WORKING CAPITAL AND PROFITABILITY PERFORMANCE: EVIDENCE FROM INDONESIAN MINING COMPANIES LISTED IN THE INDONESIAN STOCK EXCHANGE By FRANKY MANTIRI An Independent Study Submitted in Partial Fulfillment of the Requirements For the Degree of Master of Business Administration Faculty of Business Administration Asia-Pacific International University 2017
ii Project Title: Working Capital and Profitability Performance: Evidence from Indonesian Mining Companies Listed in the Indonesian Stock Exchange Author: Franky Mantiri Project Supervisor: Dr. Pak Lee Program: Master in Business Administration Academic Year: 2016-2017 ABSTRACT The data from the 10 biggest Indonesian mining companies listed in Indonesian Stock Exchange (IDX) that are measured with the Jakarta Composite Index (IHSG) from the period of 2011 to 2015 were collected and analyzed. The purpose of this study is to establish the working capital and the components in the financial reports of the mining companies listed in Indonesia Stock Exchange and to determine whether there is a relationship between working capital (WC) including CCC, IT, ACP, CR and performance (profitability) that is measured with Return on Asset (ROA). The result of study indicates that there are some week positive correlations between working capital elements and the return on asset (profitability), also there are some negative correlations between working capital elements and return on asset. Moreover, there is some indication of medium negative correlations. This shows that the profitability of these 10 mining companies in Indonesian that was included in this study does not have strong correlations. This could be due to other elements such as company size, company ownerships such as government or privately own, or the financial structure of each company. KEY WORDS: WORKING CAPITAL MANAGEMENT, WORKING CAPITAL ELEMENT, CASH CONVERSION CYCLE, INVENTORY TURNOVER, AVERAGE COLLECTION PERIOD, CURRENT RATIO, RETURN ON ASSET, PROFITABILITY
iii Table of Contents ABSTRACT.................................................................................................................................... ii Table of Contents...........................................................................................................................iii List of Figure................................................................................................................................... v List of Tables ................................................................................................................................. vi Chapter I Introduction................................................................................................................... 1 1.1 Background of Study........................................................................................................ 1 1.2 Research Problems........................................................................................................... 3 1.3 Purpose of Study .............................................................................................................. 4 1.4 Limitation of Study .......................................................................................................... 4 Chapter 2 Literature Review and Conceptual Framework ........................................................... 5 2.1 Review of Concepts.............................................................................................................. 5 2.1.1 Working Capital Management....................................................................................... 5 2.1.2 Management of Cash ..................................................................................................... 6 2.1.3 Management of Inventory.............................................................................................. 8 2.1.4 Management of Receivables.......................................................................................... 9 2.1.6 Importance of Working Capital Management ............................................................. 10 2.2 Review of Related Studies.................................................................................................. 11 2.3 Conceptual Framework....................................................................................................... 15 2.3.1 Hypothesis.................................................................................................................... 16 2.3.2 Operational Definitions................................................................................................ 17 Chapter 3 Methodology .............................................................................................................. 21 Chapter 4 Result.......................................................................................................................... 23 4.1 What is the working capital of Indonesian mining companies listed in Indonesian Stock Exchange? What are the components of the working capital in these companies?................. 23 4.2 Is the working capital (including CCC, IT, ACP, QR, and CR) significantly different among different mining companies?......................................................................................... 33 4.3 Is there any significant relationship between the working capital as whole, CCC, IT, ACP, and CR and performance of the mining companies in terms of profitability?.......................... 36 Chapter 5 Discussion .................................................................................................................. 43
iv 5.1 Theoretical Implication....................................................................................................... 43 5.2 Conclusion and Implementation ......................................................................................... 45 5.3 Recommendation ................................................................................................................ 46 References..................................................................................................................................... 47 APPENDICES .............................................................................................................................. 50 APPENDIX A: Mining Companies Included in the Study........................................................... 50 APPENDIX B: Elements of Working Capital (CCC, IT, ACP, CR, WC, ROA)........................ 50 APPENDIX C: Correlations........................................................................................................ 53 APPENDIX D: Descriptive Statistics.......................................................................................... 53 APPENDIX E: Model Summary and ANOVA........................................................................... 54 APPENDIX F: Correlations of each element .............................................................................. 55
v List of Figure Figure 1.1 Cash Conversion Cycle………………………………….......…………………….......7 Figure 2.1 Conceptual Framework……………………………........…………………………....15 Figure 2.2 Operational Definition……………………….........……………………………….....18 Figure 4.1 Line Chart of Cash Conversion Cycle (CCC)..............................................................33 Figure 4.2 Line Chart of Inventory Turnover (IT).........................................................................34 Figure 4.3 Line Chart of Average Collection Period (ACP).........................................................34 Figure 4.4 Line Chart of Current Ratio (CR).................................................................................35 Figure 4.5 Line Chart of Return On Asset (ROA).........................................................................36 Figure 4.6 Correlations between CCC and ROA...........................................................................38 Figure 4.7 Correlations between IT and ROA...............................................................................39 Figure 4.8 Correlations between ACP and ROA...........................................................................40 Figure 4.9 Correlations between CR and ROA.............................................................................41 Figure 4.10 Correlations between WC and ROA..........................................................................42
vi List of Tables Table 4.1 PT. Adaro Energy Tbk - Financial Report …………………………………………....24 Table 4.2 PT. Vale Indonesia Tbk – Financial Report…………………………………………..25 Table 4.3 PT. Indo Tambangraya Mega Tbk – Financial Report………………………………..26 Table 4.4 PT. Delta Dunia Makmur Tbk – Financial Report…………………………………....27 Table 4.5 PT. Bayan Resources Tbk – Financial Report………………………………………...28 Table 4.6 PT. Medco Energy International Tbk – Financial Report…………………………….29 Table 4.7 PT. Harum Energy Tbk – Financial Report…………………………………………...30 Table 4.8 PT. Golden Energy Mines Tbk – Financial Report…………………………………...31 Table 4.9 PT. Baramulti Suksessarana Tbk – Financial Report………………………………....32 Table 4.10 PT. Aneka Tambang (Persero) Tbk – Financial Report…………………………......33 Table 4.11 Correlations Table........................................................................................................37
Chapter I Introduction 1.1Background of Study Working capital management in a company is very important for the operations to give a good indication of its healthiness (Valipour & Jamshidi, 2012). Moreover they stated that the effectiveness of working capital management includes; planning and controlling the current assets and debts. And it can be done by avoiding over-investment of the current asserts and avoiding inappropriate flow of the working assets for fulfilling the responsibilities. This indicates that for company to be profitable has to have a good management of their asset and liabilities. During the downturn of the economy in the past decade, many giant companies’ collapses due to the cause that makes many executives wonder what the issue is. To name some of the company such as; General Motors, Lehmann Brother, and Kodak, with the name that they have had it is just difficult to understand why they collapses (Charitou, Lois, & Santoso, 2012). They stated further that the cause could be from both side, the internal and external factors. Internal factors are more controllable and external factors are less controllable. Moreover, they says that efficient utilization of firms resources as it relates to working capital management shows that executives has to find ways to efficiently manage their cash availability on the daily basis. In the other words, poor management of companies’ working capital will lead to less profit because of fewer customers. And in the end company might lose market share. Furthermore, according to Ilerisoy (2015), says that in the event of market down turn in the past the problem that companies facing was related to its liquidity management, where it was not well managed that leads to the economic crisis. The same idea was stated by Charitou, et al. (2012).
