The Effect of Financial Ratios on Profit Growth in Manufacturing Companies in the Consumer Goods Sector Listed on the Indonesia Stock Exchange

Oct 13, 2025 by wbrum.org 146 views

The Effect of Financial Ratios on Profit Growth in Manufacturing Companies in the Consumer Goods Sector Listed on the Indonesia Stock Exchange

Introduction

Financial statements are a crucial tool for users to analyze the conditions and performance of a company. In an effort to understand financial statements, users often rely on financial ratios as a measurement tool to predict earnings growth. The consumer goods sector is one of the most competitive and dynamic industries in the world, and companies listed on the Indonesia Stock Exchange (IDX) face intense competition and pressure to maintain profitability. This study aims to investigate the role of financial ratios in influencing the growth of companies in the manufacturing sector of consumer goods listed on the IDX.

Background

The manufacturing sector of consumer goods is a significant contributor to the Indonesian economy, accounting for a substantial portion of the country's GDP. Companies in this sector face various challenges, including intense competition, fluctuating raw material prices, and changing consumer preferences. To maintain profitability, companies must carefully manage their financial resources and make informed decisions about investments, financing, and risk management. Financial ratios are a key tool for companies to assess their financial performance and make informed decisions.

Research Objectives

The main objective of this study is to empirically test the impact of financial ratios on earnings growth, both partially and simultaneously. The four financial ratios that will be analyzed are:

Debt Ratio: This ratio measures a company's debt-to-equity ratio and is an indicator of a company's financial leverage.
Net Profit Margin: This ratio measures a company's net profit as a percentage of its revenue and is an indicator of a company's profitability.
Inventory Turnover: This ratio measures a company's inventory turnover as a percentage of its revenue and is an indicator of a company's inventory management efficiency.
Return on Equity (ROE): This ratio measures a company's net income as a percentage of its shareholders' equity and is an indicator of a company's profitability and efficiency.

Methodology

This study uses a causal research design, with a population of 35 companies in the consumer goods sector listed on the IDX in the 2006-2008 period. After using the purposive sampling method, 33 companies were selected as samples. Data analysis was carried out using multiple regression, through F test and T-test at a significance level of 5% (α = 0.005).

Results

The results of the analysis showed that simultaneously, the four financial ratios affected earnings growth. However, when viewed partially, only the debt ratio has a significant influence on earnings growth. The effect of regressors' variables on profit growth recorded at 24%. This figure shows that there are other factors outside the variables tested that contribute 76% to profit growth.

Discussion

The results of this study suggest that financial ratios play a significant role in influencing earnings growth in the manufacturing sector of consumer goods listed on the IDX. The debt ratio is a key indicator of a company's financial leverage and has a significant influence on earnings growth. High debt ratios may reflect a greater risk, but if managed properly, companies can utilize debt for more profitable investment.

The net profit margin, inventory turnover, and return on equity are also important indicators in assessing company efficiency and profitability, although the effect is not significant in the context of this research. These ratios provide valuable insights into a company's ability to manage its resources and generate profits.

Conclusion

The conclusion that can be drawn from this study is the need for companies to pay attention to debt management carefully, because the debt ratio has proven to affect earnings growth. However, the company must also continue to optimize overall financial performance to increase profitability. This study provides valuable insights for stakeholders in companies to better understand how financial ratios can affect earnings performance, as well as opening ways to further research in this field.

Implications

The findings of this study have several implications for companies in the manufacturing sector of consumer goods listed on the IDX. Firstly, companies must carefully manage their debt levels to avoid excessive financial leverage. Secondly, companies must continue to optimize their overall financial performance to increase profitability. Finally, companies must use financial ratios as a tool to assess their financial performance and make informed decisions about investments, financing, and risk management.

Limitations

This study has several limitations. Firstly, the sample size is relatively small, which may limit the generalizability of the findings. Secondly, the study only focuses on the manufacturing sector of consumer goods listed on the IDX, which may not be representative of other industries or companies. Finally, the study only uses a limited number of financial ratios, which may not capture the full range of factors that influence earnings growth.

