Acompanycanmaximizeitsprofitifthefinancialmanagerknowsthefactorsthathavemajorinfluenceonprofitability.Thecompanycandeterminestepstoovercomeproblemsandminimizethenegativeimpact.Therearemanyfactorsthataffectthecompanyprofitability.Factorscanbemeasuredbyusingfinancialratio,financialsuchascurrentcapitalturnover,currentratioandcurrentsalegrowth,companysizeanddebitratiocanbeusedtodeterminetheeffectofeachvariableoncompany’sprofitability.
Profitabilitycanmeasurehowmuchgrowthacompanyearnintermofsale,assetsandprofitsforitsowncapital.Themeasureofsuccessofamanagercanbeseenfromtheabilitytocreateprofitability.Increasingprofitabilityisthemostimportanttaskforamanger.Managersareconsistentlyproportionofdebtisgreaterthanequity.Profitabilityratioisusedtoshowhowmuchprofitisderivedfromthecompanyperformance.Theformulaisasfollows:
ROA=Earningsaftertax
TotalAssets
Leverageisastrategythatcompaniesusedtoincreaseassets.Itpaysshort-termandlong-termdebts.Theyusefixedassetstoincreasingcompanyincome.Theyalsousedtomeasurelevelofsolvency.Theuseofdebtthatistoohighwillindangerthecompanybecausethecompanywillenterintoextremeleveragethatiscompanytrappedinhighlevelofdebtandit’sdifficulttoreleasethedebtburden.Thereforethecompanymustbalancehowmuchdebtisworthtakingandfromwhichsourcescanbeusedtopayoffdebt.Leveragehasnosignificanteffectonprofitability.Theformulaisasfollows
Debtofequityratio=TotalLiabilities
Totalshareholder’sequity
Tomeasuretheleverageofresearchersusingdebtofequityratio.DERistheratiothatillustratestheratioofdebtandequityincorporatefundingandshowtheabilityofthecompanyowncapitaltomeetsitsobligations.
Liquidityshowthecompanyabilitytomeetsitfinancialobligations.Italsoshowtheabilityofshort-termobligationssuchasloans,staffwages,billsandtax.Theyshowpositiveeffectonprofitability.Forexample:whenahumantakeoutaloantopurchaseanassetorwiththehopeofgrowingtheirmoneyinfuture.Currentdebtispaymentobligationsinoneyearandanormaloperatingcycleinbusiness.Currentratioistheratiobetweentheamountofcurrentassetsandcurrentdebts.Hereistheformulausedtocalculatethecurrentratio:
CurrentRatio=Currentassets
Currentliabilities
WorkingCapitalisthemoneyavailabletomeetyourcurrentobligations.Theexistenceofhighlevelofworkingcapitalturnoverindicatesthatthecompanyhasanopportunitytoachieveahighprofitgrowthinthefuture.Aratiothatmeasures,howefficientlyacompanyisusingitsworkingcapitaltosupportitssalesandgrowths.HereistheformulaofWorkingcapitalratio.
WorkingCapitalturnover=Sales
Currentassets–Currentliabilities
Previousresearch:
Previousresearchthatcansupportthisresearchisasfollows:Putranto[15]inhisresearchentitled”TheEffectofDiversification,Leverage,andInflationStrategiesontheProfitabilityofFood&BeverageCompanies”.Theresultsshowedthatthediversificationstrategyhadapositiveeffectoncompanyprofitability;leveragehadapositiveeffectoncompanyprofitabilitybutwasnotinaccordancewiththehypothesis,whileinflationdidnotaffectthecompany’sprofitability.
WijayaandIsnani[16]intheirstudyentitled”TheEffectofWorkingCapitalEfficiency,Liquidity,andSolvencyontheProfitabilityofPharmaceuticalCompanies”.TheresultsshowedthattheWorkingCapitalTurnover(WCT),DebttoEquityRatio(DER)partiallyhadanegativeandnotsignificanteffectonReturnonAssets(ROA).CurrentRatio(CR)hasapositiveandsignificanteffectonReturnonAssets(ROA).
YulianitaandIsynuwardhana[17]intheirstudyentitled”TheEffectofWorkingCapitalTurnover,Liquidity,andLeverageonProfitability(EmpiricalStudyofConsumerGoodsCompaniesListedontheIndonesiaStockExchangeforthe2015-2017Period)”.TheresultsshowedthatsimultaneouslyshowedWorkingCapitalTurnover(WCOT),Liquidity(CR),andLeverage(DER)significantlyinfluenceProfitability(ROA).Partially,WorkingCapitalTurnover(WCOT)hasasignificanteffectonprofitability(ROA),whileLiquidity(CR)andLeverage(DER)havenosignificanteffectonprofitability(ROA).
Framework:
Basedonthetheoreticalbasisandtheresultsofpreviousstudiesandtheproblemsthathavebeenraised,thenasabasisforformulatingahypothesis,thefollowingframeworkispresentedintheresearchmodelinthefollowingfigure:
HYPOTHESIS:
Theresearchhypothesesproposedareasfollows:Ha1=WorkingCapitalTurnoveraffectsProfitability.Ha2=LiquidityaffectsProfitability.Ha3=Leverageaffectsprofitability.
RESEARCHMETHODS:Typesofresearchthisresearchiscausalresearch.Thetypeofresearchusedinthisstudyiscasualassociativeresearch(causalassociativeresearch).AccordingtoSanusi[11],associative-causalresearchisresearchthatlooksforrelationshipsbetweentwoormorevariables.Thepurposeofassociativeresearchistolookforrelationshipsbetweenonevariableandanother.
DefinitionofVariableOperations:
Thevariablesusedinthisstudyconsistedofthedependentvariableandtheindependentvariable.OperationalresearchvariablesontheEffectsofWorkingCapitalTurnover,Liquidity,andLeverageonProfitabilitycanbesummarizedintable1.1.
Table-1.1:OperationalizationofVariables
TypesofVariables OperationalDefinition Formula Scale
Dependent
Profitability Oneindicatortoassessthelevelofeffectivenessofmanagementperformanceinrunningacompanybylookingatthelevelofbenefitsobtained ROA Ratio
Independent
WorkingCapitalturnover Workingcapitalisalwaysoperatingwithinthecompanyaslongasthecompanyconcernedisinbusiness
Sales
Currentassets-CurrentLiabilities Ratio
Liquidity Theratiousedtomeasurethecompany’sabilitytomeetshort-termobligationsthatmustbemeet CurrentRatio Ratio
Leverage Theratiousedtomeasurehowmuchthecompanyisfinancedwithdebt DebttoEquityratio Ratio