Profitability Pays Idle Liquidity Does Not: Financial Fundamentals and Firm Value in Indonesian Manufacturing
DOI:
https://doi.org/10.61656/sbamr.v8i3.196Keywords:
firm value, price-to-book value, current ratio, return on assets, debt-to-equity ratio, signalling theoryAbstract
Purpose: This study examines whether liquidity (current ratio), profitability (return on assets), firm size, and leverage (debt-to-equity ratio) affect the firm value of manufacturing companies listed on the Indonesia Stock Exchange, using signalling theory as the main lens.
Methodology: The study adopts a quantitative explanatory design using secondary data from the published financial statements of manufacturing companies listed on the Indonesia Stock Exchange for the 2018 financial year. Firm value is proxied by the price-to-book value ratio, and the hypotheses are tested with multiple linear regression analysis using the t-test, while the F-test is used to assess model fit.
Findings: The current ratio has a negative and significant effect on firm value, whereas return on assets and firm size have positive and significant effects. The debt-to-equity ratio has a negative but insignificant effect. The model fit test confirms that the regression model is appropriate, and the results indicate that investors reward profitable and large firms but discount excessive idle liquidity.
Implications: Managers should channel excess current assets into productive, profit-generating investments and communicate profitability credibly to the market, while investors may rely more on profitability and size signals than on leverage when assessing the price-to-book value of manufacturing firms.
Originality: The study integrates signalling, agency, and capital-structure perspectives to explain the effects of four fundamental ratios on the market valuation of manufacturing firms in an emerging market, and reconciles its results with both international and Indonesian evidence.
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