Financial Ratios and Bond Rating

Oct 13, 2025 by talynt.org 60 views

The Influence of Return on Assets, Debt to Equity Ratio, Current Ratio, and Firm Size on Ranking Non-Financial Company Bonds Listed on the Indonesia Stock Exchange

Introduction

The Indonesia Stock Exchange (IDX) is one of the largest stock exchanges in Southeast Asia, with a wide range of companies listed, including non-financial companies. Investing in bonds issued by these companies can be a lucrative option for investors, but it also comes with a certain level of risk. One of the key factors that affect the risk associated with investing in company bonds is the financial performance of the issuer. In this study, we aim to investigate the relationship between financial performance and bond rating of non-financial companies listed on the IDX.

Financial Ratios and Bond Rating

Financial ratios are widely used by investors and analysts to assess the financial health and performance of companies. In this study, we focus on four key financial ratios that are commonly used to evaluate the financial performance of companies:

*** Return on Asset (ROA): ** This ratio measures the company's profitability by comparing net profit to total assets. A higher ROA indicates that the company is generating more profits from its assets, which can be a positive indicator for investors.

*** Debt to Equity Ratio (DER): ** This ratio shows the ratio of debt to equity, which indicates the level of leverage or the company's ability to finance its operations with debt. A higher DER can indicate a higher level of risk for investors, as the company may struggle to meet its debt obligations.

*** Current Ratio (CR): ** This ratio shows the company's ability to fulfill short-term obligations with its current assets. A higher CR can indicate that the company has sufficient liquidity to meet its short-term obligations, which can be a positive indicator for investors.

*** Firm Size (FS): ** The size of the company, measured based on the total assets of the company, shows the scale of operations and company capabilities. A larger company may have more resources and a more stable financial position, which can be a positive indicator for investors.

Methodology

This study uses a multiple linear regression technique to analyze the relationship between the four financial ratios and bond rating of non-financial companies listed on the IDX. The data used in this study is based on the financial statements of non-financial companies listed on the IDX during the 2010-2013 period. The bond rating is used as the dependent variable, while the four financial ratios are used as independent variables.

Results

The results of this study show that:

*** Return on Assets (ROA) ** and ** Firm Size (FS)** ** have a positive and significant influence on bond ratings. That is, the higher the ROA and the greater the size of the company, the higher the bond ranking. This indicates that companies that have high profitability and large scale of operations are considered more able to meet their obligations and have a lower risk for investors.

*** Current Ratio (CR) ** has a negative and significant influence on bond ratings. That is, the higher the CR, the bond rating tends to be lower. This shows that even though the company has good liquidity, investors may worry about the potential to decrease profitability due to excessive use of current assets.

*** Debt to Equity Ratio (DER) ** has a negative but not significant influence on the ranking of bonds. That is, companies with a high debt to equity ratio do not always show increased risk for investors.

Conclusion

This study shows that financial performance has a significant influence on bond rating of non-financial companies listed on the IDX. The results of this study can be useful for investors to assess the risk and potential of profits in investing in bonds of non-financial companies in Indonesia. However, it is essential to note that the results of this study only apply to the period and sample studied.

Implications

The findings of this study have several implications for investors and analysts:

Investors should consider the financial performance of the company when evaluating the risk associated with investing in company bonds.
Companies with high profitability and large scale of operations may be considered more able to meet their obligations and have a lower risk for investors.
Even though a company has good liquidity, investors may worry about the potential to decrease profitability due to excessive use of current assets.
Companies with a high debt to equity ratio do not always show increased risk for investors.

Limitations

This study has several limitations that should be noted:

The study only focuses on non-financial companies listed on the IDX during the 2010-2013 period.
The study uses a multiple linear regression technique, which may not capture the complexity of the relationship between financial ratios and bond rating.
The study does not consider other factors that may affect bond rating, such as industry trends and market conditions.

Future Research Directions

Future research should aim to:

Expand the sample period and include more companies listed on the IDX.
Use more advanced statistical techniques to capture the complexity of the relationship between financial ratios and bond rating.
Consider other factors that may affect bond rating, such as industry trends and market conditions.

References

[List of references used in the study]

Appendix

[Appendix containing additional tables and figures used in the study]
Frequently Asked Questions (FAQs) about the Influence of Return on Assets, Debt to Equity Ratio, Current Ratio, and Firm Size on Ranking Non-Financial Company Bonds Listed on the Indonesia Stock Exchange

Q: What is the main objective of this study?

A: The main objective of this study is to investigate the relationship between financial performance and bond rating of non-financial companies listed on the Indonesia Stock Exchange.

Q: What are the four financial ratios used in this study?

A: The four financial ratios used in this study are:

Return on Asset (ROA): This ratio measures the company's profitability by comparing net profit to total assets.
Debt to Equity Ratio (DER): This ratio shows the ratio of debt to equity, which indicates the level of leverage or the company's ability to finance its operations with debt.
Current Ratio (CR): This ratio shows the company's ability to fulfill short-term obligations with its current assets.
Firm Size (FS): The size of the company, measured based on the total assets of the company, shows the scale of operations and company capabilities.

Q: What is the dependent variable in this study?

A: The dependent variable in this study is Bond Rating, which shows the level of risk faced by investors in holding company bonds.

Q: What is the methodology used in this study?

A: This study uses a multiple linear regression technique to analyze the relationship between the four financial ratios and bond rating of non-financial companies listed on the Indonesia Stock Exchange.

Q: What are the results of this study?

A: The results of this study show that:

Return on Assets (ROA) and Firm Size (FS) have a positive and significant influence on bond ratings.
Current Ratio (CR) has a negative and significant influence on bond ratings.
Debt to Equity Ratio (DER) has a negative but not significant influence on the ranking of bonds.

Q: What are the implications of this study?

A: The findings of this study have several implications for investors and analysts:

Investors should consider the financial performance of the company when evaluating the risk associated with investing in company bonds.
Companies with high profitability and large scale of operations may be considered more able to meet their obligations and have a lower risk for investors.
Even though a company has good liquidity, investors may worry about the potential to decrease profitability due to excessive use of current assets.
Companies with a high debt to equity ratio do not always show increased risk for investors.

Q: What are the limitations of this study?

A: This study has several limitations that should be noted:

The study only focuses on non-financial companies listed on the Indonesia Stock Exchange during the 2010-2013 period.
The study uses a multiple linear regression technique, which may not capture the complexity of the relationship between financial ratios and bond rating.
The study does not consider other factors that may affect bond rating, such as industry trends and market conditions.

Q: What are the future research directions?

A: Future research should aim to:

Expand the sample period and include more companies listed on the Indonesia Stock Exchange.
Use more advanced statistical techniques to capture the complexity of the relationship between financial ratios and bond rating.
Consider other factors that may affect bond rating, such as industry trends and market conditions.

Q: What are the practical implications of this study?

A: The practical implications of this study are:

Investors can use the results of this study to assess the risk and potential of profits in investing in bonds of non-financial companies in Indonesia.
Companies can use the results of this study to improve their financial performance and reduce their risk of default.

Q: What are the theoretical implications of this study?

A: The theoretical implications of this study are:

The study contributes to the existing literature on the relationship between financial ratios and bond rating.
The study provides insights into the factors that affect bond rating and the implications for investors and companies.