The Influence of Liquidity and Solvency on Company Value Mediated by Profitability (A Study on the Raw Material Sector Listed on the Indonesia Stock Exchange)

Ardianta Rabu, September 09, 2026
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FORMOSA NEWS

Profitability Drives Company Value in Indonesia's Raw Material Sector, Study Reveals

Profitability serves as the primary driver of firm value in Indonesia's raw material sector, while liquidity and debt levels hold no direct influence over investor valuation. A study published in 2026 by researchers Destavia Pristi Andayana and Iwan Firdaus from Universitas Mercu Buana, Jakarta, demonstrates that neither liquidity nor solvency directly impacts the market valuation of listed raw material companies on the Indonesia Stock Exchange (IDX). Instead, profitability acts as a crucial mediating bridge through which financial management and debt structures shape investor perceptions. These findings offer valuable guidance for corporate leaders, equity analysts, and stock market investors navigating capital allocation in essential industrial sectors.

The raw material sector—comprising basic chemicals, iron and steel, metals, minerals, and paper—plays a fundamental role in supporting national infrastructure, manufacturing, and export economies. According to statistics from Statistics Indonesia (Badan Pusat Statistik), manufacturing contributes roughly 18.67% to the national Gross Domestic Product (GDP), with basic metal and paper industries generating billions in export value. Despite this macroeconomic significance, the market valuation of raw material companies, measured by the Price to Book Value (PBV) ratio, experienced notable volatility and decline between 2019 and 2024. This disparity highlighted a critical question for financial analysts regarding which fundamental indicators truly drive market valuation during post-pandemic recovery periods.

To evaluate these corporate dynamics, the research team from Universitas Mercu Buana analyzed financial data collected from March 2025 to June 2026 through the Investment Gallery of the Indonesia Stock Exchange at Universitas Mercu Buana. The quantitative study applied a causality design across a sample of seven representative raw material companies listed on the IDX, tracking financial performance metrics over a six-year observation period from 2019 through 2024. Utilizing panel data regression via EViews 14 statistical software and mediation testing via the Sobel Test, the researchers evaluated how liquidity (Current Ratio) and solvency (Debt to Equity Ratio) influence firm value (Price to Book Value) both directly and indirectly through profitability (Return on Assets).

The empirical analysis yielded several significant findings regarding corporate financial management in the industrial raw materials market:

  • Profitability Directly Enhances Firm Value: Return on Assets (ROA) exerts a strong, positive, and direct influence on Price to Book Value. Investors reward companies that efficiently generate net income from their total assets, viewing strong profitability as a positive signal of operational performance.
  • No Direct Impact from Liquidity or Solvency: Neither the Current Ratio (CR) nor the Debt to Equity Ratio (DER) has a statistically significant direct impact on firm value. High liquidity reserves or low leverage ratios do not automatically translate to higher market valuations if overall profit generation remains stagnant.
  • Excess Liquidity Depresses Profitability: High liquidity ratios demonstrate a statistically significant negative effect on Return on Assets. Holding excessive current assets, such as idle cash or uncollected receivables, reduces operational efficiency and lowers overall asset profitability.
  • High Leverage Suppresses Profit Margins: Solvency ratios display a significant negative impact on profitability. Heavy reliance on debt financing increases interest expenses and financial obligations, which directly erodes net earnings and asset returns.
  • Mediating Role of Profitability: Both liquidity and solvency exert an indirect negative effect on firm value through profitability. Mismanaged liquid assets or excessive debt burdens depress Return on Assets first, which subsequently damages investor perception and lowers market valuation.

The practical implications of this research extend directly to corporate financial strategy, asset management, and investment planning. For corporate management within the raw material sector, the findings emphasize that stockpiling liquid assets or accumulating debt without corresponding profit returns harms firm value. Executives must focus on working capital optimization and efficient asset utilization rather than simply maintaining large cash buffers. For stock market investors and portfolio managers, the study indicates that profitability metrics like Return on Assets should serve as the primary criteria when picking industrial stocks on the Indonesia Stock Exchange, as market pricing responds directly to earnings efficiency rather than balance sheet size alone.

The authors summarized the strategic takeaway regarding asset management and market perception:

"A company's ability to generate profit from its assets serves as the primary positive signal for market investors. Efficient management of current assets and debt structures is essential to prevent margin erosion and preserve firm value in capital markets."

Author Profiles

  1. Destavia Pristi Andayana, S.E. – Lead researcher from the Master of Accounting Program at Universitas Mercu Buana, Jakarta, specializing in corporate finance, financial accounting, and capital market analysis.
  2. Iwan Firdaus, S.E., M.Si. – Senior lecturer and researcher at Universitas Mercu Buana, Jakarta, focusing on financial management, capital structure strategies, and corporate governance.

Research Source

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