Understanding Financial Leverage and Its Impact on Earnings Per Share

Oct 13, 2025 by recoveryshake.com 11 views

The Influence of Changes in Financial Leverage on the Level of Earnings Per Share in Plantation and Mining Companies Listed on the Indonesia Stock Exchange

In the world of investment, one of the main concerns is the influence of financial leverage on company performance. Financial leverage, which is measured through various debt ratios such as Debt to Total Asset Ratio (DAR), Debt to Equity Ratio (DER), Long Term Debt to Total Asset Ratio (LDAR), and Long Term Debt to Equity Ratio (LDD), can have a significant effect on Earning Per Share (EPS) of a company. This study aims to analyze the effect of financial leverage changes on EPS levels in plantation and mining companies listed on the Indonesia Stock Exchange.

Understanding Financial Leverage and Its Impact on Earnings Per Share

Financial leverage is a crucial aspect of a company's financial strategy, as it can significantly impact the company's profitability and risk level. By using debt to finance assets, companies can potentially increase their earnings per share, but at the same time, they also increase their financial risk. This study aims to investigate the relationship between financial leverage and earnings per share in plantation and mining companies listed on the Indonesia Stock Exchange.

Research Methodology

This study uses descriptive analysis methods and statistical analysis through multiple linear regression. A total of 27 companies became the population in this study, with 18 companies selected as samples that were targeted by analysis. In this study, the data obtained will be analyzed using SPSS software to test simultaneous and partial effects of the debt ratio to EPS.

Main Findings

The results showed that simultaneously, debt ratios such as DAR, DER, LDAR, and LDD did not have a significant influence on Earning Per Share. However, when viewed partially, the results of the analysis revealed that:

Debt to Total Asset Ratio (DAR)

This ratio shows a significant negative effect on EPS. This indicates that the higher the proportion of debt to total assets, the lower the company's EPS, which can be associated with the higher financial risk faced by the company. For example, if a company has a high DAR, it means that the company is heavily reliant on debt to finance its assets, which can lead to a decrease in EPS.

Debt to Equity Ratio (DER)

Similar to DAR, this ratio also shows a significant negative effect on EPS. The high DER shows the company's dependence on debt for financing, which can reduce profits per share. This is because when a company uses debt to finance its assets, it increases its financial risk, which can lead to a decrease in EPS.

Long Term Debt to Total Asset Ratio (LDAR)

This finding shows that LDAR also has a significant negative effect on EPS. High-term debt can be a burden for the company and affect the ability to generate profits. For instance, if a company has a high LDAR, it means that the company has a high level of long-term debt, which can lead to a decrease in EPS.

Long Term Debt to Equity Ratio (LDD)

LDD also shows a significant negative effect on EPS, which reflects the impact of long-term debt on the capital structure and profitability of the company. This is because when a company uses long-term debt to finance its assets, it increases its financial risk, which can lead to a decrease in EPS.

Additional Analysis

The above findings show the importance of debt management in the company, especially in the plantation and mining sectors that are vulnerable to market fluctuations. High financial leverage can be a two-edged sword; while it can increase potential earnings, on the other hand, can also increase the risk of bankruptcy if not managed properly.

Investors and company managers need to pay attention to these ratios and carry out more conservative debt management strategies. One step that can be taken is to improve the company's capital structure, so that it is more balanced between debt and equity. Thus, companies can reduce risk and at the same time maximize earnings per share, which in turn will attract more investors.

Conclusion

This study illustrates that changes in financial leverage have a significant impact on earning per share in companies listed on the Indonesia Stock Exchange, especially in the plantation and mining sectors. These results show the need for more attention from management in debt management so as not to have a negative impact on the company's financial performance. For investors, a better understanding of the relationship between financial leverage and EPS can help in making intelligent investment decisions.

Implications of the Study

The findings of this study have several implications for investors, company managers, and policymakers. Firstly, investors need to be aware of the potential risks associated with high financial leverage and the importance of debt management in companies. Secondly, company managers need to pay attention to the capital structure of their companies and ensure that it is balanced between debt and equity. Finally, policymakers need to consider the impact of financial leverage on the financial performance of companies and develop policies that promote responsible debt management practices.

Limitations of the Study

This study has several limitations that need to be acknowledged. Firstly, the study only focuses on plantation and mining companies listed on the Indonesia Stock Exchange, which may not be representative of all companies in the industry. Secondly, the study uses a sample size of 18 companies, which may not be sufficient to generalize the findings to the entire population. Finally, the study only examines the relationship between financial leverage and EPS, and does not consider other factors that may influence EPS.

