The Importance of Financial Ratios in Stock Price Analysis

Oct 13, 2025 by magicalceylontours.com 53 views

The Influence of Return on Assets, Return on Equity, and Price Earning Ratio on Stock Prices in Manufacturing Companies on the Indonesia Stock Exchange

Introduction

The Indonesia Stock Exchange (IDX) is one of the largest stock exchanges in Southeast Asia, with a vast array of companies listed across various sectors. Among these, manufacturing companies play a significant role in driving economic growth and development. However, the performance of these companies can be influenced by various factors, including their financial health and market sentiment. In this context, understanding the relationship between financial ratios and stock prices is crucial for investors, financial managers, and stakeholders.

The Importance of Financial Ratios in Stock Price Analysis

Financial ratios are a set of metrics used to evaluate a company's financial performance and position. Among these, Return on Assets (ROA), Return on Equity (ROE), and Price Earning Ratio (PER) are three key variables that have been extensively studied in the context of stock price analysis. ROA reflects a company's ability to generate profits from its assets, while ROE indicates its capacity to generate profits from shareholder equity. PER, on the other hand, provides an indication of whether a company's shares are undervalued or overvalued.

The Role of Return on Assets (ROA) in Stock Price Analysis

ROA is a critical financial ratio that measures a company's ability to generate profits from its assets. A higher ROA indicates that a company is more efficient in managing its assets, which can have a positive impact on stock prices. Investors tend to look for companies with a high ROA, as it suggests that the company is well-managed and has a strong financial position. Conversely, a low ROA can indicate that a company is struggling to generate profits from its assets, which can lead to a decline in stock prices.

The Impact of Return on Equity (ROE) on Stock Prices

ROE is another important financial ratio that measures a company's ability to generate profits from shareholder equity. A high ROE indicates that a company is generating significant profits from its equity, which can attract investors and lead to an increase in stock prices. Investors tend to look for companies with a consistent and high ROE, as it suggests that the company has a strong financial position and is well-managed. Conversely, a low ROE can indicate that a company is struggling to generate profits from its equity, which can lead to a decline in stock prices.

The Significance of Price Earning Ratio (PER) in Stock Price Analysis

PER is a critical financial ratio that provides an indication of whether a company's shares are undervalued or overvalued. A low PER can indicate that a company's shares are undervalued, which can attract investors and lead to an increase in stock prices. Conversely, a high PER can indicate that a company's shares are overvalued, which can lead to a decline in stock prices.

Research Methodology

This study aims to explore the effect of ROA, ROE, and PER on stock prices in manufacturing companies listed on the Indonesia Stock Exchange. The study uses a sample of 117 out of 181 registered manufacturing companies, with data collected from financial statements taken from the Indonesian Capital Market Directory (ICMD) and the official website of the Indonesia Stock Exchange. Multiple linear regression is used to test the relationship between these variables.

Research Findings

The results of the study show that the three variables, namely ROA, ROE, and PER, have a significant effect both simultaneously and partially on the stock prices of manufacturing companies listed on the Indonesia Stock Exchange. This means that changes in one of the three variables will have an impact on stock prices. This finding provides evidence that investors can use these three financial ratios as an indicator for making better investment decisions.

Conclusion

By understanding the effect of ROA, ROE, and PER on stock prices, investors on the Indonesia Stock Exchange can be more careful in evaluating the performance of manufacturing companies. This research not only adds insight into financial ratio analysis but also provides a deeper understanding of the relationship between company financial performance and market reactions to stock prices. Therefore, it is essential for stakeholders to continue to monitor and analyze these ratios in order to make more informed and strategic investment decisions.

Recommendations

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

Investors should use ROA, ROE, and PER as indicators for making better investment decisions.
Financial managers should focus on improving ROA, ROE, and PER to enhance the financial performance of their companies.
Stakeholders should continue to monitor and analyze these ratios to make more informed and strategic investment decisions.

