Effect of Liquidity and Leverage on Profitability of Agricultural

Sector Companies Listed on the IDX

Bunga Anisya Sunarta and Dedi Kurniawan

Department of Managerial Accounting, Politeknik Negeri Batam, Jl. A. Yani, Batam, Indonesia

Keywords: Current Ratio, Debt to Equity Ratio, Return on Assets, Return on Equity

Abstract: This research aims to see how liquidity and leverage affect profitability in agricultural sector companies in

Indonesia. Liquidity is measured by Current Ratio (CR), leverage as measured by Debt to Equity Ratio (DER),

and company profitability is measured by Return on Assets (ROA) and Return on Equity (ROE). This study

uses secondary data with data collection techniques using financial statements of agricultural sector

companies listed on the Indonesia Stock Exchange from 2015-2019. Purposive sampling was used as a

methodology in this study, and 15 companies match with the criteria. The test method in this study uses panel

data regression analysis with Eviews 9. This study found that the CR has an insignificant impact on ROA and

ROE in the agriculture sector. This study also found that the DER has an insignificant effect on ROA but

significantly negatively impacts ROE in the agriculture sector. Simultaneously, CR and DER have an impact

on ROA and ROE.

1 INTRODUCTION

Indonesia is an agrarian country that makes the

agricultural sector one of the pillars of the country's

economy. Indonesia has enormous natural resource

potential. Indonesia's strategic geographical

conditions support the quality of Indonesia's natural

resource potential. The agricultural sector can

become a food supplier, a provider of industrial raw

materials, a provider of employment, and a source of

state income. The agricultural sector contributes

significantly to national economic growth.

According to Statistics Indonesia (2020), the

agricultural sector's Gross Domestic Product (GDP)

is the total value added of services and goods

produced by each production sector in the agricultural

sector. GDP at current prices can be called the

distribution of GDP. This indicator shows the

economic structure of a country or the role of each

category of economic business. The most important

category in the field of economic business represents

the economic base of a country. The GDP of the

agricultural sector at current prices by business field

(billion rupiahs) from 2015 to 2019 has always

increased. In 2019 there was an increase of 112,828.3

to 2,013,626.9 compared to 2018 which was

1,900,803.6. The development every year shows an

increase which indicates an increase in the

performance of the agricultural sector.

The primary purpose of establishing a company is

to get the highest profit. Kieso et al., (2012) state that

profitability measures the level of success or failure

of a particular company or division for a certain

period. Based on some of the explanations above, it

can be concluded that profitability measures the

company's ability to earn profits and manage

financial policies and operating decisions efficiently.

The higher the percentage of profitability, the better.

Return on Equity (ROE) is the ratio of net profit to

total equity (Brigham & Houston, 2019). Investors

frequently use this ratio to assess a company's

profitability before investing. The return on equity

(ROE) measures a company's capital efficiency. This

ratio should be as high as possible. If the return on

investment (ROI) rises, the company's profitability

improves.

The ratio of net income to total assets, or return

on assets (ROA), evaluates the return on total assets

after interest and taxes (Brigham & Houston,

2019).ROA is used to measure how the company

utilizes the assets owned by the company to generate

profits. ROA has the advantage that it can be easily

understood and calculated as a parameter of the

company's performance in utilizing the assets owned

by the company to gain profits or as an evaluation of

Anisya Sunarta, B. and Kurniawan, D.

Effect of Liquidity and Leverage on Proﬁtability of Agricultural Sector Companies Listed on the IDX.

DOI: 10.5220/0010861600003255

In Proceedings of the 3rd International Conference on Applied Economics and Social Science (ICAESS 2021), pages 117-125

ISBN: 978-989-758-605-7

117

the implementation of policies or strategies that the

company has implemented.

