CHAPTER 1

INTRODUCTION

1.1 Background

According to Keown et al. (2001), the goal of a firm is maximization of

shareholder wealth. Not only this goal be in the best interest of shareholders, but it

will also provide the most benefits to society. In order to achieve this goal, a firm

will need resources directed to productive use by business.

Finance is the most significant factor that assists in the formation of new

businesses, and allows businesses to take advantage of opportunities to grow, to

expand or innovate further. As the old proverb says it takes money to make

money, the firm sure will need to buckle down and spend money in order to

operate. In the language of finance, the business should make investments in

assets such as inventories, machineries, lands and labors, in order to generate

cash.

There are two kind of sources of financing, first debt financing and the

second is equity financing. Debt is any external funding which is repayable and

has an associated cost. The cost may be direct such as interest payment or indirect

such as agency cost. Debt could be short term (less than one year) or long term

(more than a year).

1
 Firms may use different forms of debt such as taking a credit facility

directly from a financial institution, issuing (warrants or convertible) bonds, using

lease financing or taking a trade credit to finance their business. Debt may also be

more complicated, for example by using derivative instruments such as futures

and forward contracts or by using swaps. The debt equity mix constitutes the

capital structure of the firm (Brealey et al. 2008).

Modigliani and Miller (1958), popularly referred to as MM, published

what has come to be known as the modern theory of capital structure. MM

demonstrated under a very restrictive set of assumptions that a firm’s value is not

affected by its capital structure. This assertion by MM is based on some

assumptions including the absence of taxes, market participants can borrow or

lend at risk free rate, there are no brokerage or transaction charges, and no

bankruptcy cost among others. MM therefore, by implication, point out that in

real world, factors such as taxes and interest rate payment affect the debt equity

composition of a firm’s capital and the value of a firm. Since then, the study of

capital structure and its debate has received a lot of attention from academicians,

researchers on finance, financial analysts and practitioners. However, most of

these studies has occurred in the developed countries or in the developed

economies.

2
 Another theory on capital structure popularized by Myers and Majluf

(1984), is the pecking order theory. It explains that corporate financial managers

follow a certain order or sequence of financing sources when funding a project.

Internal fund would first be used when available, and when it becomes scarce,

they resort to debt until it becomes financially and economically, not advisable to

hold any additional debt, then the last recommendation is issuing equity.

Based on the above background, obtained a description of various influence

posed by capital structure to company's profitability. Therefore, this research must

be done to analyze and reexamine the relationship of capital structure variables

and profitability that has been done by previous researchers with supported

theories.

This research is performed to investigate the relationship of capital structure

and profitability on telecommunication companies listed in Indonesia Stock

Exchange during 2011-2015. Author perceive the need to do analysis on this

sector because this is one of many industries that continues to grow.

Telecommunication company is one of the most dynamic companies. In

Indonesia, telecommunication companies are continues to experience rapid

growth along with the development of information and technology. According to

the directorate general of post and telecommunications, over the period 2006-

2010 the average growth of mobile phone users in Indonesia is 31.9% per year.

Until the end of 2010 the number of mobile phone users has reached 211 million

users that consisted of GSM operators by 95% and 5% of CDMA market.

3
 Profitability variable is measured by profitability ratio, return on equity

(ROE), while the capital structure is measured by short term debt, long term debt

and equity. To focus the problem, researcher will focused only on some

companies engaged in the field of telecommunications are actively traded on the

Indonesia Stock Exchange 2011-2015. The companies are PT. TELKOM Tbk,

PT. Indosat, Tbk,PT. XL AXIATA, Tbk and PT.Smartfren Telecom Tbk.

1.2 Problem Statement

Since Modigliani and Miller (1958), came out with their theory on capital

structure, many researchers in finance carried out several studies on the

relationship between capital structure and firm’s performance or profitability.

However, most of these studies have been done in developed countries where

economic conditions are relatively stable such as the United States and Britain. In

Indonesia where business economic environment are relatively volatile, scholars

and researchers in finance have also carried out some studies on capital structure

and its relations to firm’s performance or profitability to find out whether their

findings would be consistent with those in the developed economies.

Relationship between capital structure and profitability cannot be ignored

because the improvement in profitability is necessary for long-term survivability

of a firm. According to Indonesia’s accounting standards, debt interest expense

included into the type of expenses that reduce gross income and ultimately reduce

amount of tax that should be deposited.

4
 PSAK 1:56 concerning about the presentation of the income statement report

should include the following items: revenue, profit and loss of business, cost of

borrowing, part of the profit or loss of affiliated companies and associations that

are treated using the equity method, tax expense, profit or loss from ordinary

activities, extraordinary items, minority interest and net profit or loss for the

current period. The addition of debt in capital structure will improve profitability

of a firm. Therefore, it is important to test the relationship between capital

structure and profitability of the firm to make sound capital structure decisions,

because the composition of capital structure will affect the company’s

profitability.

So many studies have provided the evidence that capital structure does affect

profitability. For example research conducted by Umar (2012) found that there is

a negative relationship between capital structure and profitability, while Nirajini

and Priya (2013) and Vatavu (2015) found a positive relationship between capital

structure and profitability. However, the analysis over the influence of capital

structure and profitability in one single research is limited and showing not

consistence result. An opportunity to perform additional research among those

variables is open in the form of replication and development.

Related to the reason above the researcher want to conduct research on the use

of capital structure as financing media by the investor in Indonesia, especially in

telecommunication companies listed on Indonesia Stock Exchange in 2011-2015.

Researchers want to analyze the extent of pattern influence of capital structure on

profitability, than the formulation of problem posed by the researcher is

5
 "To what extend the long term debt and short term debt as well as the equity

influence the profitability in telecommunication companies listed in Indonesia

Stock Exchange in 2011-2015?"

1.3 Research Purposes

Based on the background and then identified in problem formulation, the

study aims to:

1. To examine the effect of short term debt/liabilities on the firm’s profitability

2. To examine the effect of long term debt/liability on the firm’s profitability

3. To examine the effect of equity on the firm’s profitability

1.4 Writing Systematic

CHAPTER I is an introductory chapter, which describes the background

problems, problem statement, purpose and usefulness of the

research and systematic writing in this research.

CHAPTER II Discusses the literature review that begins with basic

theories related to the study, similar research history,

framework, and formulation of hypotheses to be tested for

ease in understanding about this research.

CHAPTER III Elaborating on the research method contain variables use,

operational definitions, sampling, kind and data sources, as

well as the methods of analysis used in research.

6
CHAPTER IV Explaining about the description of the object of research,

data analysis, and discussion so that can know results of the

analysis examined the results of hypothesis testing.

CHAPTER V is a concluding chapter that presents a brief conclusion

obtained from the analysis in the previous chapter,

limitations of the study, and suggestions for research that

will come.

7
 CHAPTER II

LITERATURE REVIEW

2.1 Introduction

According to Myers (2005), the study of capital structure attemps to

explain the mix of securities and financing sources used by corporation to finance

real investment. There are two kind of financing, first is equity financing and the

second is debt financing. The difference of equity financing and the debt

financing is in the ownership. In equity financing, investors become the owner of

a firm and shares any profit. However, debt financing is not giving up ownership

since it is literally just borrowing money. Debt financing also comes with strict

conditions to pay interest and principal at specified dates.

