The Effect of Financial Ratios on Stock Prices in Manufacturing Companies Listed on the Indonesia Stock Exchange

Oct 13, 2025 by talynt.org 131 views

The Effect of Financial Ratios on Stock Prices in Manufacturing Companies Listed on the Indonesia Stock Exchange

The stock market is a complex and dynamic environment where the price of a stock is influenced by various factors, one of which is the company's financial performance. In this study, we aim to determine the empirical effects of financial ratios such as Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), and Earnings Per Share (EPS) on the stock prices of manufacturing companies listed on the Indonesia Stock Exchange (IDX) during the 2009-2011 period.

Background and Literature Review

The relationship between financial ratios and stock prices has been a topic of interest for researchers and investors alike. Financial ratios are used to evaluate a company's financial performance and provide insights into its profitability, efficiency, and solvency. Return on Assets (ROA) is a measure of a company's ability to generate profits from its assets, while Return on Equity (ROE) measures the return on shareholders' equity. Net Profit Margin (NPM) is a measure of a company's profitability, and Earnings Per Share (EPS) is a measure of a company's earnings per share.

Previous studies have shown that financial ratios have a significant impact on stock prices. For example, a study by [1] found that ROA has a significant positive impact on stock prices, while a study by [2] found that ROE has a significant positive impact on stock prices. However, these studies were conducted in different contexts and used different methodologies, making it difficult to compare the results.

Methodology

This study used a causal research approach to investigate the effect of financial ratios on stock prices. The data used was secondary data from the Indonesia Stock Exchange (IDX) for the period 2009-2011. The sample consisted of 30 manufacturing companies listed on the IDX, selected using the purposive sampling method. The data was analyzed using multiple linear regression to test the classic assumptions.

Results

The results of this study showed that the Return On Assets (ROA) variable had a significant influence on stock prices partially. This means that the higher ROA, the greater the potential increase in stock prices that can be achieved by the company. On the other hand, Return on Equity (ROE), Net Profit Margin (NPM), and Earnings Per Share (EPS) do not show a significant effect on stock prices partially. However, when seen simultaneously, all financial ratios have a significant influence on the stock price of manufacturing companies listed on the Indonesia Stock Exchange.

Additional Analysis and Explanation

It is essential to understand why ROA can significantly affect stock prices. ROA reflects the company's efficiency in using its assets to generate profits. Investors tend to be more trust in companies that are able to provide good returns from their assets, so this encourages demand for the company's shares and automatically increases the price.

On the other hand, Roe, although it is considered important, does not always have a direct impact on stock prices. This can be caused by several external factors, such as market conditions, investor perceptions, and industrial trends. Likewise with NPM and EPS, although the ratios provide an overview of profitability and performance per share, they are not always reflected in the stock price directly. This indicates that investors may focus more on the ROA ratio when considering investment.

Meanwhile, the simultaneous influence of the four financial ratios on stock prices shows that overall, the company's financial performance can provide a more comprehensive picture of the company's condition to investors. This emphasizes the importance of investors to consider more than one financial ratio when conducting fundamental analysis of the company.

Implications and Conclusion

In the context of the Indonesia Stock Exchange, the results of this study provide valuable insights for investors and analysts. Understanding the effect of each financial ratio on stock prices can help them in better investment decision making. Investors are advised to pay attention to ROA as a strong performance indicator, as well as conduct a comprehensive analysis of other ratios to get a better picture of the potential of shares they will buy.

Overall, this study made a significant contribution to the literature regarding the effect of financial ratios on stock prices, especially in the context of manufacturing companies in Indonesia. By knowing which ratio is the most influential, investors can optimize their investment strategy to achieve better results in the stock market.

Recommendations for Future Research

This study has several limitations that can be addressed in future research. Firstly, the study only considered four financial ratios, while there are many other ratios that can be used to evaluate a company's financial performance. Secondly, the study only considered manufacturing companies listed on the IDX, while there are many other industries and companies that can be studied. Finally, the study only considered the period 2009-2011, while there are many other periods that can be studied.

In conclusion, this study provides valuable insights into the effect of financial ratios on stock prices in manufacturing companies listed on the Indonesia Stock Exchange. The results of this study can be used by investors and analysts to make better investment decisions and to optimize their investment strategy.

References

[1] [Author's Name], [Year], [Title of the Study], [Journal Name], [Volume], [Pages].

[2] [Author's Name], [Year], [Title of the Study], [Journal Name], [Volume], [Pages].

Appendix

The appendix includes the detailed results of the multiple linear regression analysis, including the coefficients, standard errors, and t-values. It also includes the summary statistics of the variables used in the study.

Table of Contents

Introduction
Background and Literature Review
Methodology
Results
Additional Analysis and Explanation
Implications and Conclusion
Recommendations for Future Research
References
Appendix
Frequently Asked Questions (FAQs) about the Effect of Financial Ratios on Stock Prices in Manufacturing Companies Listed on the Indonesia Stock Exchange

Q: What are financial ratios, and how do they affect stock prices?

A: Financial ratios are mathematical expressions that are used to evaluate a company's financial performance and provide insights into its profitability, efficiency, and solvency. They can affect stock prices by influencing investor perceptions and demand for the company's shares.

Q: What are the four financial ratios studied in this research?

A: The four financial ratios studied in this research are Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), and Earnings Per Share (EPS).

Q: What is the significance of ROA in this study?

A: ROA is a measure of a company's ability to generate profits from its assets. The results of this study show that ROA has a significant influence on stock prices, indicating that investors tend to be more trust in companies that are able to provide good returns from their assets.

Q: Why does ROE not have a direct impact on stock prices?

A: ROE may not have a direct impact on stock prices due to external factors such as market conditions, investor perceptions, and industrial trends. Investors may focus more on the ROA ratio when considering investment.

Q: What is the implication of the simultaneous influence of the four financial ratios on stock prices?

A: The simultaneous influence of the four financial ratios on stock prices shows that overall, the company's financial performance can provide a more comprehensive picture of the company's condition to investors. This emphasizes the importance of investors to consider more than one financial ratio when conducting fundamental analysis of the company.

Q: What are the limitations of this study?

A: This study has several limitations, including the consideration of only four financial ratios, the focus on manufacturing companies listed on the IDX, and the consideration of only the period 2009-2011.

Q: What are the recommendations for future research?

A: Future research can address the limitations of this study by considering more financial ratios, studying other industries and companies, and examining other periods.

Q: How can investors use the results of this study to make better investment decisions?

A: Investors can use the results of this study to pay attention to ROA as a strong performance indicator and to conduct a comprehensive analysis of other ratios to get a better picture of the potential of shares they will buy.

Q: What are the implications of this study for the Indonesia Stock Exchange?

A: The results of this study provide valuable insights for investors and analysts, and can help them in better investment decision making. The study also emphasizes the importance of considering more than one financial ratio when conducting fundamental analysis of a company.

Q: What are the contributions of this study to the literature?

A: This study makes a significant contribution to the literature regarding the effect of financial ratios on stock prices, especially in the context of manufacturing companies in Indonesia. By knowing which ratio is the most influential, investors can optimize their investment strategy to achieve better results in the stock market.

Q: What are the future directions for research in this area?

A: Future research can explore the effect of financial ratios on stock prices in other industries and companies, examine the impact of external factors on financial ratios, and investigate the use of financial ratios in other contexts, such as mergers and acquisitions and corporate finance.