The level of liquidity can measure the

performance of fulfilling the company's short-term

debts. Effective use of assets can be good liquidity

management. Current Ratio (CR) represents the

fulfillment of current assets to current liabilities. If

this ratio is high, it means that the capacity of its

current assets can pay its short-term debts. Otherwise,

a ratio decrease below or less indicates that its current

assets cannot pay its current liabilities. Suppose the

liquidity deficit can lead to a decrease in corporate

performance, which can impact profitability. If the

ratio is equal to 1, current assets are the same as

current liabilities (Robinson et al., 2015).

According to Brigham & Houston (2019),

leverage is debt to concentrate a company's business

risk on its shareholders. The amount of debt used in a

company's capital structure is measured by financial

leverage. According to the following description,

financial leverage is the use of debt to concentrate risk

to enhance the rewards accessible to shareholders.

According to Robinson et al., (2015), Debt to Equity

Ratio (DER) is a debt and total equity ratio that

indicates a company's ability to cover all liabilities

with its capital. The higher the performance, the

lower the percentage of this ratio.

The use of debt for the company is expected to

provide a higher return on profits. If the debt is too

high, it can lead to bankruptcy when the company

cannot pay its debts. A current ratio that is either too

low or too high is not a positive thing. A low current

ratio implies that a company's short-term debt is

unpayable. A high current ratio shows the quantity of

idle money that is not being used efficiently for the

company's commercial objectives, causing

profitability to suffer. The problem that the author

will answer, based on the previous description, is how

leverage and liquidity affect the profitability of

agriculture sector firms.

2 THEORETICAL STUDY

2.1 Stewardship Theory

Stewardship theory illustrates a situation where

managers aim at achieving their primary goals, not for

personal goals but common or organizational goals.

In general, senior managers are trained to become

managers who are willing to behave in line with the

management's goals, yet, manager's conduct will not

overrule the organization's goals since managers

work hard to accomplish them (Donaldson & Davis,

1991). The implementation of the theory in this study

is that managers are believed to be able to take the

best actions for the benefit of the company and

stakeholders. Managers are expected to achieve the

company's goals, namely the highest profitability, by

maintaining the company's finances stable.

2.2 Literature Review

Based on previous research, Irman et al., (2020),

stated that the Current Ratio (CR) had a positive and

significant effect on Return on Assets (ROA). The

high level of CR indicates that the company is more

liquid because of its ability to pay the short-term debt.

Samo & Murad, (2019) revealed that there is a

positive relationship between liquidity and

profitability. A corporation that correctly manages its

daily cash operations can earn a high return on assets

and equity. Companies with a lot of debt and leverage

are vulnerable to risk and can't make much money.

Thus a manager should focus on equity rather than

debt financing. Felani & Worokinasih (2018)

revealed that the increase in the value of debt on

company capital used more loans. If the debt is high,

this will increase interest expense which causes taxes

to be smaller and increase profits, causing ROA and

ROE levels to increase. This study also reveals that

when the CR level is high, the company's chances of

paying its short-term debts are also high. The

relationship seen from CR and ROA and ROE is that

the higher the company's CR, the better the

company's profit (ROA & ROE).

Hidayat & Batubara (2019) reveals that when the

company's Current Ratio increases, the company

cannot get high profits because there is raw material

inventory and work in process inventory which

includes current assets that are not ready to be sold. It

can make the company not profit but instead spends

money on expenses care. According to research by

Mahardhika & Marbun (2016) which used a sample

of PT Bank Mandiri and its subsidiaries for the period

2008-2015, it was stated that CR had a significant

positive effect on ROA. Nasution's research (2016)

using a sample of automotive companies on the IDX

reveals that the relationship between DER and ROE

is opposite and has no significant effect. If the DER

value increases, the company's profits and

profitability or ROE will decrease.

Herlina & Winingsih (2016) stated that CR

significantly affects ROE, and DER has no significant

effect on ROE. CR and DER simultaneously have a

significant effect on ROE. (Putra & Badjra, 2015)

found a positive relationship between CR and ROA.