2 Reports by Price Water House Coopers in their article of “Managing effectively in a downturn, turning challenges into opportunities,” one element that company has to have is the management of working capital for profitability and performance. Where cash collections, sales control, cost cutting and management of companies’ asset and inventory is very important for the company’s profitability (Mohamad & Saad, 2010). Moreover, problem that happened in the US and the rest of the world in the past decade are a sign that company has to have a good management in their asset, liability, debt, cash conversion that related to their liquidity performance. All this will give the implication of negative liquidity that will causes adverse funding that will lead to portfolio liquidations that hurts asset value and market liquidity (Ilerisoy, 2015). There are many research done related to the topic of working capital management such as in Malaysia, India, Indonesia, Nigeria, and Bangladesh (Mohammad, & Saad, 2010; Sarkar & Sarkar, 2013; Barine, 2012; Titik, et al. 2014). They indicated that financial decision making related to working capital management is important to increase company’s working capital (current asset minus liabilities), where it will reduces the risk of the company not to be able to pay its obligation. Although it will negatively affect its profitability but it involves the risk – return trade off and not taking additional risk unless it compensated with additional returns. Also research has been done in Indonesia related to working capital management in banking industry (Titik et al., 2014) finds that there is a strong relationship between working capital management and profitability as one of the indicator. Although specifically there are no researches done related to working capital management in mining industry in Indonesia, gives the opportunity for this study to be done to find if there are any relationship and strong indication if working capital
3 management and profitability in mining companies in Indonesia. Therefore, further study and evaluation of working capital management in this field can be done in the future. 1.2Research Problems Study shows that poor management of asset and liability will lead to financial problem in the company where it will come to the stage that the day to day financial need won’t be met (Barine, 2012; Charitou, et al., 2012). On the other hand an effective and efficient working capital management will lead to maximum revenue collecting, according to Baidh, (2013). Also according to Biery (2013) stated in Forbes.com says that proper managing of resources through working capital management, and the proper control of their sales, inventory, and fixed assets will generate more profit for the company, where it also related to the turnover of the receivable and how to manage cash wisely. Because good cash flow management will lead to a more profitable company (Platt, 2010). Furthermore, Biery (2013) said that many US company has increased their profit due to the better management of their working capital and cash in the year of 2013, and the tread is believed to be current. Also Marr (2012) says that without a proper working capital management companies will be challenged to fund day to day operations activities. Therefore in this study researcher will try to establish whether there is any correlation between working capital (WC) with its component; Cash Conversion Cycle (CCC), Inventory Turnover (IT), Average Collection Period (ACP), and Current Ratio (CR), and profitability in mining companies listed in Indonesian stock exchange.
4 1.3Purpose of Study The purpose of this study is to establish the working capital and the components in the financial reports of the mining companies listed in Indonesia Stock Exchange and to determine whether there is a relationship between working capital (WC) including CCC, IT, ACP, CR and performance (profitability). The question this research attempts to address are: 1. What is the working capital of Indonesian mining companies listed in Indonesian Stock Exchange? What are the components of the working capital in these companies? Do these mining companies have similar components in terms of types and amounts? 2. Is the working capital and its components significantly different among different mining companies? 3. Is there any significant relationship between the working capital (CCC, IT, ACP, and CR) and performance of the mining companies in terms of profitability? 1.4 Limitation of Study The limitation of the study is due to the lack of more information related to mining company in Indonesia. Together with no information on research study related to companies working capital and profitability of mining companies in Indonesia. Therefore, the researcher will just rely on the information that is available in each company web site on the related research from different countries from the internet and scholar web site. In result there was no direct work on collecting information needed.
5 Chapter 2 Literature Review and Conceptual Framework 2.1 Review of Concepts 2.1.1 Working Capital Management Management of working capital involves the aspect of management control of company’s current assets, current liabilities, and how the two aspects relate to one another. Moreover, the relationships between current assets and current liabilities show the condition of liquidity of the company and the ability to repay its short-term debt and obligations when it is due. Company with higher liquidity will have a better capability to repay its obligations on its current liabilities. On the other hand it means that company or business firm that has less amount of funds available will lose its chance for a better opportunities that will lead to the suffering of its probabilities. According to Brigham, et.al (2013) says that working capital management involves finding the optimal levels of cash, marketable securities, accounts receivables, and inventory, and then financing that working capital at the least cost. Moreover, they say that Effective working capital management can generate considerable amount of cash that will be useful for the operations of the company. On the other hand working capital management has becoming more challenging in the latest economy where company has to balance its financial strategy and to make an important decision on how to maximize profits and stock prices. Also Gitman and Zutter, (2012) says that the goal of working capital management or short term financial management is to manage each of the firm’s current assets (inventory, account receivables, marketable securities, and cash) and current liabilities (notes payable, accruals and accounts payable) to achieve a balance between profitability and risk that contributes positively to the firm’s value. Moreover they say that forms are able to reduce financing cost or increase the funds available for expansion by minimizing the amount of funds tied up in working capital.
6 Much of short-term financial planning focuses on variation in working capital. Short term or current asset and liabilities such as cash, accounts receivable, inventories, and accounts payable vary considerably as firm move through a cycle in which raw materials are purchased, goods are produced and sold, and customers pay their bills. 2.1.2 Management of Cash Management of cash is significantly important since it is the most liquid asset of one company. The element in it including local and foreign currency and time deposits that is available to be cashed out when needed. Therefore, the purpose of cash management is to minimize the amount of cash on hand but still have enough funds to cover the expenses and needed operational activities, especially in an un-expected situation. Moreover, cash management requires cash planning and budgeting in cash flows of the company. With cash planning, it will enable the company for anticipation of future cash flows and cash needs. It also enables management to reduce the possibilities of idle cash and cash deficits, and to manage its gap between projected and actual cash flows. Furthermore, management are to seek and maintain the proper control and monitor of company cash collection and cash disbursement where it will indicate the effectiveness of company cash management. According to Brealey, Myers, and Marcus (2007, p.p 554-555) says that good cash management required manager to have control of cash and inventory in some form of centralization, where one cannot maintain their desired inventory of cash if all the subsidiaries in the group are responsible for their own private pools of cash. That means management have to have proper access and control to manage cash and inventory. The management of company has to aims at expediting cash collections and proper control of cash disbursement in order to maximise the value of the
7 organization. Moreover, cash and cash equivalent are those current asset that can be converted to cash in a short notice, such as cash in bank. Below is the cash conversion cycle figure by Brigham et.al (2013). Finish Goods and Sell Them Inventory Average Conversion Collection Period Period Payables Cash Deferral Period Conversion Period Days Receive Pay Cash for Collect Cash Materials Purchased for Accounts Materials Receivables Cash Conversion Cycle Figure 1.1 Cash Conversion Cycle Source: Essentials of Financial Management 3rd Ed. (Page. 587) by Brigham, E.F., Houston, J.F., Jun-Ming, H., Kee, K.Y., & Bany-Ariffin, A.N. (2013). Cengage Learning. Singapore.
