Total Assets Turnover, its t-statistic values is 0.81057 which is lower
than t-table, 2.262. It means total assets turnover did not influence earnings per
share, partially.
82
IV.3.3. Effect Specification
4.7 R-squared and Adjusted R-squared, probability, and F-statistic
3 years observation, 5 cross-section, 15 samples
R-squared 0.983460
Adjusted R-squared 0.922815
F-statistic 16.21658
Prob(F-statistic) 0.021048
According to the regression analysis results in table 4.7, it showed that the
coefficient correlation (R2) is 98.35%. Coefficient correlation should be between 0
– 1 (0≤KD≤1) with value closer to 1 implying the better fit. In this research the
result for R2
is 98.35%, it closer to 1, which means that the data sampling have a
good coefficient correlation. It means that the model could explain the changes of
EPS up to 98.35%, meanwhile the rest 1.65% explained by other variables that not
discussed in this research.
Then the next evaluation is F-Test. The purpose of this testing is to know
the effect of independent variable simultaneously with the dependent variable.
The degree of confidence that use in this research is 5%. If the F-statistic is
greater than F-table, therefore all the independent variable has significant affect
simultaneously on dependent variable. The F-statisticon this research is 16.21658,
and F-tablevalue is 3.418.It means the F-statistic is greater than F-table
(16.21658> 3.418). To conclude, the model of the research can be used to
determine the value of dependent variable.
83
IV.4. Interpretation
This research analyzes the effect of profitability, working capital, capital
structure, and assets utilization on earnings per share. In this research the
calculation of the numeric data done by SPSS v.20 and Eviews 6. The
interpretation is as follow:
1. First Hypothesis:
H1 : Net Profit Margin has effect on earnings per share
From the result of f-test, it can be seen that simultaneously, all independent
variable influences earnings per share. Then from coefficient correlation, this
research generates model that has 98.35% accuracy to predict earnings per
share.However, individually, net profit margin does not influence earnings per
share. The conclusion is after looking at the result of t-test. t-statistic of net profit
margin, 1.097316, is lower than t-table, 2.262.
In previous research, Khalaf Taani and Hasaa Hamed (2011) conclude that
Profit Margin does not have significant effect on earnings per share. The
conclusion is after the test of stepwise regression method, profit margin is one of
excluded variables from the model.
Despite the role of NPM as the numerator in the ratio, it did not have effect
on earnings per share. It might be caused by changes in denominator, which is
outstanding share, that can be manipulated by the company (ie: the company
bought treasury stock in large amount.)
Therefore, this research reject H1, Net Profit Margin does not influence
earnings per share.
84
2. Second Hypothesis:
H2 : Return on Equity has effect on earnings per share
From the result of f-test, it can be seen that simultaneously, all independent
variable influences earnings per share. Then from coefficient correlation, this
research generates model that has 98.35% accuracy to predict earnings per share.
However, individually, return on equity does not influence earnings per share. The
conclusion is after looking at the result of t-test. t-statistic of return on equity, -
1.331226, is lower than t-table, 2.262.
In previous research, Khalaf Taani and Hasan Hamed conclude that return
on equity has significant and positive correlation with return. A higher ROE
shows that the firm can earn higher return on shareholder‟s equity. A higher ROE
also indicates a higher efficiency in spending money invested by shareholders to
earn profit growth.
The finding from Khalaf Taani and Hasan Hamed also supported by
Hazem B. Al-khatib and Alaa Al-Horani. They conclude that ROE is one amongst
the most significant variable that discriminate successful and distress companies.
The result of this research varies from previous researches because this
research hence on the significant level of the model, not partial independent
variables. Other than that, the criteria from previous research eliminate sample
that has negative equity, while this research take all sample regardless negativity
in equity.
85
Despite the result of previous research, ROE did not show any effect on
Earnings per Share in this research. It could be caused by low amount of income
but large amount of equity.