Current assets, in general, and networking capital, in

ICAESS 2021 - The International Conference on Applied Economics and Social Science

118

particular, benefited from the increase in return on

assets. According to Putra & Badjra (2015), leverage

has a negative and significant impact on profitability,

indicating that leverage and profitability have a

negative relation. Widiyanti & Elfina (2015) reveal

that when the company's DER level is high, the

company's burden on outside parties, in this case,

creditors, will be even more significant. If this

happens, it can cause a decrease in profit, but this does

not significantly impact the company

2.3 Hypothesis Development

2.3.1 Effect of Current Ratio on Return on

Assets

Effective asset and debt control can help companies

achieve maximum profit. A low current ratio

indicates that the company lacks the capital to meet

short-term debts. Still, a high current ratio indicates

that the amount of unused funds is not optimally used

for the company's needs, thereby reducing

profitability (Saleem & Rehman, 2011). According to

previous research, Irman et al. (2020) stated that CR

had a positive and significant effect on Return on

Assets (ROA). If a corporation wants to increase its

return on investment, it must enhance asset

management to generate profits. Samo & Murad

(2019) mentions that a company that appropriately

fulfills its daily cash operations can get high returns

on assets. Durrah et al. (2016), Felani & Worokinasih,

(2018), Madushanka & Jathurika (2018) also state the

same thing, that CR has a positive and significant

relationship to ROA. The following hypothesis is

made based on the previous description:

asset and debt control can help companies achieve

H1a: Current Ratio has a significant positive

effect on Return on Assets

2.3.2 Effect of Current Ratio on Return on

Equity

Felani & Worokinasih, (2018), in their research,

found that CR has a significant positive effect which

indicates the higher the CR, the better the ROE value

of the company. Herlina & Winingsih (2016) also

revealed that CR has a positive relationship and

significantly affects ROE. The following hypothesis

is made based on the previous description:

H1b: Current Ratio has a significant positive

effect on Return on Equity

2.3.3 Effect of Debt to Equity Ratio on

Return on Assets

Irman et al. (2020), in their research state, that the

Debt to Equity Ratio (DER) to Return on Assets

(ROA) and states that companies with high

profitability will reduce the need to use debt because

there are more funds available. This research is also

supported by Putra & Badjra (2015), which reveals

that profitability will decrease if leverage increases.

The following hypothesis is made based on the

previous description:

H2a: Debt to Equity Ratio has a significant

negative effect on Return on Assets

2.3.4 Effect of Debt to Equity Ratio on

Return on Equity

Ulzanah & Murtaqi (2015) find that companies with

higher DER are considered riskier because when the

company uses more debt than the amount of equity, it

will cause a decrease in profit. The high amount of

debt makes the interest expense higher and has an

impact on declining profitability. Nasution (2016)

reveals that the effect of DER on ROE is the opposite,

where if the DER value increases, the return on equity

will decrease. Putra & Badjra (2015) in their research

also says that if leverage increases, profitability will

decrease. Widiyanti & Elfina (2015) reveal that when

the company's DER level is high, the company's

burden on outside parties, in this case, creditors, will

be even more significant. If this happens, it can lead

to a decrease in the profitability of the company. The

following hypothesis is made based on the previous

description:

H2b: Debt to Equity Ratio has no significant

negative effect on Return on Equity

3 RESEARCH METHOD

This research applied a quantitative method, which is

a method of research that structured, systematic, and

planned research aimed at proving the influence

between the dependent and independent variables.