8 2.1.3 Management of Inventory Normally company hold their inventory for different purpose such as for the precautionary purpose as well as speculative and management strategy. Manufacturing company holds their inventory to meet their day to day operation in the production, and company in general has to be able to manage their inventory in the level that is best for their operations. Because in holding inventory in a large amount means cost involvement and loss of opportunity in investment or diversification. Inventory may consist of raw materials, work in process, or finished goods waiting for sale and shipment (Brealey, Myers, & Marcus (2007, p. 553). Moreover, they say that there are also costs to holding inventories that must be set against these benefits. These are called carrying cost. For example money tied up in inventories does not earn interest. Storage and insurance must be paid for and there may be a risk of spillage or obsolesces. Therefore, production manages need to strike a sensible balance between the benefits of holding inventory and the costs. A company may also want to take advantages of quantity discounts by purchasing a large amount of quantity of raw materials, because when purchasing a large amount of quantity supplier will give some sort of discounts ore benefit to maintain their customer. This will lead to the better management of work in process to have a positive inventory related to production. Because it is expensive to maintain a large amount of inventory where it will be not efficient for the company, therefore management has to be sensitive in their techniques to improve the management of its inventory. The finished goods inventory is maintained to meet the regular and unexpected demand for goods. A Company may lose customer to its competitors if there is inadequate amount of finished goods inventory to meet customer demands. Therefore, having large
9 amount of finished goods inventory can help to avoid lost sales, it also enable the company to reduce unit production costs. However, the costs of carrying large amount of inventory should also be considered. Inventory management is the process of planning, monitoring and controlling inventory levels of a company. Inventory is a considerable component of current assets in business firms. Many companies invested large amount of funds in inventory, therefore, considerable attentions needs to be paid to inventory management (Gitman & Zutter, 2012). Moreover, they stated that the benefits of holding inventory include reducing the risk of “stock out” if demand is unexpectedly high. However, holding inventory can be very costly. Company not only has to pay for the storage costs and the risk of spoilage or obsolescence, but also has to incur the opportunity cost. The goal of inventory management is to ensure there is always adequate amount of inventory available to meet customers’ demands, while ordering and carrying costs are minimized. Several models are used to determine the optimal level of inventory. One model is the economic order quantity (EOQ), which balances order costs against carrying costs. Order costs are the costs of placing and receiving an order. Carrying costs are the costs of storage and deterioration, obsolescence, insurance, taxes, and the costs of funds locked up in inventory. The economic order quantity model states that the order costs and carrying costs are the two major components for inventory. The higher the frequency of inventory orders, the higher the order costs. On the other hand, a high order quantity leads to higher carrying cost but lower order costs. 2.1.4 Management of Receivables Management of account receivable are also another important component of a company’s working capital. A company does not usually expect to be paid immediately when they sell goods to customers. So receivables arise from the sale of goods or services on credit to customers. According to Lasher (2011, p. 34) says account receivable represent credit sales that have not yet been collected. Under normal conditions, these should be paid in cash within a matter of weeks. And most
10 companies sell on credit terms of approximately 30 days. Moreover, Brigham et al. (2013, p.p. 396- 397) says that companies often push those terms by taking somewhat longer to pay. The overall performance of the company can be affected by the effectiveness of its receivable management. Receivables are also an investment of the company. Therefore, a company’s credit policy is determined by its investment decisions. The goal of holding receivables is the same as other investments which is to maximize the profitability and value of the company. Credit sales can stimulate the generating of revenue for the company such as 1) credit period, 2) discounts, 3) credit standards, 4) collection policy. Furthermore, all this may also add to the costs related to credit sales. And those major types of cost are; financing costs, administrative cost, credit collection and bed debt. Management has to have an adequately policy in order to manage and maximize its profit. 2.1.6 Importance of Working Capital Management The importance of working capital management is indisputable given that a firm’s viability relies on the financial manager’s ability to effectively mange receivables, inventory, and payables (Gitman & Zutter, 2012). Further they say that the goal of working capital management is to manage each of the firms’ current assets (inventory, accounts receivable, marketable securities, and cash) and current liabilities (notes payable, accruals, and accounts payable to achieve a balance between profitability and risk that contributes positively to the firm’s value. Working capital management is the main aspect of the business, and financial managers spend most of their time in managing current assets and current liabilities and to aim high in maximizing company profit as their main goal. And effective management of working capital will helps the day to day operations of the company and to make sure it runs smoothly without any interruptions or delays. Moreover, when management manages well their working capital, it gives an indication to the share holders as well to the investors and consumer that firms are being run with accountability and effectiveness. In returned shareholders will be happy to
11 invest more in the company, and consumer will be loyal to it. Moreover, company will maintain their market share in the competition, and the more net working capital a company has the more likely it will be able to meet current financial obligations. The position of a company’s net working capital also affects it ability to obtain debt financing and loan agreements with commercial banks and other lending institutions, which often contain a provision requiring the firm to maintain a minimum of net working capital position. Many business firms failed because of inadequate working capital 2.2 Review of Related Studies Working capital management in a form is an important aspect that management has to give attention. It has been the interest not only to the firm’s management but also to academic researchers around the world. There are number of studies that have been conducted to examine the management of working capital management and profitability in various countries. In this study some of the research findings by different researchers are being presented. The study by Titik, A et al. (2014) investigated the working capital management and capital structure related to Indonesian banking industry. They have found that there is a significant positive effect on banking profitability with the better management of their working capital. Moreover they said that the greater the value of net working capital, the greater profitability of banking industry, which means that the management is successfully, managed the elements of working capital to have faster turnover. Study conducted by Mohamad & Saad (2010) about working capital management and the effect of market valuation and profitability in Malaysia, finds that there are significant negative associations between working capital variables with firm’s performance. In this study they explore the effect of working capital component such as cash conversion cycles (CCC), current