Limitations of the Study

This study has several limitations, including:

The study only focuses on manufacturing companies listed on the Indonesia Stock Exchange.
The study uses a sample of 117 out of 181 registered manufacturing companies.
The study only analyzes the effect of ROA, ROE, and PER on stock prices.

Future Research Directions

Future research should focus on the following areas:

Extending the study to other sectors and industries.
Analyzing the effect of other financial ratios on stock prices.
Investigating the impact of macroeconomic factors on stock prices.

References

Indonesian Capital Market Directory (ICMD). (2020). Financial Statements of Manufacturing Companies.
Indonesia Stock Exchange (IDX). (2020). Official Website.
SPSS. (2020). Multiple Linear Regression Analysis.

Appendix

The appendix includes the following:

List of manufacturing companies used in the study.
Financial statements of the manufacturing companies used in the study.
Results of the multiple linear regression analysis.
Frequently Asked Questions (FAQs) on the Influence of Return on Assets, Return on Equity, and Price Earning Ratio on Stock Prices in Manufacturing Companies on the Indonesia Stock Exchange

Q: What is the significance of Return on Assets (ROA) in stock price analysis?

A: ROA is a critical financial ratio that measures a company's ability to generate profits from its assets. A higher ROA indicates that a company is more efficient in managing its assets, which can have a positive impact on stock prices.

Q: How does Return on Equity (ROE) affect stock prices?

A: ROE is another important financial ratio that measures a company's ability to generate profits from shareholder equity. A high ROE indicates that a company is generating significant profits from its equity, which can attract investors and lead to an increase in stock prices.

Q: What is the role of Price Earning Ratio (PER) in stock price analysis?

A: PER is a critical financial ratio that provides an indication of whether a company's shares are undervalued or overvalued. A low PER can indicate that a company's shares are undervalued, which can attract investors and lead to an increase in stock prices.

Q: How can investors use ROA, ROE, and PER to make better investment decisions?

A: Investors can use these three financial ratios as indicators for making better investment decisions. By analyzing these ratios, investors can gain a deeper understanding of a company's financial performance and position, which can help them make more informed investment decisions.

Q: What are the limitations of this study?

A: This study has several limitations, including:

The study only focuses on manufacturing companies listed on the Indonesia Stock Exchange.
The study uses a sample of 117 out of 181 registered manufacturing companies.
The study only analyzes the effect of ROA, ROE, and PER on stock prices.

Q: What are the future research directions for this study?

A: Future research should focus on the following areas:

Extending the study to other sectors and industries.
Analyzing the effect of other financial ratios on stock prices.
Investigating the impact of macroeconomic factors on stock prices.

Q: How can financial managers use the findings of this study to improve their company's financial performance?

A: Financial managers can use the findings of this study to focus on improving ROA, ROE, and PER to enhance the financial performance of their companies. By doing so, they can attract investors and improve their company's stock prices.

Q: What are the implications of this study for stakeholders?

A: The findings of this study have significant implications for stakeholders, including investors, financial managers, and regulators. By understanding the effect of ROA, ROE, and PER on stock prices, stakeholders can make more informed and strategic investment decisions.

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

A: Investors can use this study to gain a deeper understanding of the relationship between financial ratios and stock prices. By analyzing the findings of this study, investors can make more informed investment decisions and avoid potential pitfalls.

Q: What are the key takeaways from this study?

A: The key takeaways from this study are:

ROA, ROE, and PER are critical financial ratios that affect stock prices.
Investors can use these ratios as indicators for making better investment decisions.
Financial managers can use the findings of this study to improve their company's financial performance.

Q: How can regulators use this study to improve the financial markets?

A: Regulators can use this study to improve the financial markets by:

Developing policies that promote transparency and accountability in financial reporting.
Encouraging companies to disclose their financial ratios and performance metrics.
Providing education and training to investors and financial managers on the use of financial ratios in investment decisions.