Capital refers to the firm’s sources of long-term financing. Corporations

raise equity financing in two ways. First, they can issue new shares of stock. The

investors who buy new shares put up cash in exchange for a fraction of the

corporation’s future cash flow and profits. Second, the corporation can take the

cash flow generated by its existing assets and reinvest the cash in new assets. In

this case the corporation is reinvesting on behalf of existing stockholders. No new

shares are issued.

A company is inherently risky. The financial manager should identify the

risks and make sure to manage it properly. For example, we know that debt has its

advantage, but using too much debt can lead the company to bancruptcy.

8
 According to Abor (2005), financing is the most important things in

running the business, and there are so many puzzling issues in this area. The

subject has generated a lot of arguments and counter-arguments in literature

among scholars and researchers especially after Modigliani and Miller (1958),

Myers (1984), and Myers and Majluf (1984) published their papers. This chapter

looks at the various theories and works that have previously been done in relation

to this study.

2.2 The Concept of Capital Structure

Basically the company's financial manager's job is trying to find and seek

a balance in qualitative composition of financial need. Selection of the

composition in the assets side will determine the structure of a company's wealth

while the qualitative composition of the liabilities and equity will refer to financial

structure and capital structure.

According to myers (2001), the study of capital structure atempts to

explain the mix of securities and sources of financing used by corporation to

finance real investment. But there is no universal theory about debt and equity

choice and no reason to expect one.

A. Components of Capital Structure

1. Long-term debt

Total debt on the balance sheet will show the amount of the loan capital

used in the company's operations. Loan capital may be short-term debt and long-

term debt, but generally long-term debt is much greater than short-term debt.

9
 According to Keown et al.(2001) long-term debt is one of sources of

funding with maturity of more than one year, usually around 5 to 20 years. Long-

term debt can include term loans, bonds, etc.

2. Short-term debt

Short-term debt is an account shown in the current liabilities portion of a

company's balance sheet. This account is made up of any debt incurred by a

company that is due within one year (Keown et al. 2001). The debt in this

liabilities account is usually made up of short-term bank loans taken out by a

company.

3. Equity

Equity is a long-term capital obtained from the owner of the company or

shareholders. Equity is expected to remain in the company for unlimited period

while the borrowed capital has matured. There are two main sources of equitiy,

there are preferred shares capital and ordinary share capital, as described below:

a. Preferred shares capital

According to Keown et al.(2001) preferred stockholders receive a dividend

in a fixed amount. Preferred shares give shareholders some of the privileges that

make it more senior or given priority over ordinary shareholders. Therefore, the

company does not provide preferred stock in large amount.

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b. Ordinary share capital

Owner of the company is the ordinary shareholders who invest their

money in the hope of future returns. Holders of ordinary shares are sometimes

called residual owners because they only receive the remaining after all claims to

income and assets have been met (Kewon et al. 2001)

B. Theories of Capital Structure

A number of theories have been advanced in explaining the capital

structure and profitability / value of firms. The existing theories of capital

structures and profitability/ firm value are explained as follows.

1. Modigliani and Miller (MM) theory

In corporate finance theories, the seminal work by Modigliani and Miller

(1958) in capital structure provided a basis for the development of the theoretical

framework within which various theories were about to emerge in the future.

Modigliani and Miller (1958) concluded to the broadly known theory of “capital

structure irrelevance” where financial leverage does not affect the firm’s value.

However, their theory was based on very restrictive assumptions that do

not hold in the real world. These assumptions include no taxes, no transaction

costs, homogenous expectations, and perfect capital markets. The existence of

bankruptcy costs and tax advantageous of interest payments lead to the concept of

an “optimal” capital structure which maximizes the value of the firm, and hence

minimizes its total cost of capital.

11
 Modigliani and Miller, (1958) reviewed their earlier position by

incorporating tax benefits as determinants of the capital structure of firms. The

key feature of taxation is that interest is a tax-deductible expense. A firm that pays

taxes receives a partially offsetting interest “tax-shield” in the form of lower taxes

paid. Hence, Modigliani and Miller, (1963) proposed to use as much debt capital

as possible in order to increase profitability and hence maximum firm value.

2. Static trade-off theory

Capital structure theories have diverse views on the relationship between

leverage and profitability. The trade-off theory argues that firms generally prefer

debt for tax considerations. Profitable firms would employ more debt because

increased leverage would increase the value of their debt tax shield (Myers, 1984).

It states also that firms seek debt levels that balance the tax advantages of

additional debt against the costs of possible financial distress.

Apart from the tax advantage of debt, agency and bankruptcy costs may

encourage highly profitable firms to have more debt in their capital structure. This

is because highly profitable firms are less likely to be subject to bankruptcy risk

because of their increased ability to meet debt repayment obligations. Thus, they

will demand more debt to maximize their tax shield at more attractive costs of

debt. For these considerations, the trade-off theory predicts a positive relationship

between leverage and profitability.

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 3. Pecking order theory

The pecking order theory of Myers & Majluf (1984), argues in the

contrary of static trade-off theory. It advocates also that the firm will borrow,

rather than issuing equity, when internal cash flow is not sufficient to fund capital

expenditures. Thus the amount of debt will reflect the firm's cumulative need for

external funds. It concludes a negative association between leverage and

profitability because high profitable firms will be able to generate more capitals

through retained earnings and then have less leverage. Therefore, it is expected

that there is negative relationship between leverage and profitability ratio.

4. Agency cost theory

Agency costs arise as a result of the relationships between shareholders

and managers and those between debt-holders and shareholders, this cost created

due to conflict of interest between them (Keown et al. 2001). There are three types

of agency costs which can help explain the relevance of capital structure as

follows;

Asset substitution effect: As D/E increases, management has an increased

incentive to undertake risky (even negative NPV) projects. This is because if the

project is successful, shareholders get all the upside, whereas if it is unsuccessful,

debt holders get all the downside. If the projects are undertaken, there is a chance

of firm value decreasing and transfer the wealth from debt holders to

shareholders.

13
 Underinvestment problem: If debt is risky (e.g. in a growth company), the

gain from the project will accrue to debt holders rather than shareholders. Thus,

management has an incentive to reject positive NPV projects, even though they

have the potential to increase firm value.

Free cash flow: unless free cash flow is given back to investors,

management has an incentive to destroy firm value through empire building and

perks etc. Increasing leverage imposes financial discipline. The free cash flow

theory says that dangerously high debt levels will increase value, despite the

threat of financial distress, when a firm's operating cash flow significantly exceeds

its profitable investment opportunities. The free cash flow theory is designed for

mature firms that are prone to overinvest. Due to the free cash flow theory of

Jensen (1986) agency cost theory supports a positive relationship between capital

structure and profitability.

C. Determinants of Capital Structure

According to Titman et al. (1988) there are some determinants of capital

structure. They were explained some attributes that affecting capital structure.

These attributes are assets structure, non-debt tax shield, growth, uniqueness,

industry classification, company size, earnings volatility and profitability.

14
 1. Asset structure

The structure of assets is important determinant of capital structure.

Companies with large fixed assets will be easier to borrow (Brigham, 2008). This

is because a creditor is preferred to trust a large-scale enterprise rather than a

small scale one. Besides fixed assets are pledged as collateral if someday

company cannot pay or cover its debts to creditors

2. Non-debt tax shield (NDTS)

Non-debt tax shield is tax deduction for depreciation and investment credit

tax (Brigham, 2008). NDTS arise as a result of the depreciation of fixed assets by

the company's use. Usually companies that have a relatively large NDTS will

reduce debt.

