Financial Leverage, Liquidity, and Profitability: The Moderating Role of Firm Size in Indonesian Manufacturing Firms

Abstract

Manufacturing firms require an appropriate balance between debt financing and short-term liquidity to sustain profitability, particularly across the economic disruption and recovery surrounding the COVID-19 pandemic. This study examines the effects of financial leverage and liquidity on profitability and tests firm size as a moderating variable. The study uses a quantitative associative design and secondary financial statement data from manufacturing firms listed on the Indonesia Stock Exchange during 2019–2023. From a population of 276 firms, purposive sampling produced 100 firms and 500 balanced panel observations. Profitability is measured by return on assets, financial leverage by the debt-to-equity ratio, liquidity by the current ratio, and firm size by the natural logarithm of total assets. Panel-data regression and moderated regression analysis were estimated using EViews 13. The fixed-effects model shows that financial leverage has a negative and significant effect on profitability, while liquidity and firm size have positive and significant effects. The interaction between financial leverage and firm size is positive and significant, indicating that larger firm size weakens the adverse effect of leverage on profitability. In contrast, the liquidity–firm size interaction is not significant. These findings show that firm size provides financial resilience against debt-related pressure but does not automatically improve the profitability consequences of liquidity management. The study contributes evidence from Indonesian manufacturing firms across the pandemic and post-pandemic period and highlights the need for optimal debt and working-capital policies.