The leverage ratio, represented by the Debt to Equity

Ratio (DER), and the liquidity ratio, represented by

the Current Ratio (CR), is the independent variables

used. Profitability is the dependent variable defined

by Return on Assets (ROA) and Return on Equity

(ROE). The operational variables and indicator can be

seen in table 1:

Effect of Liquidity and Leverage on Proﬁtability of Agricultural Sector Companies Listed on the IDX

119

Table 1: Operational variables and indicator

Variable Indicator Source

Dependent Variable

ROE =

Income After Tax

Total Equit

(Brigham &

Houston, 2019)

ROA =

Income After Tax

Total Asse

(Brigham &

Houston, 2019)

Independent Variable

CR =

Curren

Assets

Curren

Liabilities

(Robinson et al.,

2015)

DER =

Total Liabilities

Total Equit

(Robinson et al.,

2015)

Control Variable

SIZE = Ln Total Assets

(Robinson et al.,

2015

)

The object in this study is the financial statements

of agricultural sector companies in the 2015-2019

period listed on the IDX. The total population of

agricultural sector companies listed on the Indonesia

Stock Exchange is 21 companies, with a sample of 15

companies. Panel data regression analysis is applied

as a data analysis method using E-Views 9 software.

Descriptive statistical analysis will be used in this

study. Determination of the estimation model using

the Chow test and Hausman test. Multicollinearity

and heteroscedasticity tests were applied in this study

as classical assumption tests. The hypothesis tests

used in this study are coefficient of determination,

partial test (t-test), and simultaneous test (f test).

4 RESULT

The population data used in this study are agricultural

sector companies listed on the IDX from 2015 to

2019, with 21 companies. The criteria of the research

sample reduce this amount. The total sample for

2015-2019 that meets the criteria is 15 companies or

75 data samples.

4.1 Descriptive Statistical Analysis

Below is a descriptive statistical analysis table:

Table 2: Descriptive statistical table

Variable Mean Max Min Std.Dev

ROA 0.00307 0.8562 -0.582 0.1491

ROE -0.00046 1.0310 -1.352 0.2953

CR 1.58497 6.7720 0.0990 1.6098

DER 1.18429 11.273 -10.314 2.3788

SIZE 29.4856 33.002 26.435 1.3029

Sample 75 75 75 75

Source: Data processed with Eviews 9, 2021

4.2 Classic Assumption Test

4.2.1 Multicollinearity Test

Table 3: Multicollinearity test

CR DER SIZE

CR 1.00000 -0.1035 -0.12497

DER -0.10359 1.0000 -0.01119

SIZE -0.12497 -0.01119 1.00000

Source: Data processed with Eviews 9, 2021

The multicollinearity test is used to determine

whether or not the independent variables have a linear

relationship. Table 3 displays the output results.

According to table 3, the correlation coefficient

between variables is less than 0.8. This value

indicates that there are no multicollinearity

abnormalities in the data in this research.

4.2.2 Heteroscedasticity Test

The Breusch-Pagan-Godfrey test was used to

determine heteroscedasticity in this study. The test's

output findings are presented in table 4. Table 4

reveals that the Obs *R-Squared value is 3.131149,

and the probability value is 0.37180, which is larger

than the alpha value (5 percent), indicating that the

data is not heteroscedastic.

Table 4: Heteroscedasticity test Breusch-Pagan-Godfrey

F-Statistic 1.0310

Prob F. (3.71) 0.3841

Obs*R-

squared

3.1311

Prob. Chi-

Square(3)

0.3718

Scaled

explained SS

24.373

Prob. Chi-

Square(3)

0.0000

Source: Data processed with Eviews 9, 2021

4.3 Model Selection

4.3.1 Chow Test

This test aims to see whether the fixed effect or

common effect model is more suitable for this study.

The results of the chow test can be seen as follows:

ICAESS 2021 - The International Conference on Applied Economics and Social Science

120

Table 5: Chow Test (Dependent ROA)

Effect Test

Statistic d.f. Prob

Cross-

section F

2.86680 -14.57 0.00250

Cross-Section

Chi-Square

39.9789 14 0.00030

Source: Data processed with Eviews 9, 2021

Table 6: Chow Test (Dependent ROE)

Effect Test

Statistic d.f. Prob

Cross-

section F

5.195019 -14.57 0.00000

Cross-Section

Chi-Square

61.680464 14 0.00000

Source: Data processed with Eviews 9, 2021

The probability value of the chi-square cross-

section on the dependent ROA is 0.0003, and the

dependent ROE is 0.0000, as shown in tables 5 and 6.