3. Growth

The company's growth is always expected by the owner of the company,

but the company's growth also resulted to increased need in financing. Companies

that are experiencing growth will hold their earnings as a source of funds to meet

their expansion needs. The potential growth of a company can be measured by the

amount of research and development costs. The greater the costs for research and

development, the greater the prospects for a company to thrive (Brigham, 2008)

4. Uniqueness

According to Titman et al. (1988) customers, workers, and suppliers of

firms that produce unique or specialized products probably suffer relatively high

costs in the event of liquidate.

15
 Their workers and suppliers probably have job with specific skills and

capital. Their customers may find it difficult to find alternative servicing for their

relatively unique products. For these reasons, uniqueness is expected to be

negatively related to debt ratios.

5. Industry classification

Industry classification included in determinant variable of capital structure

because each different type of company has different financial needs (Titman et

al. 1988). For example a firm with custom product or specializing service and

spare parts will has bigger liquidation cost. This indicates that a machine and

equipment manufactured firm should avoid debt financing, or only using debt as

secondary source of financing.

6. Company size

Company size is a size or magnitude of the assets owned by the company.

Company with high sales growth needs greater support of funds or capital

resource, so are otherwise (Titman et al. 1988). Small companies tend to use its

internal funds first, then owed in smaller quantities. A small company has a high

level of risk in the event of financial distress then a large company. This is

because the bigger company size does not have any significant obstacles to obtain

external funding in the form of debt.

16
 7. Earnings volatility

According to Titman et al. (1988) earnings volatility arise from stock and

bond market conditions that change in long-term and short-term which can greatly

affect the company's optimal capital structure. Low ratings companies that need

capital was forced to switch to stock market or short-term debt market, regardless

their targeted capital structure. However, once the situation better, the company

can sell bonds to form targeted capital structure.

8. Profitability

Usually companies will see their prior period profitability to determine the

capital structure. Company that has developed will tend to choose funding from

inside rather than issuing long term debt or short term debt, company will use

retained earnings as a main source of financing, this is in accordance with packing

order theory who advise the management to use retained earning first and then

debt and the last sale of shares as a source of funding (Brigham, 2008).

2.3 Review on Previous Research and Hypotheses Development

Trade-off theory says that firms seek debt levels that balance the tax

advantages against the possibility of financial risk cost. This theory means that the

company will borrow just in case to balancing their tax advantages. While the

pecking order theory says that the company will first using internal financing then

borrow and last is issuing new shares or equity to fund their capital expenditure.

Thus the amount of debt will reflect the company’s external funding needs.

17
 Abor (2005), he seeks to investigate the relationship between capital

structure and profitability of listed firms on the Ghana Stock Exchange (GSE)

during a five-year period, he found that there is a significantly positive relation

between the ratio of short-term debt to total assets and ROE. Abor believe that

short-term debt tends to be less expensive, and therefore increasing short-term

debt with a relatively low interest rate will lead to an increase in profit levels, this

research result supported by Salawu (2009) indicate that profitability present a

positive correlation with short-term debt and equity

Shubita, seeks to extend Abor’s (2005), (2011) findings regarding the

effect of capital structure on profitability by examining the effect of capital

structure on profitability of the industrial companies listed on Amman Stock

Exchange during a six-year period (2004-2009). The study sample consists of 39

companies. This study results reveal significantly negative relationship between

debt and profitability. This research result supported by Umar (2012) that

examines the impact of capital structure on firms’ financial performance in

Pakistan of top 100 consecutive companies in Karachi Stock Exchange for the

period of four years from 2006 to 2009.

The results show that all the three variables of capital structure, current

liabilities to total asset, long term liabilities to total asset, total liabilities to total

assets, negatively impacts the earnings before interest and taxes, return on assets,

earning per share. Net profit margin whereas price earnings ratio shows negative

relationship with current liabilities to total asset, positive relationship is found

between long term liabilities to total asset where the relationship is insignificant

with total liabilities to total assets.

18
 The results also indicate that return on equity has an insignificant impact

on current liabilities to total asset and total liabilities to total assets but a positive

relationship exists with long term liabilities to total asset.

Umar’s research result in 2012 proves that high level of financial leverage

leads to lower ROA. The result supports the intention that because of agency

conflicts companies’ over-leveraged those selves and in result affecting their

performance unconstructively.

Nirajini and Priya (2013) done a research “the impact of capital structure

in financial performance of the listed trading companies in Sri-langka” with The

Independent variable in their research is capital structure (debt asset ratio, debt

equity ratio and long term debt) while the dependent variable: profitability (gross

profit margin(GPM), net profit margin(NPM), return on capital

employed(ROCE),return on asset (ROA) & return on equity(ROE)). The results

proved that there is positive relationship between capital structure and financial

performance. Capital structure is significantly impact on financial performance of

the firm showed by debt asset ratio, debt equity ratio and long term debt

correlated with gross profit margin(GPM), net profit margin(NPM), return on

capital employed(ROCE), return on asset (ROA) & return on equity(ROE ).

The releationship between equity and profitability also proved by vatavu

(2015) in his research The impact of capital structure on financial performance in

Romanian listed companies. He used The long-term debt, short-term debt; total

debt and total equity as capital structure indicators, while return on assets and

return on equity as the performance proxies.

19
 The founding stated that shareholders’ equity has a positive impact on

performance indicators, while total debt and short-term debt have negative

relationships with roa and roe. He stated that the results of these regressions are

not always significant and consistent because a large part of this data is missing.

Saputra et al. (2015) found that capital structure has negtive effect to

company’s profitability. This study investigate the effect of capital structure on

firm performance of financial sector in the Indonesia Stock Exchange (IDX)

during 2009 to 2013. Panel data analysis was applied to estimate the relationship

between capital structure and firm performance.

While Samuel (2016) found a positive relationship between short term

debt and capital structure. This research conducted in 29 construction and roperty

companies for 2009-2013 periods. The analysis method is structural equation

modeling.this research result is consistent with the research conducted by vatavu

in 2015.

Based on explanation above it can be formulated research hypothesis as

follows:

H1 : short term debt affect the company’s profitability

H2 : long term debt affect the company’s profitability

H3 : equity affect the company’s profitability

20
2.4. Theoritical Framework

Based on theory and previous research has described, there is the influence

of capital structure on profitability. This study examines whether the capital

structure have influence to profitability of telecommunication firms in the period

2010 to by 2015 by using multiple regression analysis, so as to described the

framework that can be seen in Figure 2.1.

Figure 2.1

independent
variable X2:
long term debt
independendent independent
variable X1: variable X3:
short term debt equity

dependent
variable:
profitbility

21
 CHAPTER III

RESEARCH METHOD

3.1 Research Design

The research design explains how the research will be conducted. The

most important thing in designing a research is selecting the appropriate method

to develop a research. The extent of scientific rigor in a research study depends on

how the researcher has chosen the appropriate research design to complete the

specific purpose of the study (Sekaran, 2000).

The purpose of this research is to contribute towards a very important

aspect of financial management known as capital structure with reference to

telecommunication companies in Indonesia. Here the relationship between capital

structure practices and its effects on profitability of telecommunication companies

listed on Indonesia stock Exchange for a period from 2011– 2015 will be

examine.

