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Analysis of Relationship Between Financial Liquidity on Financial Performance : Case Study at Pt. Map, Tbk

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ANALYSIS OF RELATIONSHIP BETWEEN FINANCIAL LIQUIDITY ON FINANCIAL PERFORMANCE : CASE STUDY AT PT. MAP, Tbk

Jap Nelson Adolf1*, Nabilla Sarah Permana2*

1,2School of Business and Management ITB, Jakarta, Indonesia

*Correspondence E-mail : jap.adolf@sbm-itb.ac.id, nabilla.permana@sbm-itb.ac.id

ABSTRACT

 Every year Indonesia make an positive improvement in economic growth with a lot of contribution from micro and small industry. Now, information and technology has a massive impact in many ways that every sector can’t hide from it, especially retail sector that one of the sector that already impacted by this trend. Therefore, the purpose of this study is to analysis the impact of financial liquidity on the profitability of retail company in Indonesia. This study points out most important liquidity, which is current ratio, acid test ratio, cash ratio and financial performance by using Return on assets ratio. Every company that listen in IDX (Indonesia Stock Exchange) have capital structure consists of debt that can be derived from other parties or from the sale of shares of the company. This is one of the attention of the company, especially in maintaining how much of the company's capital is financed by debt and stock because it can affect the level of liquidity and solvency of the company. This study choose one of the leading company in retail sector, which is PT MAP, Tbk. The secondary data were obtained from the financial statement and annual report of PT MAP, Tbk that listed on IDX. The analysis showed that current ratio, acid test ratio, and cash ratio have a cause and effect relationship with return on assets (ROA) in PT MAP, Tbk. That means PT MAP, Tbk have to maintain their liquidity level in order to meet their financial obligations to maximize financial performance for the company longetivity.

Keywords : Financial Liquidity, Financial Performance, Return On Assets, Current Ratio.

INTRODUCTION

        Indonesia’s economic growth is one of the top leading in Asia and in the world, in 2017 Indonesia’s economic growth reach 5,07%. In recent years, many investors came to Indonesia to see which sector has a hottest prospect to invest their money. In this digital era, dependency on information technology has become bigger than ever and slowly will reach every corner in this world. This trend has make a lot of impact in all sector, not to mention retail sector. Recently, there are some big player in retail sector that has to closed their stores because they are not profitable anymore, that their revenue can’t cover their expenses such as Debenhams, Lotus, 7-eleven, etc. Many people especially millennials slowly shifting from visiting retail store or physical store to online store. Everything is so easy right now that regular store can’t compete in certain area, such as rent expense, wages expense, storage cost, freight cost, etc. If they can’t make profit, how can they pay their debts? or even pay their operating cost. The ability of the company to analyze its financial position is essential for improving its position in the market. With a deep and detail analysis of its financial performance, the company can identify opportunities to improve performance of company.

Liquidity ratios show the entity’s ability to meet its short-term liabilities, as the weakness of the value of these ratios indicates that the organization may face difficulties in meeting short-term financial liabilities (Amengor, 2010). This in turn would negatively affect the volume of company’s activity, thus on its financial performance. On the other hand, the improvement in the values of these ratios can be pointing to recovery in liquidity of companies, which may reflect positively on the volume of activity, and therefore on its financial performance (Gibson, 2009).

 A liquid company can takes advantage of available investments, such as cash discounts and lower interest charges on borrowings. Liquidity of the company are some indicators that will capture the position of the company and the problem they face.  Liquidity plays a crucial role to make sure that the business will be successful. A company should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both the internal and the external analysts because of its close relationship with day-to-day operations of a business (Bhunia et al, 2011).

From 2012 to 2016 there is 701 new outlets that PT MAP, Tbk has established all over Indonesia. New stores under PT MAP Tbk is still coming up but the growth is smaller than previous year, there just 26 new store that open in 2016.  The study aims to identify the relationship between liquidity ratio on financial performance of the PT MAP Tbk, which using three ratios of financial liquidity such as Current Ratio, Acid Test Ratio, and Cash Ratio and ratio of financial performance, which is Return On Assets. The understanding of the liquidity and its impact on financial performance in retail company will help management, shareholders, and stakeholders to carefully making a decision that will benefit them to stimulate the growth and sustainability of retail company especially PT MAP, Tbk.

LITERATURE REVIEW

Liquidity refers to the speed in the transfer of assets into cash, liquidity ratios primarily focus on the cash flows, it is an indicator to measure a company’s ability to meet its short-term liabilities. Liquidity management is achieved through the effective use of assets (Robinson et  al., 2015). A company is considered liquid when the resources issued by the current operations of the exercise supplies enough cash in order to face the short term payment settling day and the liquidity degree expresses the quality of the financial balance of the company on short term. (Petrescu et al,. 2008). Liquidity ratio include, such as current ratio, acid test ratio or quick ratio, and cash ratio.

The current ratio is the most wide-spread liquidity indicator, current ratio measure the company’s ability to pay short-term liabilities such as payable accounts and short-term loans, which represents the ratio of current assets to current liabilities. The magnitude of this ratio expresses high liquidity of the company, thus a greater capacity to meet the short-term liabilities. If the current asset of a company is more than industry average, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current asset, then the company may have problems meeting its short-term obligations.

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