The Effect of Liquidity and Leverage on Firm Value with Profitability as an Intervening Variable (A Study of the Mining Sector Listed on the Indonesia Stock Exchange)

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FORMOSA NEWS - Jakarta - High Liquidity Tends to Decrease Firm Value in Indonesia’s Mining Sector, New Study Finds. Holding excessive amounts of cash or short-term liquid assets can backfire on mining companies by reducing their overall market value, according to a recent evaluation of the Indonesian financial landscape. The comprehensive study, published in 2026, was conducted by researchers Naufal Karuna Bumi Adhiatmiko and Iwan Firdaus from Universitas Mercu Buana. Examining the financial performance of corporate mining operations listed on the Indonesia Stock Exchange (IDX) from 2020 to 2024, the researchers discovered a critical structural paradox. While maintaining substantial liquidity is vital for funding day-to-day operations and driving profitability, a surplus of unallocated cash sends an unintended negative signal to stock market investors, ultimately depressing the enterprise value.

The Paradox of Cash Reserves in Capital-Intensive Sectors
The mining industry remains a foundational pillar of economic growth in Indonesia, contributing significantly to the nation's Gross Domestic Product (GDP) through corporate taxes, royalties, job creation, and regional infrastructure development. Driven by surging global production demands for commodities like coal, nickel, and tin, as well as aggressive domestic downstream processing policies, the sector has seen steady operational growth. However, this industrial momentum has faced a visible disconnect in the capital markets. Between 2020 and 2024, the actual market value of listed mining companies fluctuated wildly and experienced a downward trend. To understand why robust operational industries fail to achieve sustained high valuations from public investors, Naufal Karuna Bumi Adhiatmiko and Iwan Firdaus initiated an investigation. The research team analyzed how corporate liquidity (short-term cash solvency) and leverage (debt utilization) impact corporate value, introducing corporate profitability as a crucial intervening variable to trace the indirect pathways of financial decision-making.

Simplified Methodology: Tracking Data Panel Regressions
The financial experts at Universitas Mercu Buana structured the study as a quantitative causal investigation. Rather than relying on subjective surveys, the authors extracted secondary data directly from the verified annual financial audits published on the official Indonesia Stock Exchange platform. Using a strict purposive sampling framework, the research focused on a dedicated group of eight core mining corporations tracked consistently over a five-year observation window (2020–2024), yielding 40 balanced data points. To process this dataset without technical distortion, Adhiatmiko and Firdaus deployed a panel data regression approach utilizing a Random Effect Model.
The primary indicators used to assess the companies included:

• Firm Value: Measured using Tobin’s Q, a ratio comparing market value to asset replacement costs.
  
• Liquidity: Evaluated via the Current Ratio (CR), measuring short-term asset availability.
  
• Leverage: Proksied through the Debt to Equity Ratio (DER), tracking capital debt levels.
  
• Profitability: Represented by Return on Assets (ROA), determining net accounting gains from investments.
  

The indirect relationships within the financial model were verified using the statistical Sobel Test to confirm the exact mediating power of corporate profits.

Key Findings: The Critical Mediating Role of Profitability
The data analysis conducted by the Universitas Mercu Buana researchers revealed several defining insights regarding corporate finance structures in the extraction industry:

• Negative Impact of Immediate Liquidity: High short-term liquidity directly correlates with lower overall firm value. Investors interpret an overabundance of idle cash reserves as management's inability to deploy resources into highly lucrative long-term mining ventures.
  
• Neutral Impact of Financial Debt: Corporate debt leverage does not significantly influence a mining company’s direct valuation or its basic profitability. In the mining sector, the market prioritizes physical commodity reserves, production efficiency, and global price shifts over specific internal choices between debt or equity financing.
  
• Positive Power of Net Profits: High profitability dramatically increases firm value. Companies that consistently wring strong returns out of their assets build immediate, unshakeable investor confidence.
  
• The Mediation Effect: The Sobel Test confirmed that liquidity exerts a strong, positive indirect effect on firm value when channeled specifically through profitability. Cash reserves are vital for operational survival; however, they only boost a company's market worth if they are actively spent to generate high corporate profits.
  

Real-World Impact and Recommendations for Investors
The structural insights provided by Adhiatmiko and Firdaus offer clear actionable guidance for corporate boards, financial planners, and institutional investors active in Southeast Asian markets. Because mining requires substantial, capital-intensive allocations for exploration, extraction equipment, and safety logistics, cash hoarding can prove hazardous to stock performance. For corporate leaders, the study underscores the necessity of aggressive cash management. Mining executives must optimize their short-term assets rather than let them pile up unproductively. Surplus capital should be actively redirected into expanding mining concessions, technological upgrades, or distribution efficiency to ensure it converts directly into net profitability. For stock market investors, the Universitas Mercu Buana research provides a warning against relying purely on defensive balance sheets. A company that appears safe due to low debt and high cash may experience stagnating market values. Analysts should prioritize Return on Assets over basic liquidity metrics, as corporate profitability serves as the primary engine driving long-term capital appreciation in the public markets.

Author Profiles
Naufal Karuna Bumi Adhiatmiko is a corporate finance researcher affiliated with the Faculty of Economics and Business at Universitas Mercu Buana, Jakarta, Indonesia. His academic focus involves capital structure analysis, market valuation models, and the behavior of industrial commodities listed on emerging stock exchanges.
Iwan Firdaus is a senior academic and financial analyst within the Faculty of Economics and Business at Universitas Mercu Buana. He specializes in econometric modeling, panel data regressions, and corporate governance assessment within resource-extraction industries.

Source
Naufal Karuna Bumi Adhiatmiko,  Iwan Firdaus (2026). The Effect of Liquidity and Leverage on Firm Value with Profitability as an Intervening Variable (A Study of the Mining Sector Listed on the Indonesia Stock Exchange). Formosa Journal of Applied Sciences (FJAS). Vol. 5, No. 5, Tahun 2026: Hal. 1247-1260
DOI: https://doi.org/10.55927/fjas.v5i5.62
URL: https://journalfjas.my.id/index.php/fjas