The research comes at a time when Indonesia’s basic materials sector, which supplies essential raw materials such as metals, paper, aluminum, wood, gold, and iron, continues to play a strategic role in the national economy. Despite its significant contribution to Indonesia’s Gross Domestic Product (GDP), the market value of many companies in this sector has declined in recent years. This disconnect between economic importance and market performance prompted the researchers to investigate the financial factors influencing corporate value.
Why Firm Value Matters
Firm value reflects how investors assess a company's future prospects and financial performance. Companies with higher market value generally attract more investment, enjoy easier access to capital, and demonstrate stronger long-term competitiveness.
Traditionally, investors have considered liquidity—defined as a company's ability to meet short-term financial obligations—as a sign of financial health. Likewise, capital structure, or the balance between debt and equity financing, is often regarded as a key indicator of financial stability.
However, the new findings suggest that these indicators alone do not guarantee higher market valuation.
How the Research Was Conducted
Diandra Saskia and Iwan Firdaus analyzed financial reports from basic materials companies listed on the Indonesia Stock Exchange between 2020 and 2024.
Out of 113 listed companies, the researchers selected 13 companies that met predetermined sampling criteria. They examined relationships among four financial indicators:
- Liquidity (Current Ratio/CR)
- Capital Structure (Debt-to-Equity Ratio/DER)
- Profitability (Return on Assets/ROA)
- Firm Value (Tobin’s Q)
The analysis used panel regression techniques to identify both direct and indirect relationships among these variables while evaluating whether profitability serves as a bridge between financial management and firm value.
Profitability Emerges as the Strongest Driver
The study produced several notable findings that challenge conventional investment assumptions.
The researchers found that:
- Higher liquidity significantly reduced firm value.
- Capital structure had no significant influence on firm value.
- Higher profitability significantly increased firm value.
- Liquidity improved profitability by supporting smoother business operations.
- Higher debt levels reduced profitability because of increased interest expenses.
Among these findings, profitability emerged as the most influential factor affecting investors' perceptions of company value.
Companies capable of generating stronger returns from their assets consistently achieved higher market valuations, regardless of how much cash they held or how they financed their operations.
Why More Liquidity Can Reduce Company Value
At first glance, the negative relationship between liquidity and firm value may seem surprising.
According to the researchers, excessively high liquidity may indicate that a company is holding too many idle current assets rather than investing them productively. Large cash reserves or underutilized working capital can signal inefficient asset management, reducing investor confidence in future growth.
In contrast, companies that efficiently convert assets into profits demonstrate stronger operational performance, making them more attractive to investors.
Profitability Bridges Liquidity and Market Value
An important contribution of the study is its examination of profitability as a mediating variable.
The researchers found that liquidity indirectly contributes to higher firm value only when it improves profitability first. In other words, maintaining sufficient liquidity benefits investors only if those financial resources are effectively transformed into earnings.
Meanwhile, profitability did not mediate the relationship between capital structure and firm value. Simply changing the proportion of debt financing was not enough to increase market valuation.
As Diandra Saskia and Iwan Firdaus of Universitas Mercu Buana conclude, profitability serves as the key mechanism through which liquidity can create firm value, whereas capital structure alone does not significantly influence investors' perceptions when profitability remains unchanged.
Implications for Investors and Businesses
The findings provide practical guidance for several stakeholders.
For corporate managers, maintaining high liquidity should not be the ultimate financial objective. Instead, companies should ensure that available assets are actively utilized to improve operational efficiency and generate sustainable profits.
For investors, profitability indicators—particularly Return on Assets (ROA)—may offer a more reliable measure of corporate quality than liquidity ratios or debt composition alone when evaluating companies in Indonesia’s basic materials sector.
For policymakers and market regulators, the study suggests that policies encouraging operational efficiency and productive asset utilization may strengthen investor confidence more effectively than initiatives focused solely on corporate financing structures.
As Indonesia continues expanding its manufacturing base, improving corporate profitability could become a more important strategy for increasing shareholder value than simply maintaining large cash reserves or adjusting debt levels.
Author Profile
Diandra Saskia is a researcher at Universitas Mercu Buana specializing in corporate finance, financial statement analysis, liquidity, capital structure, profitability, and firm value.
Iwan Firdaus is an academic at Universitas Mercu Buana whose expertise includes financial management, investment analysis, corporate governance, and quantitative research in business and finance.
Source
Article Title: The Effect of Liquidity and Capital Structure on Firm Value in Basic Materials Sector Companies Listed on the Indonesia Stock Exchange, with Profitability as a Mediating Variable
Authors: Diandra Saskia & Iwan Firdaus
Affiliation: Universitas Mercu Buana
Journal: International Journal of Sustainable Applied Sciences (IJSAS), Vol. 4, No. 7 (2026)
DOI: https://doi.org/10.59890/ijsas.v4i7.9
URL: http://ijsasjournal.my.id/index.php/ijsas
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