Therefore, this research reject H2, return on equity does not influence
earnings per share.
3. Third Hypothesis:
H3 : Current Ratio has effect on earnings per share
From the result of f-test, it can be seen that simultaneously, all independent
variable influences earnings per share. Then from coefficient correlation, this
research generates model that has 98.35% accuracy to predict earnings per share.
However, individually, current ratio does not influence earnings per share. The
conclusion is after looking at the result of t-test. t-statistic of current ratio,
0.209951, is lower than t-table, 2.262.
In previous research, Khalaf Taani and Hasan Hamed (2011) conclude that
current ratio does not have significant effect on earnings per share. The conclusion
is after the test of stepwise regression method, current ratio is one of excluded
variables from the model.
Hazem B. Al-khatib and Alaa Al-Horani‟s research (2012) concludes that
current ratio is not a significant variable to discriminate successful and distress
companies listed in Amman.
The function of current ratio is to provide near-future estimation of the
continuance of a company. The current ratio did not effect on earnings per share
86
because it is used to forecast a long-term vision, when it best to forecast near-
future estimation.
Therefore, H3 is rejected; Current Ratio does not influence earnings per
share.
4. Fourth Hypothesis
H4 : Debt to Equity has effect on earnings per share
From the result of f-test, it can be seen that simultaneously, all
independent variable influences earnings per share. Then from coefficient
correlation, this research generates model that has 98.35% accuracy to predict
earnings per share. However, individually, debt to equity does not influence
earnings per share. The conclusion is after looking at the result of t-test. t-statistic
of current ratio, -1.336869, is lower than t-table, 2.262.
In previous research, Khalaf Taani and Hasan Hamed (2011) conclude that
debt to equity is one amongst the most significant variable that has significant
effect towards earnings per share.
The result of this research varies from previous researches because this
research hence on the significant level of the model, not partial independent
variables. Other than that, the criteria from previous research eliminate sample
that has negative equity, while this research take all sample regardless negativity
in equity.
87
Similar with previous research, debt is bad for the company, especially
when it did not use to increase productivity. Moreover, the equity of some
companies used in this research is not stable due to conversion and acqusition.
Therefore, H4 is rejected;Debt to Equity does not influence earnings per
share
5. Fifth Hypothesis
H5 : Total Assets Turnover has effect on earnings per share
From the result of f-test, it can be seen that simultaneously, all
independent variable influences earnings per share. Then from coefficient
correlation, this research generates model that has 98.35% accuracy to predict
earnings per share. However, individually, current ratio does not influence
earnings per share. The conclusion is after looking at the result of t-test. t-statistic
of current ratio, 0.181057, is lower than t-table, 2.262.
In previous research, Khalaf Taani and Hasan Hamed (2011) conclude that
current ratio does not have significant effect on earnings per share. The conclusion
is after the test of stepwise regression method, current ratio is one of excluded
variables from the model.
In another research, Kennedy, 2003 and Slavin, 2006, they conclude that
total assets turnover has significant effect over earnings per share. This
diversification explained by Khalaf Taani and Hasan Hamed as a belief that big
firms could not increase their TATO easily.
88
The function of Asset Turnover is to indicate the efficiency of assets
utilization but did not have effect on earnings per share. It could be because access
in capital market throughout the sample is not spread evenly, one of them have
more dominant market position, or another source of income, which is not earned
from sales.
Therefore, this research reject H5, Total Assets Turnover does not
influence earnings per share.
6. Sixth Hypothesis
H6: Net Profit Margin, Return on Equity, Current Ratio, Debt to Equity, and
Total Assets Turnover simultaneously have effect on earnings per share
From the result of f-test, it can be seen that simultaneously, all
independent variable influences earnings per share. Then from coefficient
correlation, this research generates model that has 98.35% accuracy to predict
earnings per share.