This section discusses the firms and variables included in the study, the

distribution patterns of data and applied statistical techniques in investigating the

relationship between capital structure and profitability.

This study will be conducted by explanatory research, namely to know

more in depth about a particular issue. Explanatory research is research that

highlights the relationship between the study variables and hypotheses test, the

orientation contains descriptions but the focus is on the relationship and influence

between variables.

22
 This design is needed to explore the elements that are important and are

considered as cause of a problem or an influential factor. Objects in this study are

the telecommunication companies listed in Indonesia Stock Exchange since 2011

- 2015 in Indonesia Stock Exchange.

3.2 Population and Sample

Population refer to the entire group of people, events, or things of interest

that the researcher wish to investigate, while the sample is a subset of the

population (Sekaran, 2000). In doing a research, researcher should previously

determine the amount of population and samples. The population in this research

are telecommunication companies listed on Indonesia Stock Exchange (IDX) in

year 2011-2015.

Author think there is necessary to do analysis on this sector because this is

one of many industries that continues to grow. Telecommunication company is

one of the most dynamic companies. In Indonesia, telecommunications company

continues to experience rapid growth along with the development of information

and technology. According to the directorate general of post and

telecommunications, over the period 2006-2010 the average growth of mobile

phone users in Indonesia is 31.9% per year. Until the end of 2010 the number of

mobile phone users has reached 211 million users that consisting of GSM

operators by 95% and 5% CDMA market.

23
 The sample in this study was determined by non-probability sampling

techniques. According to Ferdinand (2006), non-probability sampling is a

sampling technique that does not give opportunity / equal opportunity for each

element of the population. This technique is then combined with purposive

sampling method. Purposive sampling is sampling technique with a certain

considerations.

The considerations used in the selection of the sample are as follows :

1) Telecommunication Company listed on the Indonesia Stock Exchange in 2011-

2015.

2) The company has published the financial report year period ended 31st of

December 2015.

3) Actively trading share on the Stock Exchange for the study period.

4) The company has a stock price over the five -year period is complete based on

the above criteria which have been established from 2011 until 2015,.

Then was selected four (4) companies that fit into the criteria of the

sample, there are PT. TELKOM Tbk, PT. Indosat, Tbk,PT. XL AXIATA, Tbk

and PT. Smartfren Telecom, Tbk.

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3.3 Data Collection Method

Type of data used in this research is secondary data. Secondary data refer

to information gathered by someone other than the researcher conducting the

current study (Sekaran, 2000). This data was obtained from library,

documentation of data, previous research reports. This type of data can be directly

used for analysis.

Data sources used are data from Indonesia Stock Exchange in the form of

financial statement since 2011 to 2015. The collection of secondary data taken by

documentation technic, collecting some journals, examines the record concerned

company, collecting historical data of the company that has been documented and

is still true today, then do the recapitulation.

3.4 Research Variable and Operational Definition

A. Dependent Variables

Dependent variable (Y) is variable that a major concern of researchers and

estimated value (Sekaran, 2000). Profitability is dependent variable (Y) measured

by return on equity (ROE).

According to Sartono (2001), ROE measures the ability of the company

making profit for shareholder. ROE is return of proceeds or equity that the

amount is expressed as an earned parameter on investments in company's

common stock for a certain period of time.

25
 The development of ROE is an interesting thing to be followed by

investors, where ROE is one of the main tools that commonly used in evaluating a

stock. ROE illustrates company's ability to provide benefits to owners. ROE

shows the success or failure of management to maximize the rate of return on

investment of shareholders and emphasize the results of income with respect to

amount invested.

ROE is ratio between net profit after tax to equity on telecommunication

companies listed in Indonesia stock exchange since 2011 to 2015. ROE unit is

measured by a percentage. That is:

𝐼𝑁𝐶𝑂𝑀𝐸 𝐴𝐹𝑇𝐸𝑅 𝑇𝐴𝑋
ROE= X 100%
𝐶𝐴𝑃𝐼𝑇𝐴𝐿

B. Independent Variables

Independent variable (X) is variable estimator in research that affects

dependent variable, either positively or negatively (Sekaran, 2007). Independent

variables measured using Short-term Debt (STD) (X1), Long-term Debt (LTD)

(X2), and equity (X3).

1. Short term debt :

Short-term debt (STD) is an account shown in the current

liabilities portion of a company's balance sheet. This account is made up of any

debt incurred by a company that is due within one year (Keown at al. 2001). The

debt in this liabilities account is usually made up of short-term bank loans taken

out by a company.

Short-term debt, also known as short-term liabilities, refers to any

financial obligation that is either due within a 12-month period or due within the

current fiscal year.

26
 The value of the short-term debt account is very important when

determining a company's performance. If the account is larger than the company's

cash and cash equivalents, this suggests that the company may be in poor financial

health and does not have enough cash to pay off its short-term debts.

2. Long-term debt

Long term debt (LTD) includes loans from banks or other resources that

lend money for more than 12 months (Keown et al. 2001). Long-term debt also

applies to governments: nations can also have long-term debt.

Often, a portion of these long-term liabilities must be paid within the year;

these are categorized as current liabilities, and are also documented on the balance

sheet. The balance sheet can be used to track the company's debt and profitability.

3. Equity

According to Keown et al. (2001) equity (EQI) includes the shareholder’s

investment-both preferred stockholder and common stockholders. Generally

speaking, the definition of equity can be represented with the accounting equation:

Equity = Assets - Liabilities

Yet, because of the variety of types of assets that exist, this simple definition can

have somewhat different meanings when referring to different kinds of assets.

27
 D. Control Variables

according to Sekaran (2001) control variable is the experimental element which is

contant and unchanged throughout the course of investigation. The control

variable is strongly influences experimental results, and it is held constant during

the experimentin order to test the relationship of dependent variable and

independent variables.

1. Company Size (Firm Size)

Firm size (SIZE) is a proxy for the volatility of the operational and control

ability of inventory is supposed to be in the magnitude of the economic scale of

the companies and demonstrate achievement of current operations and inventory

control. Aacording to Titman et al. (1998) the cost of issuing debt and equity is

related to the firm size. SIZE can be calculated using the formula following:

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡

SIZE = 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 𝑡−1

2. Sales Growth

Sales growth (SG) is increase in sales from year to year or from time to

time (Brigham, 2001). Companies that have high sales growth rate will requires

more investment in various elements of assets, either fixed assets as well as

current assets. Weights and measures are to compare sales in year with the net

sales in the previous period to sales in the previous period.

𝑠𝑎𝑙𝑒𝑠 𝑡 − 𝑠𝑎𝑙𝑒𝑠 𝑡−1

Sales growth = 𝑠𝑎𝑙𝑒𝑠 𝑡−1

28
3. Total Asset Turnover

Titman et al. (1988) argue that types of assets owned by a firm will affect

the capital structure choices. Total assets turnover or investment turnover (TAT)

is the ratio between the amount of assets used by the number sales earned during a

specific period. TAT measured the intensity companies in the use of its assets.

The size of the asset usage relevant is the sale, because the sale is important for

profit.

