ANALYSIS OF FINANCIAL RATIOS TO ESTIMATE DEFAULT RISK: CASE OF COAL MINING COMPANIES LISTED ON INDONESIA STOCK EXCHANGE PERIOD OF 2005 – MARCH 2013

Abstract

This research aims to analyze financial ratios which are current ratio (CR), working capital to total asset ratio (WCTA), net profit margin (NPM), cash flow to debt ratio (CFD), debt to equity ratio (DER), and total asset turnover (TATO) to estimate default risk in coal mining companies listed on Indonesia Stock Exchange period of 2005 – March 2013. Probability of default is chosen as the parameter to quantify default risk. Data used in this research is secondary data, obtained from Indonesia Stock Exchange website and Indonesian Capital Market Library (iCamel) in the form of Interim Report (Quarter Financial Report). Using purposive sampling, five coal mining companies which are Bumi Resource (BUMI), Resource Alam Indonesia (KKGI), ATPK Resource(ATPK), Bukit Asam (PTBA), and Petrosea (PTRO), are selected as company sample. Altman Z-Score later is calculated to determine a company on the particular accounting period is categorized to either default or non-default group. Hypotheses of this research are tested using logistic regression to estimate the probability of default of each company’s accounting quarter period. Result of data analysis using logistic regression produces highest prediction accuracy overall of 88.3%. Hypothesis testing with significance level of 5% indicates that variable of CR, WCTA, NPM, and TATO are proved to significantly affect default, while research did not find any evidence that CFD and DER significantly affect default.