Future Research Directions

This study provides several avenues for future research. Firstly, researchers can investigate the impact of financial ratios on earnings growth in other industries or companies. Secondly, researchers can explore the use of other financial ratios or metrics to assess company performance. Finally, researchers can investigate the impact of other factors, such as market conditions or economic trends, on earnings growth.

Conclusion

In conclusion, this study provides valuable insights into the role of financial ratios in influencing earnings growth in the manufacturing sector of consumer goods listed on the IDX. The findings suggest that financial ratios play a significant role in influencing earnings growth, and companies must carefully manage their debt levels and optimize their overall financial performance to increase profitability. This study provides a foundation for further research in this field and highlights the importance of financial ratios in assessing company performance.
Frequently Asked Questions (FAQs) about the Effect of Financial Ratios on Profit Growth in Manufacturing Companies in the Consumer Goods Sector Listed on the Indonesia Stock Exchange

Q: What are financial ratios, and how do they relate to profit growth?

A: Financial ratios are mathematical expressions that help users analyze a company's financial performance and position. They are used to evaluate a company's profitability, efficiency, and solvency. In this study, we used four financial ratios: Debt Ratio, Net Profit Margin, Inventory Turnover, and Return on Equity (ROE) to investigate their impact on profit growth in manufacturing companies in the consumer goods sector listed on the Indonesia Stock Exchange.

Q: What is the significance of the Debt Ratio in this study?

A: The Debt Ratio is a key indicator of a company's financial leverage and has a significant influence on earnings growth. High debt ratios may reflect a greater risk, but if managed properly, companies can utilize debt for more profitable investment. In this study, we found that the Debt Ratio has a significant impact on earnings growth, suggesting that companies must carefully manage their debt levels to avoid excessive financial leverage.

Q: What is the role of Net Profit Margin, Inventory Turnover, and Return on Equity (ROE) in this study?

A: These three financial ratios are important indicators of a company's efficiency and profitability. While they do not have a significant impact on earnings growth in this study, they provide valuable insights into a company's ability to manage its resources and generate profits. Companies must continue to optimize their overall financial performance to increase profitability.

Q: What are the implications of this study for companies in the manufacturing sector of consumer goods listed on the Indonesia Stock Exchange?

A: The findings of this study have several implications for companies in the manufacturing sector of consumer goods listed on the Indonesia Stock Exchange. Firstly, companies must carefully manage their debt levels to avoid excessive financial leverage. Secondly, companies must continue to optimize their overall financial performance to increase profitability. Finally, companies must use financial ratios as a tool to assess their financial performance and make informed decisions about investments, financing, and risk management.

Q: What are the limitations of this study?

A: This study has several limitations. Firstly, the sample size is relatively small, which may limit the generalizability of the findings. Secondly, the study only focuses on the manufacturing sector of consumer goods listed on the Indonesia Stock Exchange, which may not be representative of other industries or companies. Finally, the study only uses a limited number of financial ratios, which may not capture the full range of factors that influence earnings growth.

Q: What are the future research directions based on this study?

A: This study provides several avenues for future research. Firstly, researchers can investigate the impact of financial ratios on earnings growth in other industries or companies. Secondly, researchers can explore the use of other financial ratios or metrics to assess company performance. Finally, researchers can investigate the impact of other factors, such as market conditions or economic trends, on earnings growth.

Q: What are the practical implications of this study for investors and stakeholders?

A: The findings of this study provide valuable insights for investors and stakeholders in companies in the manufacturing sector of consumer goods listed on the Indonesia Stock Exchange. Investors and stakeholders can use financial ratios as a tool to assess a company's financial performance and make informed decisions about investments. Additionally, the study highlights the importance of debt management and overall financial performance in increasing profitability.

Q: What are the policy implications of this study for regulators and policymakers?

A: The findings of this study have several policy implications for regulators and policymakers. Firstly, regulators and policymakers can use financial ratios as a tool to assess the financial performance of companies in the manufacturing sector of consumer goods listed on the Indonesia Stock Exchange. Secondly, regulators and policymakers can develop policies to promote debt management and overall financial performance in companies. Finally, regulators and policymakers can use the study's findings to inform their decisions about investments and risk management in the manufacturing sector of consumer goods.