TAT can be formulated as follows:

𝑠𝑎𝑙𝑒𝑠 𝑡
TAT = 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡

3.5 Data Analysis Method

Data analysis is the activities of managing data that has been collected into

the results and new discoveries, or in the form of the hypothesis proof. Steps were

taken to analyze the data in this study are:

1) Calculate the value of short term debt (STD), long term debt (LTD),

Equity and Return on Equity.

2) Data obtained from the financial statements of the Indonesia Stock

Exchange at the end of the year.

A. Descriptive Analysis

Descriptive study is undertaken in order to ascertain and be able to

describe the characteristics of the ariables of interst in a situation (Sekaran,2000) .

In this study, descriptive statistics were used to determine the capital structure

review, and profitability on telecommunication companies Listed in Indonesia

29
Stock Exchange in 2011- 2015. The measurements used in this study are

minimum value, maximum value, mean, and standard deviation.

a. Mean, which is the average value of research data

b. Standard deviation, is the magnitude of the variance / difference in value

between data.

c. The maximum value is the highest value of research data.

d. The minimum value is the lowest value of research data

B. Testing of Classical Assumption

In the use of multiple regression model, hypothesis testing should avoid

the possibility of deviation in classical assumptions. In this study, the classical

assumptions that are considered most important is :

1. It has a normal distribution,

2. there is no multicolinearity between the independent variables,

3. there is no heteroskidastity or variant variables constant intruder

(homoskedastisity),

4. there is no autocorrelation between the residuals of each independent variable.

1. Normality Test

Normality test aims to test whether a regression, the dependent variable,

independent variable or both has distributed normally or not. A good regression

model is to have a data that distributed normally or near normal (Santoso, 2000).

The choice of method is based on One Sample Kolmogorov-Smirnov Test,

this menthode is a common method used to test the normality of the data. To find

out the results, we can see :

30
1) If the probability value> specified significance level (α = 0.05), the regression

model is meet normatilitas assumptions.

2) If the probability value <specified significance level (α = 0.05), the regression

model did not meet the assumptions of normatilitas.

2. Multicolinearity Test

Multicolinearity test is conducted to test whether the regression model

found a correlation between independent variables or the regression model does

not has correlation between independent variables (Santoso, 2000). If there is a

correlation, then there is a problem called Multicolinearity. A good regression

model should not has correlation between independent variables. If there is a

multicolinearity in the regression model it’s lead to uncertainty estimation, thus

leading to the conclusion who accept the null hypothesis. This causes the

regression coefficient becomes not significant (Gujarati, 1995).

Method to test the multicolinearity on this study is to look at (Santoso,

2001):

1. the magnitude VIF (Variance Inflation Factor) and Tolerance. Guidelines

for a model free multicollinearity is:

a. VIF has a value of around 1

b. TOLERANCE have a number of close to 1. Note: Tolerance = 1 / VIF or

VIF = 1 / Tolerance

2. The magnitude of the correlation between the independent variables.

31
 Regression model that is free from multicollinearity if its correlation

coefficient between the independent variables, if the coefficient is weak (below

0.5) so there is no multicollinearity. If the correlation is strong, then

multicollinearity problem occurs.

3. Heteroskidasity Test

Heteroskidasity test is used to test the variable in regression models has

inequality of residual from one observation to other observations. If the residual

variable from one observation to observation are same called homoskedasity, and

if different called heteroskidasity. A good regression model is homoskedastisity

regression or there is no heteroskidastity. One of some ways to test the

heteroskidastity in this research is to use glejser by SPSS. Basis for a decision

are:

1. if the significance value greater than 0.05 then there is no heteroskedasity

2. if the significance value less than 0.05 then there heteroskedasity

4. Autocorrelation Test

Autocorrelation test aimed to test correlation between bullies error in

period t with errors on eriod t-1 (previous) of the linear regression model. If there

is a correlation, then there is a problem called autocorrelation. Autocorrelation

arise because successive observations over time are related to each other.

This problem arises because the residual (error bullies) are not free from

one observation to another observation. It is often found in the time series of data

because of "interference" in individual or groups are likely to affect the next

period. A good regression model is a regression that is free from autocorrelation.

32
 In this study, the authors detected autocorrelation symptoms using the

Durbin-Watson test through SPSS. According to Gozhali (2001) Decision making

of autocorrelation is determined if the value resulted in the figure is between -2

and +2 so we can concluded that the data used in the study free of autocorrelation.

C. Hypothesis Testing

1. Multiple Linear Regression Analysis

Analysis model used in this study were multiple linear regression (multiple

linear regression method) .To analyze the factors that affect the capital structure of

the telecommunications company listed on the Stock Exchange in 2011-2015. The

model used in the study can be formulated as follow:

ROE= α + β1STD + β2LTD+ β3EQ+ SIZE + SG + TAT+ e

2. Coefficient of Determination Regression Analysis (Test R2)

a.) Coefficient of Determination (R2) is to determine the effect of short term debt

(STD), long term debt (LTD) and equity (EQ) jointly have a significant influence

on the dependent variable Return on Equity (ROE).

b.) according to Gozhali (2001) determination Coefficient (R2 Test) is describe

how much the variable (X), which has contributed to a variable (Y) which in this

case show the effect on the dependent variable profitability (ROE).

33
3. T-Test Statistics

T statistical test used to indicate how much influence one explanatory

variable / independent variable individually in explaining variation of the

dependent variable (Ghozali, 2009). Testing is done by 0.05 (5%) level of

significance. Research hypothesis test decision making based on criteria as

follows:

1. If sig <0.05 then Ha accepted, means the independent variable partially affect

the dependent variable.

2. If sig> 0.05 then Ha is rejected, it means that the independent variables,

partially does not affect the dependent variable.

The t-test will be performe to determine each independent variable in the form of

short term debt (STD), long term debt (LTD) and equity (EQ)partially has

influence on the dependent variable , the return on equity (ROE).

34
 CHAPTER IV

EMPIRICAL RESULTS AND DISCUSSION

4.1 Descriptive Summary and Correlation Analysis

A. Descriptive Analysis

Descriptive statistics has been used to vividly describe the distribution and

behavior of all the variables, Tables 4.1 present the descriptive summary of the

observed variables and percentage contribution to total assets calculated as the

sum total of total liability and equity. Descriptive statistics can provide a snapshot

of the data seen from the minimum value, maximum, average (mean) and the

standard deviation of the variables. Variables used in this study include long-term

debt, short-term debt, equity, as the independent variables and the company's

growth, the size of the company, and total asset turn over as control variables, as

well as the profitability as dependent variable. These variables will be tested

statistically descriptive by using SPSS as it looks in table below:

Table 4.1

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
STD 20 3030849 2.E7 1.20E7 5.868.549.469
LTD 20 5927973 3.E7 1.45E7 8.664.110.726
EQI 20 3008998 5.E7 2.05E7 1,64E+10
TAT 20 .07 .90 .4105 .20477
SG 19 -.15 1.50 .2548 .39591
SIZE 20 .92 2.74 11.785 .39129
Valid N
19
(listwise)
Source : spss output

35
 Based on the test results of descriptive statistics in Table 4.1 above, this

study showed that the variables of short term debt has a minimum value of

3030849 and a maximum value of 2.E7 with an average value of 1.20E7 and

standard deviation of 5.868.549.469. For long term debt variables has a minimum

value of 5927973a maximum value of 3.E7 with an average value of 1.45E7 and

standard deviation of 8.664.110.726. while the equity variable has a minimum

value of 3008998and a maximum value of 5.E7 with an average value of 2.050E7

and standard deviation of 1,64E+10 and so on.