Future Research Directions

This study provides several avenues for future research. Firstly, researchers can investigate the relationship between financial leverage and EPS in other industries, such as manufacturing and service sectors. Secondly, researchers can examine the impact of financial leverage on other financial performance metrics, such as return on equity (ROE) and return on assets (ROA). Finally, researchers can investigate the role of debt management in reducing the risk of bankruptcy and improving the financial performance of companies.

Conclusion

In conclusion, this study provides evidence that changes in financial leverage have a significant impact on earning per share in companies listed on the Indonesia Stock Exchange, especially in the plantation and mining sectors. The findings of this study have several implications for investors, company managers, and policymakers, and provide several avenues for future research.
Frequently Asked Questions (FAQs) on the Influence of Changes in Financial Leverage on the Level of Earnings Per Share in Plantation and Mining Companies Listed on the Indonesia Stock Exchange

In our previous article, we discussed the influence of changes in financial leverage on the level of earnings per share (EPS) in plantation and mining companies listed on the Indonesia Stock Exchange. In this article, we will answer some frequently asked questions (FAQs) related to this topic.

Q: What is financial leverage, and how does it affect EPS?

A: Financial leverage refers to the use of debt to finance a company's assets. It can have a significant impact on EPS, as it can increase potential earnings but also increase financial risk.

Q: What are the different types of debt ratios that can affect EPS?

A: The different types of debt ratios that can affect EPS include:

Debt to Total Asset Ratio (DAR)
Debt to Equity Ratio (DER)
Long Term Debt to Total Asset Ratio (LDAR)
Long Term Debt to Equity Ratio (LDD)

Q: What is the significance of the Debt to Total Asset Ratio (DAR) in determining EPS?

A: The DAR shows the proportion of debt to total assets. A high DAR indicates that a company is heavily reliant on debt to finance its assets, which can lead to a decrease in EPS.

Q: How does the Debt to Equity Ratio (DER) affect EPS?

A: The DER shows the proportion of debt to equity. A high DER indicates that a company is heavily reliant on debt to finance its assets, which can lead to a decrease in EPS.

Q: What is the impact of Long Term Debt to Total Asset Ratio (LDAR) on EPS?

A: The LDAR shows the proportion of long-term debt to total assets. A high LDAR indicates that a company has a high level of long-term debt, which can lead to a decrease in EPS.

Q: How does the Long Term Debt to Equity Ratio (LDD) affect EPS?

A: The LDD shows the proportion of long-term debt to equity. A high LDD indicates that a company has a high level of long-term debt, which can lead to a decrease in EPS.

Q: What are the implications of high financial leverage on a company's financial performance?

A: High financial leverage can increase potential earnings but also increase financial risk. If not managed properly, high financial leverage can lead to a decrease in EPS and even bankruptcy.

Q: What are the implications of this study for investors, company managers, and policymakers?

A: The findings of this study have several implications for investors, company managers, and policymakers. Investors need to be aware of the potential risks associated with high financial leverage and the importance of debt management in companies. Company managers need to pay attention to the capital structure of their companies and ensure that it is balanced between debt and equity. Policymakers need to consider the impact of financial leverage on the financial performance of companies and develop policies that promote responsible debt management practices.

Q: What are the limitations of this study?

A: This study has several limitations that need to be acknowledged. The study only focuses on plantation and mining companies listed on the Indonesia Stock Exchange, which may not be representative of all companies in the industry. The study uses a sample size of 18 companies, which may not be sufficient to generalize the findings to the entire population. The study only examines the relationship between financial leverage and EPS, and does not consider other factors that may influence EPS.

Q: What are the future research directions for this study?

A: This study provides several avenues for future research. Researchers can investigate the relationship between financial leverage and EPS in other industries, such as manufacturing and service sectors. Researchers can examine the impact of financial leverage on other financial performance metrics, such as return on equity (ROE) and return on assets (ROA). Researchers can investigate the role of debt management in reducing the risk of bankruptcy and improving the financial performance of companies.

Q: What are the conclusions of this study?

A: This study provides evidence that changes in financial leverage have a significant impact on earning per share in companies listed on the Indonesia Stock Exchange, especially in the plantation and mining sectors. The findings of this study have several implications for investors, company managers, and policymakers, and provide several avenues for future research.