12 ratio (CR) current asset to total asset ratio (CATAR), current liabilities to total asset ratio (CLTAR), and debt to asset ratio (DTAR) to the firms performance by looking at the firms value, in this instance; profitability, return on asset (ROA) and return on invested capital (ROIC). Goel, S (2013) conducted study related to working capital management efficiency and firm profitability in Indian retail industry finds that a proper working capital management helps in efficient utilization of resources, as an evident from its regression analysis. They conducted the study related to the sales, cash analysis, inventory analysis, and efficiency. The results indicated that the proper management of working capital will lead to the efficiency of utilization of the company resources. Study by Charitou, M., Lois, P., & Santoso, H. B. (2012), related to the relationship between working capital management and firm’s profitability: and empirical investigation for an emerging Asian country, finds that cash conversion cycle and net trade cycle are positively associated with the firm’s profitability. Furthermore, they said that firm’s riskiness as measured by the debt ratio, is negatively related to the firms return on asset. In the study by Zakaria, N. B., & Amin, J. M. (2013), related to working capital financing and managements in Malaysian construction companies, find out that there is a significant relationships between the method of working capital financing and the performance in working capital management. Furthermore, they said that the construction firm with low cash conversion efficient could follow a few measures to unlock cash from working capital such as differentiating between suppliers according to the risk and profit impact on implementing controls to prevent early payment than what was agreed, consolidating among fewer suppliers to increase
13 negotiating power, integrating spending approvals into purchase that will increase collection time. Therefore, monitoring of the working capital structure is an ongoing basis. Study by Sarkar, C. R., & Sarkar, A. (2013), in the impact of working capital management on corporate performance: and empirical analysis of selected public sector Oil and Gas companies in India, concluded that both positive and negative associations related to the element of working capital management such as the quick ratio, current asset to sales ratio, and the profitability; return on capital employed (ROCE), occur. However, they suggested that management involvement and control on the element will give a significant implication in the result of working capital management. In the study conducted by Rahman, M. M., & Uddin, M. N. (2015) in the topic of measuring the relationship between working capital management and profitability, and evidence from Bangladesh, they concluded that the company operating profit was positively correlated to working capital policies as to guide the efficient working capital management. Moreover, they suggested that the financial manager should manage the working management by the trade-off between profitability and liquidity. Also the findings suggested that company have enough scope to enhance their profitability by the use of working capital in more efficient ways. The firms should improve the present structure of current assets and current liability for higher profitability and to build strong relations with supplier, creditors, customers, and other private agencies to that they can get any support from them. Study conducted by Barine, M. N. (2012) about working capital management efficiency and corporate profitability, and evidence from firms in Nigeria, finds that improving gross working capital positions using the difference between means shows that costs of working
14 capital exceed returns on working capital investment affecting their profitability. To redress this anomaly and improve net returns and corporate profitability from the use of working capital, Nigerian firms should optimize working capital investment to avoid over investments with its attendant inventory cost, lost returns on excess cash holdings and receivables. And under investment with its attendant stock-out, liquidity and bad debt cost, determine its working capital policies insuring it improves corporate profitability; appraise investment in working capital using capital investment models. Valipour, H., & Jamshidi, A. (2012) in their study with the topic of determining the optimal efficiency index of working capital management and its relationship with efficiency of assets in categorized industries in Tehran stock exchange, concluded that according to the hypothesis of the study, it was accepted and it can be stated that there is significant and positive relationship between working capital management performance index and the efficiency of the assets in the firms accepted in Tehran Stock Exchange. Therefore, it can be said that changes in the utilization index of working capital management is effective on the efficiency of the assets in all the firms.
15 2.3 Conceptual Framework As the result of the literature review of all firms related to working capital management and profitability, in this particular study of mining companies listed in Indonesian Stock Exchange the conceptual framework can be described as below: Figure 2.1 Conceptual Framework Working Capital Management Performance Cash Conversion Cycle Average Collection Period Inventory Turnover Current Ratio
16 2.3.1 Hypothesis 2.3.1.1 Cash Conversion Cycle. Cash is a significant part of the financial aspect of the company, where it is a necessary item to be able to operate in a healthy matter. According to Brigham et al. (2013) says that cash conversion cycle is the length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital. Therefore, without a proper and efficient cash management, company might faces problem especially in financing their debt, paying the dues to the supplier and for day to day operating activities. Hypothesis 1: There is a significant relationship between working capital management performance for companies and the cash management. 2.3.1.2 Inventory Turn Over. The number of days where company can manage its inventory to generate cash is significant in the operations of a company. Brigham et al. (2013) says that inventories which can include supplies, raw materials, work in process and finished goods are an essential part of virtually all business operations. Optimal inventory levels depend on sales, so sales must be forecasted before target inventories can be established. Moreover, he stated that because errors in setting inventory levels lead to lost sales or excessive carrying cost, inventory management is quite important. Without an efficient inventory management, company will not be able to manage their inventory to be efficient.