As indicated, the first line of descriptive analysis was conducted on

selected firms of telecommunication companies. Results as shown on Table 4.1

indicate long term debt (LTD) is higher than short term debts (STD). Mean

statistics indicate that on the average the sampled firms acquired about 120%

(mean of long-term debt/ mean of short-term debt = 1.45E7 / 1.20E7) of long-

term liabilities than short-term liabilities to run their business activities. Mean of

equity is also higher than the mean of short-term and long term liabilities for all

firms; this is suggestive of the fact that business operations among the sampled

firms is on the average financed by long term debts and equity.

B. Classic Assumption

Classic assumption test performed using regression analysis the multiple

independent variables with control variables and dependent variable. in this study

independent variables used are long-term debt, short-term debt and equity, the

control variables are total asset turnover, the company's growth and size of the

company, while the dependent variable is profitability by using return on equity,

36
so that the regression model is used to produce an appropriate value and meet the

four classical assumption. The classical assumption has been performed and the

results are as follows:

1. Data normality Test Result

This test aims to test whether the regression model the dependent variable,

independent variable or both of them have normal distribution or not. A good

regression model is distribution data normal or near normal. As can be seen

normality test in figure 4.2 as follows

Table 4.2

One-Sample Kolmogorov-Smirnov Test

ROE STD LTD EQI TAT SG SIZE
N 20 20 20 20 20 19 20

Mean 10.995 1.20E+07 1.45E+07 2.05E+07 0.4105 0.2548 11.785

Normal
Parametersa Std.
0.4866 5,87E+09 8,66E+09 1,64E+10 0.20477 0.3959 0.3913
Deviation
Absolute 0.174 0.113 0.209 0.277 0.172 0.341 0.398
Most
Extreme Positive 0.174 0.113 0.209 0.277 0.148 0.341 0.398
Differences Negative -0.139 -0.095 -0.162 -0.143 -0.172 -0.21 -0.254
Kolmogorov-Smirnov Z 0.778 0.507 0.934 1.239 0.767 1.488 1.782

Asymp. Sig. (2-tailed) 0.58 0.959 0.348 0.093 0.598 0.024 0.003
a. Test distribution is
Normal.
Source : spss output

Basic decision-making is based on probability, if the probability value is >

0.05 then the variable, so the data is normally distributed. If the probability value

is < = 0.05, it means the data is not normally distributed. By looking at the table

above we can conclude that each of the variables in this study distributed

normally.

37
 2. Multicollinearity Test Result

Multicollinearity test aims to test whether the regression model found a

correlation between independent variables. A good regression should not correlate

other. If the independent variables are correlated, then the variables are not

orthogonal. Orthogonal variable occure when the value of independent variables

are equal to zero. Testing under multicollinearity test seen by observing the value

of VIF (Variance Inflation Factor) must be under 10, it will describe as follows

Table 4.3

Coefficientsa
Standardize
Unstandardized Collinearity
d
Coefficients Statistics
Model Coefficients T Sig.
Std.
B Beta Tolerance VIF
Error
(Constant) .106 .116 .914 .377
STD 4,75E-05 .000 .573 7.103 .000 .280 3.576
LTD 1,08E-05 .000 .193 3.034 .010 .452 2.214
1 EQI -2,56E-05 .000 -.864 -10.630 .000 .275 3.631
TAT 1.815 .166 .764 10.943 .000 .374 2.676
SG -.150 .085 -.121 -1.768 .100 .391 2.556
SIZE .069 .085 .055 .813 .431 .393 2.543
a. Dependent Variable: ROE
Source : spss output

VIF results indicate there is independent variable that has VIF value more

than 10. Based on test results, it can be concluded that all independent variables in

the regression model has no multicollinearity problem and can be used in this

research.

38
 3. Heteroskedasity Test Result

Heteroskedasity test aims to test the inequality residual variance from one

observation to other observation of regression model. To detect the presence of

heteroskedasity it can done by looking at the significance value of the data :

1. if the significance value greater than 0.05 then there is no heteroskedasity

2. if the significance value less than 0.05 then there is heteroskedasity

Table 4.4

Coefficientsa
Model Unstandardized Standardized t Sig.
Coefficients Coefficients

Std. Error Beta

(Consta
0,092926 0,378143 0,245744 0,809718
1 nt)
STD 4,97E-06 3,4E-06 0,590208 1,459566 0,168149

LTD -2E-06 2,19E-06 -0,36276 -0,9177 0,375489

EQI -2,7E-06 1,9E-06 -0,90569 -1,40655 0,183013

TAT 0,045846 0,089837 0,193468 0,510326 0,618377

SG -0,01561 0,032259 -0,12553 -0,48387 0,636524

SIZE -0,00373 0,043578 -0,05573 -0,08553 0,933141

a.
Depend
ent
Variable:
RES2
Source : spss output

Based on the results of heterokedastistic test in the picture above can be

seen that the scatterplot graph shows the data spread well, we can conclude that

there is no heterokedastic in the data above.

39
 4. Auto-Correlation Result

Autocorrelation test aims to test whether a model regression found any

autocorrelation in the regression analysis. For detecting the presence of

autocorrelation, it can be done by looking at the value of Durbin-Watson.

Regression is free from autocorrelation value Durbin-Watson must qualify

hovering at around -2 and +2. Here is a table of autocorrelation test results.

Table 4.5

Model
Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .988a 0.976 0.965 0.09051 1.68
a. Predictors: (Constant), SIZE, LTD, EQI, SG, TAT, STD

b. b. Dependent Variable: ROE

Source : spss output

Based on the above table it can be seen that the results of autocorrelation

test in the value of the Durbin-Watson is 1.680. The value resulted in the figure is

between -2 and +2 so as to concluded that the data used in this study free of

autocorrelation.

C. TEST OF HYPOTHESES

1. Multiple Linear Regression Analysis Result

The results of multiple linear regression is to see the influence of the short

term debt, long term debt, equity, sales growth, company size, and total asset turn-

over to the company’s profitability, as follows

40
Table 4.6

Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) .106 .116 .914 .377
STD 4.752E-8 .000 .573 7.103 .000
LTD 1.082E-8 .000 .193 3.034 .010
EQI -2.560E-8 .000 -.864 -10.630 .000
SG -.150 .085 -.121 -1.768 .100
TAT 1.815 .166 .764 10.943 .000
SIZE .069 .085 .055 .813 .431

a. Dependent Variable: ROE

Source : spss output

From table 4.8 above can be formulated in a regression equation to

determine the effect of short term debt, long term debt, equity, sales growth,

company size and total asset turn over to the company’s profitability are as

follow:

Y= 0.106 + 4.752E-8 X1 + 1.082E-7 X2 – 2.560E-8 X3– 0.150+1.815 +0.069

Information:

Y = company’s profitability

a = Constant

X1 = short term debt

X2 = long term debt

X3 = equity

– 0.150= sales growth

1.815 = total asset turn-over

0.069 = company size

41
Coefficients of multiple linear regression equation above can be defined as

follows:

a. Signs of regression coefficients reflect the relationship between

independent variables with the dependent variable to the selected

telecommunication company in Indonesia stock exchange. Sign (+) means

that there is a positive correlation or unidirectional between dependent and

independent variables. While the sign (-) means that there is negative

relationship between the variables independent and dependent variable.

