Stock Portofolio And Investment Selection On Public Listed Companies : A Finansial Distress Analysis

Abstract

In years following the financial crises, Indonesia's economy has to some extent bounced back in the last three years. This improvement in economy and business environment is observed in the improvement of Indonesia key economic indicators. In this improving economy, companies play an important role as means for sources of employment, sources of public funding through income tax generation, and as an input-output multiplier for goods and services. To operate with sufficient working capital and investment, companies seek various alternatives for sources of fund outside revenue generating sources. These sources of fund could come through the issuance of loans or equity. One of the channels for the interaction of companies with need for funds, and individuals or institutions with excess of funds, is the capital market. Investors placing their funds in issuing companies face a risk that the company invested undergo financial problems to repay the debt, or add value to the investment. Risk and return in financial investments are two sides of the same coin. More or higher return is generally associated with more or higher risk, vice versa. Choosing stocks or financial instruments expected to have high return are done through analysis of dividend payback, analysis of capital gain, and analysis of discounted payback period. However, there is no guarantee for dividend or capital gain in company stock, and there is the risk that the debt issuing company undergo financial distress, so it cannot repay its interests and debts. An issue arises as how to balance out or compensate a certain level of return with a certain level of financial risk associated to the investment. This study addresses this issue in identifying companies with low financial risks and thus least exposure for continuous loss, and the least tendency for bankruptcy. This study does not concentrate on assessing the level of return, but seek to group companies financial performances based on their financial distress level, and tendencies to determine selection of companies to choose from as means for investment selection.