17 Hypothesis 2: There is a significant difference between working capital management performance for companies and the Inventory turnover. 2.3.1.3 Average collection period. According to Gitman, L.J., & Zutter, C.J. (2012), knowing its average collection period enables the firm to determine whether there is a general problem with accounts receivables, and the first step in analysing an accounts receivable problem is to “age” the accounts receivable to know if the problem exist in accounts receivable in general or in specific account. Therefore, with the efficient management of the collection period the effort to collect all the outstanding receivable will affected the operations of the company. Hypothesis 3: There is a significant relationship between average collection period and the working capital management and profitability in a company. 2.3.1.4. Current ratio. With this indication of how much is the current assets to compare with the current liability will shows whether company has the ability to pay its debt and obligation when it is needed in a timely manner. According to Hawawini, G., & Viallet, C. (2011) says that the larger the current ratio, the more liquid the firm and that the current ratio should be at least greater than one and preferably close to two. In achieving this, it will give indication whether the company is able to pay its obligation when it is needed Hypothesis 4: There is a significant correlation between working capital management and the position of the current ratio of the company. 2.3.2 Operational Definitions
18 In the operational definition, the measurement of Independent and dependent variables are being presented below in finding the relationships between the independent variables and the dependent variables of working capital management and profitability. Independent Variables Dependent Variable Figure 2.2 Operational Definition 2.3.2.1 Dependent Variable. In investigating the impact and relationship of the company operations through the working capital management and profitability, the measurement of profitability/Return on Asset (ROA) will be the dependent variable in this study. Dependent variable: Profitability. In this study is the Return on Asset (ROA) WC CCC IT ACP CR Test for Relationships Test for Relationships Performance Profit / Return on Asset (ROA) Test for Relationship s Test for Relationship s Test for Relationship s Test for Relationship s
19 ROA = Net Sales Total Asset Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. And ROA gives an idea as to how efficient management is at using its Assets to generate earnings. According to Higgins (2004, p. 35) says that ROA is a basic measure of the efficiency with which a company allocates and manages its resources. Further he mention that it measures profit as a percentage of the money provided by owners and creditors. 2.3.2.2 Independent variable. To investigate the effect and impact of profitability and working capital management in company, the element of cash conversion cycle (CCC), inventory turnover (IT), average collection period (ACP), working capital (WC), and current ratio (CR) are used as the independent variables in this study. Cash Conversion Cycle (CCC) Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO) Cash Conversion Cycle (CCC) = Inventory Account Receivable Accounts Payable X 365 Cost of Good Sale Net Credit Sales Cost of Sales The cash conversion cycle (CCC) is a metric system used to show the effectiveness of a company's management and, consequently, the overall health of that company. Inventory Turnover (IT) Inventory Turnover = Cost of Goods Sold Ending Inventories The Inventory Turnover (IT) is a metric system used to show the effectiveness of a company's managing its inventory. The higher the inventory turnover the lower the firm
20 invests in inventory management. Therefore, it becomes more efficient (Hawawini & Viallet, 2011). Average Collection Period (ACP) Average Collection Period = Accounts Receivable End Average daily Sales According to Hawawini & Viallet, (2011), they said that the faster the bills are collected, the lower the firms receivables, the higher the efficiency of the firms. Therefore, it is one of the indicators of company profitability. Working Capital (WC) Working Capital = Current Assets – Current Liabilities Working Capital Ratio = Current Assets Current Liabilities According to Marr (2012) he said that the working capital ratio indicates whether a company has enough short-term assets to cover its short-term debt. Where that means, if company has more working capital and a positive ratio it can expand its operations and has a better position than company that does not have. Current Ratio (CR) Current Ratio = Current Assets Current Liabilities Current ratio is to measure the liquidity of the firm where it should be between 1 or greater. The higher the better (Mawawini & Viallet, 2011)
21 Chapter 3 Methodology 3.1 Research Design This study will be using descriptive-correlations design which will identify the financial aspects of the 10 biggest mining companies listed in Indonesian stock exchange for the period of 2010 to 2015. Those elements to be studied are; the level of working capital (liquidity) of each company and the efficiency of the individual current assets included cash, receivables and inventory. Since it is so important for company to evaluate its working capital and liquidity whether they are in the positive or negative side of the ratio, and this indicator will determine the successful of company expansion and improvement of its operations (White, Sondhi, & Fried, 1994; Marr, 2012). Financial data will be collected and analyzed through the regression model for each variable that are measured on an annual basis for 5 years period. 3.2 Sample Selection The populations and the samples that will be use in this study will be generated from 10 biggest mining companies listed in the mining index in Indonesian stock exchange for the period of 2010 to 2015. Also it will be a combining with the financial data from each company’s web site that in a regular basis gives their annual financial report. And the same data will be compared and analyzed together with the assistance of the analysis tools in Excel worksheet. 3.3 Procedure of Data Collection Company’s information and its financial data of the year 2011 to 2015 were collected from the Indonesian Stock Exchange website and from each of the company’s website that
22 provides the annual report. Those data are being calculated to get the financial numbers and ratios used in the study. 3.4 Data Analysis Techniques The quantitative data analysis have been applied by using XL Statistical tools and SPSS analysis tools in order to examine the working capital management performance of Indonesian Mining Companies, and to analyze its relationships between working capital (CCC, IT, ACP, and CR) management and the performance of its profitability (ROA). Descriptive statistics were used to analyze the working capital performance of Indonesian Mining Company One-Way ANOVA and Regression analysis will be use to investigate the co efficiency between element of working capital and the profitability of companies. And further to determine any correlations.
23 Chapter 4 Result In this study, the empirical results form quantitative data analysis using XL stats and SPSS are presented, and the research questions will be answered one by one. 4.1 What is the working capital of Indonesian mining companies listed in Indonesian Stock Exchange? What are the components of the working capital in these companies? Below are the tables of 10 mining companies that were listed in the Indonesian Stock Exchange. The table indicated the element of working capital in the company such as the; Cash Conversion Cycle (CCC), Inventory Turnover (IT), Average Collection Period (ACP), Current Asset (CR), Working Capital (WC), and Return on Asset (ROA) as the profitability ratio. For the first company (Table 4.1), the working capital showed that there are not much different in the amount from year 2011 to 2015 with the average of 553.40 Million USD. It showed the increasing trend except in 2014 where the amount is slightly lower than all the 5 years data. The component of working capital in this company starts with the; Cash Conversion Cycle (CCC). The figure showed that there are significant different amount from year to year although the negative figure happen in 2011 of -3.58 followed by -0.87 in 2014 and the average of 1.34. This showed that the cash conversion cycle of this company has fluctuated since 2011 until 2015, with some negative and some positive figure, where on the average of 5 years the company CCC is 1.34 days.
24 The Inventory Turnover (IT) showed the declining trend from year 2011 to 2015. Although in 2015 the trend goes up again to 37.71 Days. This indicated that the inventory turnover of this company is averaging at 37.71 times in 5 years. The average collection period has a stable figure without significant changes from year 2011 to 2015. The average days of collection are 38.44. The current ratio of this company indicated that there are not much fluctuated except in the year of 2015 where the ratio goes slightly up. The higher the ratio gives an indication that the company has the ability to finance and pay their debt when is needed because its current asset is more than the current liability. And also its ROA is in a good percentage of average 5.15%. Table 4.1 PT. Adaro Energy Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) (3.58) 3.85 6.80 (0.87) 0.50 1.34 Inventory Turnover (IT) 60.86 45.85 30.45 26.12 25.26 37.71 Average Collection Period (ACP) 36.98 46.32 43.55 32.64 32.70 38.44 Current Ratio (CR) 1.67 1.57 1.77 1.64 2.41 1.81 Working Capital (WC)- Million 519 515 597 497 639 553.40 Return on assets (ROA)% 10.88 6.24 3.44 2.71 2.46 5.15 The second company (Table 4.2) showed that its working capital has been hovering between 400 and 450 Million US dollar. This gives an indication that it has been stable for the past five years and the average is 450.80 Million US dollar. The element of working capital such as; cash conversion cycle, inventory turnover, and average collection period has been steady without much fluctuation. This gives indication that this company has a more stable financial position in the operations although the cash conversion
25 cycle period has been in the two months period. Moreover, the company current ratio gives a good indication that the company is healthy and has enough cash each month in case they need to pay the liability when it is needed. The current ratio has been steady around 3 and 4 figures. Also its return on asset is in a good number of average 5.73%. This company is running in healthy operations. Table 4.2 PT. Vale Indonesia Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 64.27 70.32 72.82 67.29 66.23 68.19 Inventory Turnover (IT) 5.49 5.07 5.15 5.04 5.52 5.25 Average Collection Period (ACP) 29.29 35.47 35.36 27.88 39.50 33.50 Current Ratio (CR) 4.36 3.41 3.30 2.98 4.04 3.62 Working Capital (WC)-Million 602 399 389 413 451 450.80 Return on assets (ROA)% 14.47 2.84 1.68 7.47 2.18 5.73 The third company (Table 4.3) shows that its working capital has been decreasing from 616 million US dollar in 2011 to only 228 million in 2015, and the average is 390.60 million dollar, this shows that the company has been experience some challenges in their financial situation. For the cash conversion cycle the number of day has increase from 7.59 in 2011 to 26.74 in 2015, and the average is 18.57 days. This shows that company has some problem in converting their receivable into cash that was need for the operations of the firm. The same information in the Inventory Turnover shows the same trend, where the number decreased from 16.79 in 2011 to 9.27 in 2015.