In previous research, Khalaf Taani and Hasan Hamed (2011) conclude that
return on equity, price to book value, cash flow from operation activities/sales,
and debt to equity ratio significantly affect earnings per share. The conclusion is
after the test of stepwise regression method; all four of them are selected in the
model.
In another research, Kennedy, 2003 and Slavin, 2006, they conclude that
total assets turnover has significant effect over earnings per share.
89
Despite the result from independent variables, partially they did not have
any effect on earnings per share, but together they are able to explain it. it
conclude that to forecast future earnings, one particular ratio is not enough, there
have to be another ratios.
Therefore, this research accepts H6, Net Profit Margin, Return on Equity,
Current Ratio, Debt to Equity, and Total Assets Turnover simultaneously
influence earnings per share.
90
CHAPTER V
Conclusion and Recommendation
V.1. Conclusion
The purposes of this research is to obtain empirical evidence about the
effect of profitability ratio, working capital, capital structure, and assets
utilization, partially and simultaneously, on earnings per share of listed
telecommunication company in Indonesian Stock Exchange period 2010-2012.
The results are as follow:
1. Net profit margin has no effect on earnings per share. It can be seen
from t-test, where NPM did not pass.
2. Return on equity has no effect on earnings per share. It can be seen
from t-test, where ROE did not pass.
3. Current ratio has no effect on earnings per share. It can be seen from t-
test, where CR did not pass.
4. Debt to equity has no effect on earnings per share. It can be seen from
t-test, where DER did not pass.
5. Assets turnover ratio has no effect on earnings per share. It can be seen
from t-test, where TOTA did not pass.
6. Net Profit Margin, Return on Equity, Current Ratio, Debt to Equity,
and Total Assets Turnover simultaneously have effect on earnings per
share. As a model, all five variable can explained earnings per share up
to 98.35% accuracy.
91
V.2. Recommendations
For the next researches, the writer suggests three points in order to create
better. They are:
1. In term of period, this research only use 3 years period to pick samples.
The more samples the better explanation will come out of the research.
So in future, the writer would like to suggest adding the period of
sample criterion to minimum 10 years.
2. In term of scope, this research limits the area of the company around
listed telecommunication company in Indonesia Stock Exchange. For
the next research, the writer recommends that the researcher take the
sample for another country as well.
3. In term of variable, this research uses five variables to explain earnings
per share. In the future, the writer recommends to use more than five
different ratio as variable, especially ratios that involves cash flow.
92
References
G. Picciano, Anthony. EDTATS Primer Session 6 - Descriptive Research.
Available: http://www.anthonypicciano.com/s6.html
G. Picciano, Anthony. EDTATS Primer Session 6 – Causal Comparative
Research. Available: http://www.anthonypicciano.com/s10.html
L. 2012. Harvard Referencing Style. Available:
http://www.library.auckland.ac.nz/instruct/ref/harvard.htm
L. 2013. Financial Statement Analysis. Available:
http://www.accountingtools.com/financial-statement-analysis
McGraw-Hill Companies. L. 2009. The Four Basic Financial Statements: An
Overview. Available: http://highered.mcgraw-
hill.com/sites/0073324833/student_view0/ebook/chapter1/chbody1/the_four_basi
c_financial_statements__an_overview.html
The Free Encyclopedia, Wikipedia. L. 2013. Financial Statement. Available:
http://en.wikipedia.org/wiki/Financial_statement
D‟amato, Elio. 2010.The Top 15 Financial Ratio.
B. Al-khatib, Hazem and Al-Horani, Alaa. 2012. Predicting Financial Distress of
Public Companies Listed in Amman Stock Exchange. European Scientific
Journal. Vol 8,15.
Ali Abusalah Elmabrok, Mohammed and Ng, Kim-Soon. 2012. Using Altman's
Model and Current Ratio to Assess the Financial Status of Companies Quoted In
the Malaysian Stock Exchange. International Journal of Scientific and Research
Publications. Vol 2,7.