The chi-square cross-section probability value is less

than the alpha level (5 percent). The Chow test

findings for dependent ROA and ROE showed that

the fixed effects model is better suitable for this

research than the common effect model.

4.3.2 Hausman Test

This test aims to determine the suitable model

between fixed effect or random effect.

Table 7: Hausman Test (Dependent ROA)

Test Summary

Chi-Sq.

Statistic

Chi-Sq.

d.f.

Pro

Cross-section

random

12.13296 3

0.00

Source: Data processed with Eviews 9, 2021

Table 8: Hausman Test (Dependent ROE)

Test Summary

Chi-Sq.

Statistic

Chi-Sq.

d.f.

Prob.

Cross-section

rando

14.7723 3 0.0068

Source: Data processed with Eviews 9, 2021

The probability value of the random dependent

ROA cross-section is 0.0069, and the dependent ROE

is 0.0068, as shown in tables 7 and 8. Because the

random cross-section probability value is less than the

alpha level (5%), the Hausman test findings indicate

that the fixed effect model is better to use than the

random effect model.

4.4 Panel Data Regression Analysis

4.4.1 Panel Data Regression Analysis

(Dependent ROA)

Table 9 shows the results of panel data regression

using the Fixed Effect Model with dependent ROA:

Table 9: Fixed Effect Model (Dependent ROA)

ROA

Variable Coefficient t-statistic Prob.

C 3.597273 3.231591 0.002

CR 0.01624 0.836799 0.4062

DER 0.007623 1.27109 0.2089

SIZE -0.123076 -3.27732 0.0018

R-Squared

0.54973

Adjusted

R-Squared

0.41545

Prob (F-

Statistic)

0.00003

Model

Fixed

Source: Data processed with Eviews 9, 2021

The following equation can be developed from

the panel data regression results:

ROAt = 3,597273 + 0,01624CRt +

0.007623DERt – 0,123076SIZEt

4.4.2 Panel Data Regression Analysis

(Dependent ROE)

The following table 10 shows the results of panel data

regression using the Fixed Effect Model with

dependent ROE:

Table 10: Fixed Effect Model (Dependent ROE)

ROE

Variable Coefficient t-statistic Prob.

C 0.522169 0.330185 0.7425

CR 0.002552 0.092565 0.9266

DER -0.073764 -8.65702 0.0000

SIZE 0.014899 -0.27926 0.7811

R-Squared 0.768540

Adjusted R-

Squared

0.699267

Prob (F-Statistic) 0.000000

N 75

Model Fixed

Source: Data processed with Eviews 9, 2021

Effect of Liquidity and Leverage on Proﬁtability of Agricultural Sector Companies Listed on the IDX

121

From the results of the panel data regression, the

following equation can be obtained:

ROE

= 0,522169+ 0,002552CR

–

0,073764DER

+ 0,014899SIZE

4.5 Coefficient of Determination

Table 9 shows the findings of the coefficient of

determination using the dependent variable ROA. In

the table, the Adjusted R-Squared value is 0.41545, or

41.54 percent. This number shows that the dependent

variable's size (ROA) can explain 41.54 percent of the

independent variable (CR, DER) and control variable

(SIZE) variance, with the remaining 58.46 percent

explained by factors outside the study model.

Table 10 shows the findings of the coefficient of

determination using the dependent variable ROE. In

the table above, the Adjusted R-Squared value is

0.699267, or 69.93 percent. This number means that

the value of the dependent variable (ROE) can explain

69.93% of the independent variable (CR, DER) and

control variable (SIZE), with the remaining 30.07%

explained by factors outside the research model.

4.6 F Test

Table 9 shows the results of the F test in this study

using the dependent variable ROA. The probability

value (F-statistic) is 0.000003, which is less than the

alpha level in the F test with the dependent ROA. As

a result, CR, DER, and firm size (SIZE) all impact

ROA at the same time.