26 The average collection period has increase from 0.92 in 2011 to 29.41 in 2015. This is also another indication of the problem in the firm. As the result the current ratio is 1.8 down from 2.37 in 2011 and the average of 1.99 in five years. The percentage of return on asset is only 5.08 percent in 2015, where in 2011 it was 40.94 percent. Therefore, from the financial report give the picture of the financial challenge the company has been facing since 2011 to 2015. Table 4.3 PT. Indo Tambangraya Mega Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 7.59 12.89 22.82 22.79 26.74 18.57 Inventory Turnover (IT) 16.79 13.16 12.28 11.34 9.27 12.57 Average Collection Period (ACP) 0.92 16.87 31.52 29.89 29.41 21.72 Current Ratio (CR) 2.37 2.22 1.99 1.56 1.8 1.99 Working Capital (WC)-Million 616 532 372 205 228 390.60 Return on assets (ROA) % 40.94 28.15 15.99 14.83 5.08 21.00 The forth company below (Table 4.4), gives the picture that the working capital has been steady for the past 5 years. It has slightly higher number in 2011 and was decreased in the following year, but has recovered in 2015 with 205 million dollar. The average of the firm’s working capital is 188.2 million us dollar. The cash conversion cycle, inventory turnover, average collection period and current ratio has been steady and somehow stable in the past 5 years from 2011 to 2015. As the result the ability of the company to back up their financial with a better situation with 3.0 ratio of current ratio that gives indication of the financial strength of the firm.
27 The only problem in the firm’s financial position is the return on asset that is negative. This gives signs that the company was able to manage their financial but are not very efficient and profitable in the operations. Therefore, the ROA in 2015 is only -0.96% with the average of 5 years with only -1.00 %. Table 4.4 PT. Delta Dunia Makmur Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 44.39 62.38 78.15 70.3 85.52 68.15 Inventory Turnover (IT) 15.48 15.36 16.32 18.76 20.23 17.23 Average Collection Period (ACP) 74.03 85.28 99.72 86.28 90.34 87.13 Current Ratio (CR) 2.16 1.87 1.41 2.38 3.00 2.16 Working Capital (WC)-Million 259 180 122 175 205 188.20 Return on assets (ROA)% -1.67 -1.3 -2.62 1.56 -0.96 (1.00) The fifth company (Table 4.5) showed that company working capital has improved from -214 in 2011 to 132 million us dollar in 2015. The indication is in a good trend although the average of five years is -34.60 million us dollar. The cash conversion cycle of the company has fluctuated from 6.51 in 2010 and -0.13 in 2014, but has change to 16.08 in 2015. This showed that in the past five years company has experience different financial position from different years. Its inventory turnover has been giving the trend of decreasing from 9.79 days to 3.91 days. Where it means company are able to sell more and release its inventory burden and to convert it to be more liquid in balance sheet. The only problem that the average collection period of the firm has been increasing from 18.24 days to 38.34 days in 2015, this shows that the firm has some challenge in collecting its receivable and to converting it to cash and a more liquid asset.
28 As the result the company are being not efficient and the profitability rate has decreased from 16.13% in 2011 to only -6.14% in 2015. Table 4.5 PT. Bayan Resources Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 6.51 17.75 16.1 -0.13 16.08 11.26 Inventory Turnover (IT) 9.79 7.02 5.82 6.23 3.91 6.55 Average Collection Period (ACP) 18.24 19.82 21.85 22.39 38.34 24.13 Current Ratio (CR) 0.65 1.16 1.1 0.62 1.89 1.08 Working Capital (WC)-Million -214 62 43 -196 132 (34.60) Return on assets (ROA)% 16.13 3.24 -2.09 -10.14 -6.14 0.20 The sixth company (Table 4.6) below shows that the working capital has been steady in the past five years. In the year of 2011 it has 491 million us dollar and in 2015 it has 518 million us dollar. This gives a good indication of the healthiness of the firm. The cash conversion cycle has been in a steady number of average 11.28 days as well as the inventory turnover with the average of 13.41 in 2015. The average collection period has been steady in the range of over a month with the average of 54.87 days. Moreover, the current ratio was fluctuating in the range between 1.61 in 2011 to 1.98 in 2015. This shows that the company has enough funds to manage its liquidity when it is needed. Only this company was not being so effective in managing its return on asset where in 2015 it shows the negative percentage of -6.7, where that means the company did not have enough resources and revenue from sales that is less than the firm’s total asset.
29 Table 4.6 PT. Medco Energy International Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 21.27 5.51 8.58 10.82 10.23 11.28 Inventory Turnover (IT) 19.74 10.03 14.16 12.55 10.58 13.41 Average Collection Period (ACP) 61.13 63.58 49.05 51.99 48.6 54.87 Current Ratio (CR) 1.61 2.65 2 1.61 1.98 1.97 Working Capital (WC)-Million 491 712 411 283 518 483.00 Return on assets (ROA)% 3.5 0.48 0.49 0.39 -6.7 (0.37) The seventh company (Table 4.7) indicated that the company working capital has been steady in the range of 198 million us dollar in 2011 to 193 million us dollar in 2015. It means that the company has been steady in managing its working capital in the past five years. The cash conversion cycle of this company shows the decreasing trend and have negative figure, which means that the company has extra cash that is available for them to invest in something other than the operations. The negative figure is a good indication of the availability of cash. The inventory turnover has increase and faster than what was in 2011. This gave a good indication of the realising the inventory to become liquid for the operational fund. The same indication with the collection period that was averaging in 18.62 days, which means it is below than a month of collection. Moreover, the current ratio stated that the company has the ability to pay its entire obligation when all the liability is needed with the figure of average 3.95. And about the company’s return on asset, the percentage is -4.67 shows that the firm has use more of its assets for the operation of the company and are not being profitable. This mainly happen
30 when company are a new player in the market where it has to invest more in its operations without much worry about its profit in the short term, but will have more profit in the long run. Table 4.7 PT. Harum Energy Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 27.58 29.95 21.26 -5.94 -20.77 10.42 Inventory Turnover (IT) 9.38 8.47 10.17 17.32 16.59 12.39 Average Collection Period (ACP) 5.31 12.44 24.39 26.6 24.36 18.62 Current Ratio (CR) 2.68 3.13 3.45 3.58 6.91 3.95 Working Capital (WC)-Million 198 228 202 202 193 204.60 Return on assets (ROA)% 36.18 25.04 8.21 0.09 -4.67 12.97 The eight company (Table 4.8) showed that the working capital of this firm is 126 million us dollar in 2015, where in 2011 it was 223 million us dollar. This indicated that the firm has some decrease in their working capital in the past five years. The cash conversion cycle has negative figure in 2015 of -11.01 days which means the firm has more cash that they can use it for other investment for the company. The inventory turnover has been low for the past five years with 18.67 days to convert it to cash and less than a month, this is a good sign. Moreover, the average collection period of this firm has increase and being faster than the previous five years. From 22.22 in 2011 to 32.5 in 2015 and this is a good performance from the company. The current ratio in 2015 is 2.79 which mean the company has the ability two times to pay all its obligation and liabilities if it is needed although its return on asset is 0.59 in 2015 but the average of five years is in the 5.19 percent. This also shows that the company are being profitable.