Slavin, Greg. 2007. Aggregating Earnings per Share Forecasts. Available:
http://repository.upenn.edu/curej/67
Taani, Khalaf and Hamed Banykhaled, Mari‟e Hasan. 2011. The Effect of
Financial Ratios, Firm Size, and Cash Flows from Operating Activities on
Earnings per Share. International Journal of Social Sciences and Humanity
Studies. Vol 3, 1.
M. Al-Qaisi, Khaldoun. 2011. Predicting the Profit per Share Using Financial
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SAS Institute Inc., SAS OnlineDoc®, Version 8, Cary, NC: SAS Institute Inc., 1999.
93
Appendix A Table of variables
Independent Variables and Dependent Variables Variable Concept Formula Scale
Dependent
variable
Earnings per
Share
This ratio used to
evaluate the price
of common stock
Ratios
Independent
variable
Current Ratio
A short term
measure of
financial health
Working Capital ratio
Ratios
Independent
variable
Debt to Equity
A simple measure
of financial risk in
an enterprise
Capital Structure Ratio
Ratios
Independent
Variable
Assets
Utilization
To measure the
intensity of
utilizing assets
Assets Utilization Ratio
Ratios
Independent
Variable
Return on
Equity
A measurement of
management
performance
Profitability Ratio
1. Return on Equity can be disaggregated into:
The details can be seen at chapter II, while the simple
equation is as follow:
%
Independent
Variable
Net Profit
Net Profit is an
indicator of the
percentage of
%
94
Margin company‟s sales
revenue would
remain after all cost
have been taken
into account
2. Net Profit Margin
95
Appendix B Data Test
Samples
No Companies History
1. PT Bakrie Telecom Origin from PT Radio Telepon Indonesia, founded in 1993. Later in
2003, PT Radio Telepon Indonesia changed its name into PT
Bakrie Telecom.
In 2006, PT Bakrie Telecom lists their shares.
In 2012, PT Bakrie Telecom acquired PT Sampoerna
Telekomunikasi Indonesia.
Now, in 2013, PT Bakrie Telecom has four types of products (esia,
wifone, wimode, and aha)
2. PT Indosat Established in 1967.
In 1994, Indosat is registered in Indonesia Stock Exchange.
Up to 2013, Indosat has serve with their phone services (Indosat,
IM3, and Matrix), fixed voice service, fixed wireless, and fixed
telephone services.
3. PT Telekomunikasi
Indonesia
Founded in 1856, PT Telekomunikasi Indonesia is the oldest
telecommunication company in Indonesia.
First time its registered is in 1995 at Jakarta Stock Exchange and
Surabaya Stock Exchange.
Until now, Telkom has served with fixed line telecommunication,
mobile telephony, internet services, digital, and IT services.
4. PT Smartfren Smartfren is a CDMA provider, Natiional-range telecommunication
96
and internet service provider.
Act as subsidiary, Smartfren‟s parent and controller is PT
SinarmasGroup.
5. PT XL Axiata Founded in 1996, XL Axiata focused their service in
telecommunication services.
Origin from PT Grahametropoitan, 1989
97
Appendix C
Panel Regression
One-Sample Kolmogorov-Smirnov Test
Unstandardiz
ed Predicted
Value
N 15
Normal Parametersa,b
Mean 215.0006667
Std.
Deviation
317.3032948
1
Most Extreme
Differences
Absolute .183
Positive .183
98
Negative -.104
Kolmogorov-Smirnov Z .404
Asymp. Sig. (2-tailed) .997
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
CR 15 21.52 116.04 55.3733 29.71179
DER 15 -38.53 4.53 -.8929 10.45860
NPM 15 -372.32 23.84 -48.8500 116.16006
ROE 15 -104.51 1141.39 74.4153 298.39026
TOTA 15 .08 .72 .4201 .23460
EPS 15 -102.63 912.10 223.6407 316.29306
Valid N (listwise) 15
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