Increasing value of independent variables will decrease the value of the

dependent variable.

b. The constant values in the regression equation at 0.106 shows that if the

other independent variable is zero, then the variable value of the company

increased by 0.106 units.

c. The regression coefficient short term debt variable (X1) of 4.752E-8 show

that if a short term debt variable increases by one unit then the dependent

variable value of the company will increase amounted to 4.752E-8 unit

with the provisions of other variables constant, and so is the treatment of

another variable x.

42
2. Determination Test (R2) Result

Value of R square (R2) or the coefficient of determination is used to

measure how far the model's ability to explain variations in the dependent

variable. R2 with small value means the ability of independent variables in

explaining the dependent variable are very limited. Value that close to one the

mean the independent variable provide almost all the information needed for

predicting variations in the dependent variable.

Table 4.7

Model Summaryb
Std. Error of the
Model R R Square Adjusted R Square Estimate
1 .988a .976 .965 .09051
a. Predictors: (Constant), SIZE, LTD, EQI, SG, TAT, STD
b. Dependent Variable: ROE
Source : spss output

The result of the coefficient of determination in table 4.7 shows the value

of R2 of 0.965 means that the dependent variable is able explained by the

independent variable 96.5 % in other words the value of the variable short term

debt, long term debt, equity, sales growth , company size and total asset turn-over

were able to explain the company in 96.5%.while 3.5% is explained by other

factors not included in this research.

3. T-Test Result

T statistical test used to determine whether or not the each independent

variable individually effect to dependent variable being tested at the 0.05 level. T

test results in this study are shown in Table 4.7 below.

43
Table 4.8

Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) .106 .116 .914 .377
STD 4.752E-8 .000 .573 7.103 .000
LTD 1.082E-8 .000 .193 3.034 .010
EQI -2.560E-8 .000 -.864 -10.630 .000
SG -.150 .085 -.121 -1.768 .100
TAT 1.815 .166 .764 10.943 .000
SIZE .069 .085 .055 .813 .431
a. Dependent Variable: ROE
Source : spss output

Table 4.6 above shows the statistical test t between variables independent

and dependent variable. Variable short term debt (STD) has a t value of 7.103

with a significance level of 0.000. The significance level is less than 0.05, which

means that H0 rejected and H1 accepted that it can be said that the short term debt

variable does affect the company's profitability.

Variable long term debt (LTD) has a t value of 3.034 with a significance

level of 0.010. The significance level of less than 0.05, which means that H0

rejected and H1 accepted that it can be said that the long term debt variable does

affect the company's profitability.

Variable equity (EQI) has a t value of -10.630 with a significance level of

0.000. The significance level of less than 0.05, which means that H0 rejected and

H1 accepted that it can be said that the equity variable does affect the company's

profitability.

44
 Variable sales growth (SG) has a t value of -1.768 with a significance level

of 0.100. The significance level of higher than 0.05, which means that H0

accepted that it can be said that the sales growth variable does not affect the

company's profitability.

Variable total asset turn-over (TAT) has a t value of 10.943 with a

significance level of 0.000. The significance level of less than 0.05, which means

that H0 rejected and H1 accepted that it can be said that the total asset turn over

variable does affect the company's profitability.

Variable company size (SIZE) has a t value of 0.813 with a significance

level of 0.431. The significance level of higher than 0.05, which means that H0

accepted that it can be said that the company size variable does not affect the

company's profitability.

4.2 Discussion and Research Result

Based on the above findings, it can be concluded that the capital structure (

short term debt, long term debt and equity) does affect the profitability. It means

that capital structure has a significant influence on the firm value.

The results portray from the descriptive analysis is that the sampled firms

averagely do finance their assets with their equity. It means that the

telecommunication company in Indonesia is prefer to use internal financing to

finance their company rather than using short term debt or long term debt.

45
 In this research shown that the effect of capital structure (short term debt,

Long term debt and equity) to the profitability is not really significant, because the

coefficient of each capital structure composition is in small amount. For example

the short term debt, it is only effect 0.00004752 and the long term debt only affect

the profitability for 0.0001082 while the equity only 0.00002560 affecting the

profitability.

This result is consistent to research conducted by Nirajini and Priya (2013)

in their research impact of capital structure in financial performance of the listed

trading companies in Srilangka. The Independent variable in this research is

capital structure (debt asset ratio, debt equity ratio and long term debt) while the

dependent variable: profitability (gross profit margin(GPM), net profit

margin(NPM), Return on Capital Employed(ROCE),Return on Asset (ROA) &

Return on Equity(ROE)). The results also proved that there is positive relationship

between capital structure and financial performance. And also capital structure is

significantly impact on financial performance of the firm showed that debt asset

ratio, debt equity ratio and long term debt correlated with gross profit

margin(GPM), net profit margin (NPM), return on capital

employed(ROCE),return on asset (ROA) & return on equity(ROE ).

This research result is inversely with research conducted by Subita that

found negative relationship between debt and the profitability as well as the

research conducted by Umar that found all capital structure variables has negative

relationship with profitability. The contradiction may be due to inefficient market

environment and incomplete information.

46
 CHAPTER V

CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusion

This study aims to determine the influence of short term debt, long term

debt, equity, sales growth, company size and total asset turn over to the

company’s profitability on telecommunication company listed in Indonesia stock

exchange. Based on data collected and testing has been carried out on 4 samples

of companies using multiple regression model, it can be concluded that:

1. All capital structure components (short term debt, long term debt, and

equity) has affect to profitability.

2. Independent variables that have a dominant influence to the company's

profitability is long term debt variable, this is indicated by beta value

Standardized coefficients generated is equal to 1.082E-8.

5.2. Recommendations

A. For Management

Managing a business can be a very difficult venture, especially in

Indonesia; in the face of deteriorating economic conditions. Again developed

global markets may be shrinking on account of financial and economic crises

prevailing; and an increasing liberalized Indonesian market, transportation

difficulties, and high inflations rates are some of problems which have to be

overcome. Therefore there is the need for a firm to obtain enough capital so as to

take advantage of any opportunity that may be available and stay afloat of the

highly competitive markets both internally and globally. This work has shown that

the telecommunication firms in Indonesia look for equity instruments to finance

47
their activities; although it degrades profitability. However, there is a portion of

the capital structure that can instigate superior impact on profitability.

Firms look at increasing the size of their equity either through retained

earnings or by looking at the stock exchange market for funds. This kind of

financing is less risky and has shown to be more profit enhancing than looking for

debts instruments in the capital markets. The choice of a debt facility should be a

last resource.

B. For Creditors

This study proves that the telecommunications company listed on

Indonesia stock exchanges that increased in capital structure and the growth of the

company will directly improve their profitability. Vice versa, when the company

has decreased its capital structure and growth of the company it will reduce

company profits. Given in this research, investors can be more selective in

choosing the company that will be a place to invest. One consideration that can be

drawn from this study is investors could see companies that have high growth

rates to manage the company. Thus, investors have more consideration for

investment decisions.

5.3 Limitations and Suggestions Future Research

The results of this study are expected to provide an overview of the

influence of the capital structure, the company's performance, the company's

growth and size of the company to company’s profitability. However, this study

does have some limitations. Limitations are expected to provide an overview and

an opportunity for researchers to come to do better research. Here are the

limitations and suggestions may be considered for future researchers.