31 Table 4.8 PT. Golden Energy Mines Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 4.85 3.34 -6.57 -16.13 -11.01 (5.10) Inventory Turnover (IT) 27.73 31.47 26.13 25.13 18.67 25.83 Average Collection Period (ACP) 22.22 21.04 18.56 21.84 32.5 23.23 Current Ratio (CR) 5.42 3.55 1.83 2.2 2.79 3.16 Working Capital (WC)-Million 223 133 69 77 126 125.60 Return on assets (ROA)% 12.9 5.09 4.04 3.33 0.59 5.19 This night company (Table 4.9) has the working capital of 3 million us dollar in 2011 and -9 million us dollar in 2015, it shows that the company has been struggling to have a reasonable working capital for its operations. The cosh conversion cycle has been good in the past five years although it has increase in number of days in 2015. Moreover the inventory turnover of this firm shows 22.43 that are faster in 2015 to compare with the figure in 2011 5.75. And the average collection period is also longer in the year 2015 with 21.93 days. As the result its current ratio is below the healthy number of 0.84, which means the company has very little ability to pay all its liability when it is needed at the time of reporting. The return on asset indicated that it has a good figure of 15.47%, which means the firm is being profitable or maybe are holding back their cash to be more careful in their investment and are not spending it for some reason other than the operation. This could be the strategy of the company or could be some inefficiency.
32 Table 4.9 PT. Baramulti Suksessarana Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) -68.48 -3.85 20.96 16.3 14.56 (4.10) Inventory Turnover (IT) 5.75 5.09 5.78 13.18 22.43 10.45 Average Collection Period (ACP) 2.94 7.07 10.47 16.67 21.93 11.82 Current Ratio (CR) 1.06 1.68 0.49 0.67 0.84 0.95 Working Capital (WC)-Million 3 32 -34 -19 -9 (5.40) Return on assets (ROA)% 3.91 8.07 3.17 1.55 15.47 6.43 The last company, number tenth (Table 4.10) shows that the company has working capital of 528.22 million us dollar and it has been fluctuating for the past five years. The average figure is 396.24 million us dollar. The cash conversion cycle has an encouraging figure where it declines from 109.84 days in 2011 to only 52.56 days in 2015. This indicated that the conversion of cash has improved for the past five years. Moreover, the inventory turnover also has increase in its ratio to 4.26 times, which means it is faster than the figure in 2011 of 2.57, and the average collection period goes down from 40.96 in 2011 to 22.2 in 2015. The current ratio is very good with the figure of 1.99 in 2015 that give indication the company has the liquidity and resources to pay its liability when it is needed in the period. The only negative figure is the return on asset where in 2015, the figure is -4.25% which means the company is probably not using its resources for the operations but are holding back and being careful in investing the cash they have.
33 Table 4.10 PT. Aneka Tambang (Persero) Tbk Year Amount in USD 2011 2012 2013 2014 2015 Average Cash Conversion Cycle (CCC) 109.84 103.64 96.15 83.83 52.56 89.20 Inventory Turnover (IT) 2.57 2.87 2.88 2.99 4.26 3.11 Average Collection Period (ACP) 40.96 44.32 39.8 32.98 22.2 36.05 Current Ratio (CR) 8.19 1.93 1.41 1.26 1.99 2.96 Working Capital (WC)-Million 683.76 354.2 227.92 187.11 528.22 396.24 Return on assets (ROA)% 10.71 12.77 1.45 -2.81 -4.25 3.57 4.2 Is the working capital (including CCC, IT, ACP, QR, and CR) significantly different among different mining companies? To analyse the difference of working capital and its element, using the graphs will showed the best picture of the difference of each elements. Figure 4.1 – Line Chart Cash Conversion Cycle (CCC) In the graph (Figure 4.1) showed clearly that the cash conversion cycle for each mining company is different from one to another. Although the trend showed some similarities from year 2011 to 2015, but each company has different number. PT. Adaro, PT. IndoTambangraya, PT. Bayan, PT. Golden, and PT. Baramulti has the lowest number among the tenth companies, (100.00) (50.00) - 50.00 100.00 150.00 Year 2012 Year 2011 Year 2013 Year 2014 Year 2015
34 which means that they have the quickest number of days to convert their cash, and have the ability to use their cash for other need in the operations. Figure 4.2 – Line Chart Inventory Turnover (IT) In figure 4.2 shows that the inventory turnover of each company is not much different and has similarities in the amount. However, PT. Vale, PT. Indo Tambangraya, PT. Bayan and PT. Aneka Tambang has the smallest number amongst the tenth companies, which means they are able to convert and turn their inventory into receivable or cash faster than the rest of the mining companies. Generally means that the company are being effective in managing their inventory and not too tied up in the balance sheet but to utilize it to cash. Figure 4.3 – Line Chart Average Collection Period (ACP) - 10.00 20.00 30.00 40.00 50.00 60.00 70.00 Year 2011 Year 2012 Year 2013 Year 2014 Year 2015 - 20.00 40.00 60.00 80.00 100.00 120.00 Year 2011 Year 2012 Year 2013 Year 2014 Year 2015
35 The average collection period of each mining company (Figure 4.3) shows the difference from one to another from the past five years 2011-2015. Although the amount shows not much different, however, PT. Delta and PT. Medco have the most days in collecting their receivable. Meaning they are facing difficulties to collect their cash and receivable. Therefore, they are not being so efficient in the collections from debtors and other entity or customer. Figure 4.4 – Line Chart Current Ratio (CR) The current ratio (Figure 4.4) for each mining company is also different from year to year but all of them has positive ratio which means all are performing well in their financial position and are able to have more current asset to back up when they need to pay all their liabilities. The only significant different is PT. Vale and PT. Harum, where they are the one that have a significant positive number in their ratio of 4.04 and 6.91. That means they have more than four to six times in their current asset capacity to pay all the liability when it is needed for the operations. - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Year 2011 Year 2012 Year 2013 Year 2014 Year 2015
36 Figure 4.5 – Line Chart Working Capital (WC) The amount of working capital (Figure 4.5) from each company is significantly different between years 2011 to 2015. Each company has its own number of working capital; however most of them are similar. The only significant different in number is for PT.Bayan and PT. Barmulti, where their working capital has some negative and below zero figure during the operations for the past five years from the year 2011 to 2015. 4.3 Is there any significant relationship between the working capital as whole, CCC, IT, ACP, and CR and performance of the mining companies in terms of profitability? The result of the different measure of working capital management performance including Cash Conversion Cycle (CCC), Inventory Turnover (IT), Average Collection Period (ACP), Current Ratio (CR), and Return on Asset (ROA) are presented in the following section. (400) (200) - 200 400 600 800 Year 2011 Year 2012 Year 2013 Year 2014 Year 2015
