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

Oct 13, 2025 by talynt.org 0 views

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

Introduction

In the world of investment, financial ratio analysis has become a crucial tool in determining the potential return of a stock. The Indonesia Stock Exchange (IDX) is one of the largest stock exchanges in Southeast Asia, with a vast array of companies listed on it. This study aims to examine the effect of various financial ratios, namely liquidity ratio, solvency ratio, activity ratio, profitability ratio, and market ratio, on company stock returns listed on the IDX. By understanding the impact of these financial ratios, investors and company management can make more informed decisions in their investment and financial management strategies.

Background

The Indonesia Stock Exchange (IDX) was established in 1912 and has since become one of the largest stock exchanges in Southeast Asia. With a vast array of companies listed on it, the IDX provides a platform for investors to invest in various sectors, including manufacturing, finance, and services. However, with the increasing complexity of the financial markets, investors face numerous challenges in making informed investment decisions. Financial ratio analysis has become a crucial tool in determining the potential return of a stock, and this study aims to examine the effect of various financial ratios on company stock returns listed on the IDX.

Methodology

This study took a sample of 124 non-sacrificial, non-insurance, and non-financing companies that had actively issued financial statements and recorded profits between 2004 to 2007. The sample was selected based on the availability of financial data and the company's listing status on the IDX. The financial ratios used in this study include liquidity ratio, solvency ratio, activity ratio, profitability ratio, and market ratio. The data was analyzed using regression analysis to examine the effect of these financial ratios on company stock returns.

Results

The results of this study showed that the ratio of liquidity, solvency ratio, and activity ratio did not have a significant effect on stock returns. Conversely, the profitability and market ratio ratio showed a significant effect on stock returns. The findings of this study are consistent with previous studies that have examined the effect of financial ratios on stock returns.

Financial Ratio Analysis

Liquidity Ratio

The liquidity ratio measures the company's ability to meet short-term obligations. Although important, the results of this study show that liquidity does not significantly affect stock returns. This could be because investors prioritize profitability and market valuation in investment decision making.

Solvency Ratio

The solvency ratio shows the company's ability to meet long-term obligations. Although solvency is important for business continuity, it seems that investors do not see it as the main factor that affects stock returns in this study.

Activity Ratio

The activity ratio measures company efficiency in using its assets to produce sales. The results show that the activity ratio does not have a significant effect on stock returns. This could be interpreted that investors do not pay enough attention to the company's operational efficiency in a broader market context.

Profitability Ratio

The profitability ratio is very important because it reflects the extent to which the company generates profits. The finding that the profitability ratio has a significant effect on stock returns shows that investors tend to pay more attention to the potential profit of the company in making investment decisions.

Market Ratio

The market ratio is an indicator that shows the company's market value compared to the value of the book. The significant positive influence of the market ratio reflects that investors pay more attention to market valuation and company growth prospects when considering investment.

Research Implications

This study provides valuable insights for investors and company management. For investors, it is essential to pay more attention to the ratio of profitability and market ratios when choosing shares to be invested. Meanwhile, company management should focus on increasing profitability and management of market valuation to attract investors.

With a better understanding of the effect of financial ratios on stock returns, both investors and companies can take more appropriate steps in their investment and financial management strategies. This study contributes to the existing literature on financial ratio analysis and provides a framework for investors and company management to make more informed decisions.

Conclusion

In conclusion, this study examined the effect of various financial ratios on company stock returns listed on the IDX. The results showed that the ratio of liquidity, solvency ratio, and activity ratio did not have a significant effect on stock returns. Conversely, the profitability and market ratio ratio showed a significant effect on stock returns. This study provides valuable insights for investors and company management and contributes to the existing literature on financial ratio analysis.

Recommendations

Based on the findings of this study, the following recommendations are made:

Investors should pay more attention to the ratio of profitability and market ratios when choosing shares to be invested.
Company management should focus on increasing profitability and management of market valuation to attract investors.
Further research should be conducted to examine the effect of other financial ratios on stock returns.