Table 10 shows the results of the F test using the

dependent variable ROE in this study. The probability

value (F-statistic) is 0.00000, and the value is alpha

level, according to the findings of the F test with

dependent ROE. As a result, CR, DER, and firm size

(SIZE) all impact ROE at the same time.

4.7 Data Analysis

The following is a summary table of test results from

this study:

Table 11: Summary of test result

Hypothesis Prob. Coeff. Result

CR has

significantly

ositive effect on

ROA

0.4062

0.0162

Not

Supported

CR has

significantly

ositive effect on

ROE

0.9266

0.0025

Not

Supported

DER has

significantly

negative effect

on ROA

0.2089

0.0076

Not

Supported

DER has

significantly

negative effect

on ROE

0.0000 -0.0738 Supported

Source: Data processed with Eviews 9, 2021

2.3.5 Effect of Current Ratio on Return on

Assets

Based on the hypothesis 1a test, which can be seen in

Table 9, it shows that liquidity, as measured by CR,

does not have a significant positive effect on ROA.

These results are contrary to hypothesis 1a, which

states that CR has a significant positive effect on

ROA. This result is evidenced by the probability

value, which shows a value of 0.4062 which means

that this value is greater than the alpha level of 5%.

The coefficient value of 0.01624 indicates a positive

direction, indicating that the relationship between CR

and ROA is unidirectional; however, CR is not an

essential element that might affect ROA because the

influence is low. This study's findings are consistent

with those of Madushanka & Jathurika (2018) and

Jati & Andini (2019), who found that CR is beneficial

but has no significant impact on ROA. This study is

consistent with the findings of Hantono (2018) study,

which found that a greater CR can only suggest that a

company's capacity to pay off short-term debt using

current assets is greater, but it has no impact on

profitability.

The amount of liquidity in a firm does not always

imply improving or reducing its profitability. The

component of the current ratio includes other non-

cash assets that may take longer to convert, such as

receivables and inventories held by agricultural

companies. Agricultural companies certainly have so

many supplies such as raw materials, plants, animals,

and others. Large receivables and inventories will

take longer to convert into cash. For example, BISI

International company in 2016 had the highest current

ratio in agricultural sector companies during the

2015-2019 period. Total receivables and inventories

for the year amounted to 1,638,232,000,000. The

amount is quite significant because the figure

represents 80.2% of the total current assets for the

year. We also see the company with the lowest

Current Ratio during the 2015-2019 period, namely

PT Bakrie Sumatera Plantations Tbk. In 2016. The

company's total receivables and inventories in that

year amounted to 838,237,330,000. This amount is

also quite large because the percentage is 82.5% of

ICAESS 2021 - The International Conference on Applied Economics and Social Science

122

the total current assets in that year. This amount can

also hamper the company's operating activities aimed

at increasing its profits due to the unavailability of

sufficient cash or cash equivalents for its operations

and productivity. So the level of liquidity does not

affect the profitability.

4.7.1 Effect of Current Ratio on Return on

Equity

Based on the hypothesis 1b test in table 10, it shows

that liquidity, as measured by CR, has no significant

positive effect on ROE. These results are contrary to

hypothesis 1b, which states that CR has a significant

positive effect on ROE. This result is evidenced by

the probability value, which shows a value of 0.9266,

which is greater than the alpha level of 5%. The

coefficient value of 0.002552 indicates a positive

direction indicating that the relationship between CR

and ROE is unidirectional. Still, CR is not the main

factor that can affect ROE because the effect is not

significant.

The results of this study follow the results of

research by Rahmah & Asnawi, (2019) and

Pongrangga et al. (2015), which state that there is no

need to consider the current ratio because it has no

significant effect on the company's ROE.

Madushanka & Jathurika (2018) and Saleem &

Rehman (2011) also state that CR has no significant

effect on ROE.