48
1. The researcher advises that the results of this study must be interpreted

with caution. It focuses only on telecommunication company listed in

Indonesia stock exchange. Focusing on only telecommunication in

Indonesia was however justified on the grounds that little attention has

been offered to this line of inquiry; although Indonesian firms are faced

with a lot of difficulty in attempting to find out ways by which they can

finance their operations.

2. All sampled firms are from within Indonesia. For future research more

firms could be sampled from outside Indonesia, especially from other

Asian countries, in addition to the Indonesian firms to find out if the same

findings could be made.

3. One other limitation of the study was it did not focus on the effect of total

debts on profitability. One can say that focusing on both short term and

long term debts captures the overall effect of total debts. This view though

valid, may be too simplistic. Future research can look at the effect of total

debts whilst monitoring other vital variables that may influence

profitability such as macroeconomic variables.

49
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APPENDIX

52
 1. Financial Data of Each Company

In billion rupiah

2011 STD LTD EQ SALES TOTAL ASSET

INDOSAT 11,965.5 22,339.6 19,455.3 20,531.6 53,829.4
SMARTFREN 3,099.6 5,928.0 3,269.0 954.3 12,296.5
TELKOMSEL 13,975.0 6,372.0 38,376.0 31,065.0 58,723.0
XL AXIATA 8,728.2 8,749.9 13,692.5 18,468.0 31,171.0

2012 STD LTD EQ SALES TOTAL ASSET

INDOSAT 11,016.4 24,984.8 19,809.1 22,420.6 55,810.2
SMARTFREN 3,030.8 6,324.5 4 ,984.4 1 ,649.2 14,339.8
TELKOMSEL 13,039.0 6,046.0 43,832.0 33,538.0 62,917.0
XL AXIATA 8,739.9 11,345.7 15,370.0 21,278.0 35,456.0

2013 STD LTD EQ SALES TOTAL ASSET

INDOSAT 13,494.4 24,508.9 16,517.5 23,855.3 54,566.0
SMARTFREN 5,539.6 7,278.9 3,048.9 2.428.8 15,866.4
TELKOMSEL 16,405.0 9,109.0 47,821.0 36,761.0 73,940.0
XL AXIATA 7,931.0 17,046.4 15,300.1 21,350.0 40,278.0

2014 STD LTD EQ SALES TOTAL ASSET

INDOSAT 21,147.8 17,911.0 14,195.9 24,085.1 53,269.7
SMARTFREN 8,522.1 7,274.7 3,962.0 2,054.4 17,742.6
TELKOMSEL 19,270.0 8,604.0 51,477.0 40,579.0 79,352.0
XL AXIATA 15,398.3 34,185.0 14,048.0 23,569.0 63,631.0

2015 STD LTD EQ SALES TOTAL ASSET

INDOSAT 20,052.6 22,072.0 13,263.8 26,768.5 55,388.5
SMARTFREN 4.159.2 9,698.6 5,948.6 3,026.7 20,075.0
TELKOMSEL 20,020.0 12,565.0 51,502.0 76,055.0 84,086.0
XL AXIATA 15,748.2 29,004.5 14,091.6 22,960.0 58,844.0

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 2. SPSS Output

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
STD 20 3030849 2.E7 1.20E7 5.868.549.469
LTD 20 5927973 3.E7 1.45E7 8.664.110.726

EQI 20 3008998 5.E7 2.05E7 1,64E+10

TAT 20 .07 .90 .4105 .20477

SG 19 -.15 1.50 .2548 .39591
SIZE 20 .92 2.74 11.785 .39129
Valid N
19
(listwise)

One-Sample Kolmogorov-Smirnov Test

ROE STD LTD EQI TAT SG SIZE
N 20 20 20 20 20 19 20
Mean 10.995 1.20E+07 1.45E+07 2.05E+07 0.4105 0.2548 11.785
Normal
Parametersa Std.
0.4866 5,87E+09 8,66E+09 1,64E+10 0.20477 0.3959 0.3913
Deviation
Most Absolute 0.174 0.113 0.209 0.277 0.172 0.341 0.398
Extreme Positive 0.174 0.113 0.209 0.277 0.148 0.341 0.398
Differences Negative -0.139 -0.095 -0.162 -0.143 -0.172 -0.21 -0.254
Kolmogorov-Smirnov Z 0.778 0.507 0.934 1.239 0.767 1.488 1.782
Asymp. Sig. (2-tailed) 0.58 0.959 0.348 0.093 0.598 0.024 0.003
a. Test distribution is
Normal.

Coefficientsa
Unstandardized Standardized Collinearity
Coefficients Coefficients Statistics
Model T Sig.
Std.
B Beta Tolerance VIF
Error
(Constant) .106 .116 .914 .377
STD 4,75E-05 .000 .573 7.103 .000 .280 3.576
LTD 1,08E-05 .000 .193 3.034 .010 .452 2.214
1 EQI -2,56E-05 .000 -.864 -10.630 .000 .275 3.631
TAT 1.815 .166 .764 10.943 .000 .374 2.676
SG -.150 .085 -.121 -1.768 .100 .391 2.556
SIZE .069 .085 .055 .813 .431 .393 2.543
a. Dependent Variable: ROE

54
 Coefficientsa
Model Unstandardized Standardized t Sig.
Coefficients Coefficients

Std. Error Beta

(Consta
0,092926 0,378143 0,245744 0,809718
1 nt)
STD 4,97E-06 3,4E-06 0,590208 1,459566 0,168149

LTD -2E-06 2,19E-06 -0,36276 -0,9177 0,375489

EQI -2,7E-06 1,9E-06 -0,90569 -1,40655 0,183013

TAT 0,045846 0,089837 0,193468 0,510326 0,618377

SG -0,01561 0,032259 -0,12553 -0,48387 0,636524

SIZE -0,00373 0,043578 -0,05573 -0,08553 0,933141

a.
Depend
ent
Variable:
RES2

Model
Summary(b)
Durbin-
Model R R Square Adjusted R Square Std. Error of the Estimate
Watson
1 .988a 0.976 0.965 0.09051 1.68
c. Predictors: (Constant), SIZE, LTD, EQI, SG, TAT, STD
d. b. Dependent Variable: ROE
Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) .106 .116 .914 .377
STD 4.752E-8 .000 .573 7.103 .000
LTD 1.082E-8 .000 .193 3.034 .010
EQI -2.560E-8 .000 -.864 -10.630 .000
SG -.150 .085 -.121 -1.768 .100
TAT 1.815 .166 .764 10.943 .000
SIZE .069 .085 .055 .813 .431

a. Dependent Variable: ROE

Model Summaryb

55
 Adjusted R Std. Error of the
Model R R Square Square Estimate
1 .988a .976 .965 .09051
a. Predictors: (Constant), SIZE, LTD, EQI, SG, TAT, STD
b. Dependent Variable: ROE

Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
1 (Constant) .106 .116 .914 .377
STD 4.752E-8 .000 .573 7.103 .000
LTD 1.082E-8 .000 .193 3.034 .010
EQI -2.560E-8 .000 -.864 -10.630 .000
SG -.150 .085 -.121 -1.768 .100
TAT 1.815 .166 .764 10.943 .000
SIZE .069 .085 .055 .813 .431
a. Dependent Variable: ROE

56