The Effect of Profitability, Working Capital, Capital ...

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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

26

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

27

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

28

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


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


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.

54

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

55

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

77

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



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



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



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



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.


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




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.


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




earnings per share.


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

Ratios. Asian Journal of Finance & Accounting. Vol 3,6.

SAS Institute Inc., SAS OnlineDoc®, Version 8, Cary, NC: SAS Institute Inc., 1999.

http://www.anthonypicciano.com/s6.html

http://www.anthonypicciano.com/s10.html

http://www.library.auckland.ac.nz/instruct/ref/harvard.htm

http://www.accountingtools.com/financial-statement-analysis

http://highered.mcgraw-hill.com/sites/0073324833/student_view0/ebook/chapter1/chbody1/the_four_basic_financial_statements__an_overview.html



http://en.wikipedia.org/wiki/Financial_statement

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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