37 According to the analysis after the data was analyzed using the SPSS analysis tools shows that the correlations between working capital indicator and the profitability ratio of ROA did not shows a significant correlation and does not have a strong relationships (Table 4.1). In the table (Table 4.11) shows that cash conversion cycle has a week negative correlations with the return on asset, which means that when the cash conversion cycle increases the return on asset decreases and vise versa, it went the other way although it is only week. The inventory turnover ratio has no correlations to the return on asset where it has 0.060 in the correlations table. Moreover, the current ratio and working capital also have very low correlations with the profitability (ROA) in the figure of 0.10 and 0.18. Only the average collection period has a bit strong but negative correlations to the return on asset, which means when the average collection period goes up the return on asset ratio goes down and it happen the other way around as well. Table 4.11 Correlations Table ROA CCC IT ACP CR WC Pearson Correlation ROA 1.000 -.032 .060 -.442 .100 .183 CCC -.032 1.000 -.390 .475 .224 .230 IT .060 -.390 1.000 .142 -.042 .177 ACP -.442 .475 .142 1.000 .018 .211 CR .100 .224 -.042 .018 1.000 .389 WC .183 .230 .177 .211 .389 1.000 In a different way to show the graphs of the correlations between each working capital element (CCC, IT, ACP, CR) and ROA, the use of SPSS analysis tools and its scatter plot is presented below:
38 Figure 4.6 Correlations between CCC and ROA The scatter plot of CCC and ROA in figure 4.6 shows that between cash conversion cycle and return on asset has a week negative correlations where the indication of the line is horizontal and slightly downwards. It means that if the ratio of ROA increase does not necessarily means CCC contributes to the increased, but on the other way around, it shows that between ROA and CCC there is a negative correlations. This result gives an indication that the findings of this correlation between CCC and ROA differ with the hypothesis that was stated earlier which says there is a significant correlation between ROA and CCC. Moreover, to answer the question if there is a significant relation between ROA and CCC, the answer is no.
39 Figure 4.7 Correlations between IT and ROA The figure 4.7 shows that between inventories turnover and return on asset, there is a week positive correlations between this two elements, and it is shown with the line that has a slight upward positions in the graph. This indicates that although there is not a huge and significant relation between IT and ROA but still there is small relationship between those two. This is in the contrary of the hypothesis that stated between ROA and IT there is a different in the relationships between those two. Therefore, one can conclude that IT affected companies ROA although not significant. And it answers the question whether there is a significant correlation between ROA and IT, where the answer is not significant but only affected in a small way.
40 Figure 4.8 Correlations between ACP and ROA This figure 4.8 shows that between average collection period and return on asset as the profitability measurement has a medium negative correlations with the indicator of the line in the graphs. This means that when average collection period goes up the return on asset goes down.
41 Figure 4.9 Correlations between CR and ROA This figure 4.9 shows that between current ratio and return on asset there is a week correlations where the line in the graphs shows an increase and upward trend.
42 Figure 4.10 Correlations between WC and ROA The figure of 4.10 shows that between working capital and return on asset has a week positive correlations where the line shows increase and upward trend.
43 Chapter 5 Discussion In this chapter researcher will discussed and conclude the findings and the result of the empirical data that was collected and analyzed in chapter 4. Data will be compared with the previous theory and evidence that was done in the previous study. At the end the recommendation will be given. 5.1 Theoretical Implication The average cash conversion cycle of Indonesian mining company that are included in this study has showed an extremely different number between one to another and it ranges between -5.10 to 68.15 days. That means each mining companies in Indonesia has their own way on managing their cash and how to convert its sales and receivable into a more liquid asset so it can be used for the operations. Moreover, with the difference in cash conversion cycle is indicates that each company has its differences in financial resource and all of them cannot be compared as a group. However, it can be compared between one or two mining companies that maybe have the same or similar financial position. In this study PT. Adaro, PT.Golden, and PT. Baramulti has the fastest and negative conversion cycle, which means these three companies are able to utilize its sales into cash that is benefit for the companies The inventory turnover of each mining companies in this study suggested that there are major differences among all of them. It ranges between 3.11 times as the minimum number to 37.71 times as the maximum number. In this study PT. Adaro and PT. Baramulti has the fastest inventory turnover, which means they are able to convert their receivable into cash quicker and better to compare with the other mining companies. Moreover, they are able to manage their payable to a better deal that they can extend more time to get value added in it.
44 The average collection period from these 10 mining companies are all different and did not show some significant relationships. Almost all of the companies have more than one month of collection period and only two companies which is PT. Harum and PT. Baramulti has the shortest number of days of collection. This gives indication that these two companies are able to collect their receivable and unpaid or collectible sales from their customer. With the faster collection the better company make money and earn profit, where the longer the period the worst the cash position of the company. For current ratio only three companies that has a better position with the figure of 3.0 and up, which means companies are in the better position of cash and liquidity when they have to pay all their liability when it is needed, because they have 3 times in current asset than current liabilities. These companies are PT. Vale, PT. Harum, and PT. Golden, while the other seven companies are not as good as these three companies in terms of liquidity. Regarding the working capital amount, there are variations between all the tenth mining companies in Indonesia. However, there are three companies that have high number of working capital. They are PT. Adaro, PT. Vale and PT. Medco. All these three companies has similar amount of working capital as the average and the rage is in more than 400 million us dollar. In terms of profitability or Return on Asset, there are also differences between mining companies in this study. However, only two companies that in average has the better figure of 21.00% and 12.97%, they are PT. Indo and PT. Harum. With the high percentage of ROA, companies are being efficient in managing their financial, although it is not always positively correct where there is also other element that needed to be considered.