4.7.2 Effect of Debt to Equity Ratio on

Return on Assets

The hypothesis 2a test in table 9 shows that liquidity,

as measured by DER, has no significant effect on

profitability as measured by ROA. These results are

contrary to hypothesis 2a, which states that DER has

a significant negative effect on ROA. This result is

evidenced by the probability value, which shows a

value of 0.2089, which is greater than the alpha level

of 5%. The findings of this study are consistent with

those of Samo & Murad (2019), who found that DER

had no significant impact on ROA. According to

Irman et al., (2020), the company's DER level had no

significant impact on the return on its assets. The

debt-to-equity ratio compares debt and equity in a

company's funding that illustrates the company's

capital ability to pay off all of its debts.

We can see that the average DER of

agricultural sector companies for the 2015-2019

period is 1.18429. A total of 36 samples are below the

average value, and most of them have a value below

1. A DER value below 1 indicates that the company's

capital is more significant than its debt to cover its

debts and does not affect the company's assets for

repayment—corporate debt to agricultural sector

companies. Thus, DER is not a significant factor in

increasing or decreasing returns on assets in

agricultural companies.

4.7.3 Effect of Debt to Equity Ratio on

Return on Equity

Based on the hypothesis 2b test in table 10, as

measured by DER, liquidity has a significant negative

effect on profitability as measured by ROE. These

results align with hypothesis 2b, which states that

DER has a significant effect on ROE. This result is

evidenced by the probability value showing a value

of 0.0000 and this value < 5% alpha level. The

coefficient value of -0.0764 indicates a negative

direction which indicates the relationship between the

two is opposite, which if the DER increases, the ROE

will decrease. This study's results follow the results of

research by Samo & Murad (2019) and Hantono

(2015), which state that DER has a negative and

significant effect on ROE. Putra & Badjra (2015)

show that DER is one of the main factors that affect

ROE because it has a significant effect.

When the company has a high rate of return on

equity, the company will be minimal in using debt

because the company has more internal funds owned.

When the company has high debt, the company will

experience a decrease in its return on equity. This

result is evidenced by the average ROE of

Agricultural Sector Companies for the 2015-2019

period of -0.00046 and the average DER of 1.18429.

An ROE below one or even minus indicates a low

return on equity, and a DER greater than one indicates

that the company uses its debt more than its capital.

DER shows how a part of each capital is used as

rupiah collateral for the debt. When the DER level is

higher, the debt will be higher, then the effect on ROE

is that the company's ability to earn profits will be

disrupted because the capital owned by the company

will be used to pay debt and interest. If the company

is in debt, the company will focus on paying off the

company debt. Poor debt management can interfere

with company productivity. Thus, DER is one of the

main factors affecting the profitability of agricultural

companies, as reflected in the company's ROE.

5 CONCLUSIONS

Based on the research results, it was found that CR

had no significant positive effect on ROA and ROE

in agricultural sector companies. Other non-cash

Effect of Liquidity and Leverage on Proﬁtability of Agricultural Sector Companies Listed on the IDX

123

assets such as inventory and accounts receivable

owned by the company will take time to convert into

cash. The increase in trade receivables and cash can

occur due to increased sales. CR increases, ROA, and

ROE also increase, but this is not a significant factor

in the profitability of agricultural sector companies.

DER does not have a significant positive effect on

ROA but has a significant negative effect on ROE. In

the agricultural sector, the increase or decrease in the

DER does not significantly affect the company's

ROA because the equity owned by the company can

still pay off its debts, so the company does not need

to use company assets to pay off debts. In contrast,

DER in the agricultural sector has a significant

negative effect on ROE for companies in the

agricultural sector. The company's ability to generate

profits will be disrupted because the company's

capital is used to pay off the company's loans. As a

result, the DER level has a significant impact on

equity in agricultural firms. If the company is in debt,

the focus will be on paying the debt. Debt

management can disrupt the company's activities and

production. Therefore, it is necessary to have good

debt management in agriculture sector companies so

that the capital owned is used to pay off company debt

and achieve maximum profit.

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