Limitations

This study has several limitations. Firstly, the sample size was limited to 124 companies, which may not be representative of the entire population of companies listed on the IDX. Secondly, the study only examined the effect of financial ratios on stock returns and did not consider other factors that may affect stock returns. Finally, the study only analyzed data from 2004 to 2007, which may not be representative of the current market conditions.

Future Research Directions

This study provides a framework for future research on financial ratio analysis. Future studies should examine the effect of other financial ratios on stock returns and consider other factors that may affect stock returns. Additionally, future studies should analyze data from a more recent period to examine the current market conditions.

References

[List of references cited in the study]

Appendix

[Appendix containing additional data and tables]

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Frequently Asked Questions (FAQs) on the Effect of Financial Ratios on Stock Returns in Companies Listed on the Indonesia Stock Exchange

Q: What is the purpose of financial ratio analysis in determining stock returns?

A: Financial ratio analysis is a crucial tool in determining the potential return of a stock. It helps investors and company management to understand the financial health and performance of a company, which can impact stock returns.

Q: What are the different types of financial ratios used in this study?

A: The study used five types of financial ratios: liquidity ratio, solvency ratio, activity ratio, profitability ratio, and market ratio.

Q: What is the liquidity ratio, and how does it affect stock returns?

A: The liquidity ratio measures a company's ability to meet short-term obligations. The study found that liquidity does not significantly affect stock returns, as investors prioritize profitability and market valuation in investment decision making.

Q: What is the solvency ratio, and how does it affect stock returns?

A: The solvency ratio shows a company's ability to meet long-term obligations. The study found that solvency does not significantly affect stock returns, as investors do not see it as the main factor that affects stock returns.

Q: What is the activity ratio, and how does it affect stock returns?

A: The activity ratio measures a company's efficiency in using its assets to produce sales. The study found that the activity ratio does not have a significant effect on stock returns, as investors do not pay enough attention to the company's operational efficiency in a broader market context.

Q: What is the profitability ratio, and how does it affect stock returns?

A: The profitability ratio reflects the extent to which a company generates profits. The study found that the profitability ratio has a significant effect on stock returns, as investors tend to pay more attention to the potential profit of the company in making investment decisions.

Q: What is the market ratio, and how does it affect stock returns?

A: The market ratio is an indicator that shows a company's market value compared to the value of the book. The study found that the market ratio has a significant positive influence on stock returns, as investors pay more attention to market valuation and company growth prospects when considering investment.

Q: What are the implications of this study for investors and company management?

A: The study provides valuable insights for investors and company management. Investors should pay more attention to the ratio of profitability and market ratios when choosing shares to be invested. Company management should focus on increasing profitability and management of market valuation to attract investors.

Q: What are the limitations of this study?

A: The study has several limitations, including a limited sample size, the study only examined the effect of financial ratios on stock returns, and the study only analyzed data from 2004 to 2007.

Q: What are the future research directions based on this study?

A: Future studies should examine the effect of other financial ratios on stock returns, consider other factors that may affect stock returns, and analyze data from a more recent period to examine the current market conditions.

Q: What are the practical implications of this study for investors and company management?

A: The study provides a framework for investors and company management to make more informed decisions. Investors should consider the ratio of profitability and market ratios when choosing shares to be invested. Company management should focus on increasing profitability and management of market valuation to attract investors.

Q: What are the potential applications of this study in the field of finance?

A: The study has potential applications in the field of finance, including the development of new financial models, the creation of new financial instruments, and the improvement of financial decision-making processes.

Q: What are the potential limitations of this study in the field of finance?

A: The study has potential limitations in the field of finance, including the limited sample size, the study only examined the effect of financial ratios on stock returns, and the study only analyzed data from 2004 to 2007.

Q: What are the potential future research directions in the field of finance based on this study?

Note: The Q&A article is in markdown form, and the questions and answers are formatted in a clear and concise manner. The article provides additional insights and information on the effect of financial ratios on stock returns in companies listed on the Indonesia Stock Exchange.