Volume 6, Issue 9, September – 2021 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165

The Effect of Profitability Ratio and Market Value

Ratio on Companies Stock Prices Listed in Indonesia
Stock Exchange (Study on IDX30 2018-2020 Period)
David1 and Djoko Hanantijo2
1,2
Bachelor Program in Management
Perbanas Institute, Jakarta, Indonesia

Abstract:- According to signaling theory, information unfavorable financial condition would give negative signal to
published by the company could give a positive or investors, thus making investors not interested owning the
negative signal to the investors. These signals could company’s stock and in the end make stock price fall.
influence an investor’s decision whether to buy or sell a Therefore, the company’s financial performance is one of the
company’s stock, which can affect the stock price in the important factors that affect stock price movements. In
capital market. One of the information that can be analyzing the company’s financial performance, one of the
received by investors is the company’s financial methods is through financial ratio analysis. Financial ratio
performance which is represented by financial ratios. This analysis is an analysis that connects various estimates
research aims to analyze and determine the effect of contained in financial statement to reveal important
profitability ratio (proxied by Return On Equity) and relationships between financial statement estimates (Hery,
market value ratio (proxied by Price-to-Earning Ratio) on 2018). There are several types of financial ratios, namely
a company’s stock prices that are listed on the IDX30 liquidity ratios, solveny ratios, activity ratio, profitability
Index for the 2018 to 2020 period. The method in this ratios, and market value ratios. However, this research
research uses a quantitative approach by using multiple focused on analyzing the effect of profitability ratio (proxied
linear regression analysis. With the purposive sampling by ROE) and market value ratio (proxied by PER) on stock
method, there are twenty companies selected to be the price.
research samples with sixty observations. The results of
the research concluded that the Return on Equity (ROE) There are various groupings of stocks represented
and Price-to-Earning Ratio (PER) have a positive and through an index. One of the indices on the Indonesia Stock
significant effect on the stock price. Exchange is the IDX30 Index, an index that contains thirty
companies with large market capitalization, high liquidity,
Keywords: - Stock Price, ROE, PER, IDX30 and good fundamental conditions. With the stock portfolio of
well-performing companies, IDX30 could become an
I. INTRODUCTION attractive investment option for retail investors and fund
managers who need long-term investment options. Although
In the capital market, company’s stock actively traded IDX30 has screened the best-performing stocks, this does not
on the secondary market. The value of a company’s stock can comply with the IDX30 stock index price movements.
be reflected through the stock price which is formed based on throughout the 2018-2020 period, the movements of IDX30
the forces of demand and supply between buyers and sellers. stock index prices tend to be stagnant. Furthermore, in early
In general, investors decisions whether to buying or selling a 2020, there was a significant decline in IDX30 stock index
company’s stock are based on the information, conditions, price due to the impact of the Covid-19 pandemic.
and prospects of the company that issued the shares. Based on
signaling theory, the information published by the company There have been several previous researches that
would give a positive or negative signal, based on the analyzing the effect of ROE on stock price. The result of
information that investor receive (Jogiyanto, 2015). These research conducted by E. D. Astutik, Surachman, and A.
signals become the basis for investors to make decisions to Djazuli. (2014), mentions that ROE have significant and
buy or sell stock. One of the sources of information that’s positive effect on stock price. However, other researches that
published periodically by the company is the financial has been conducted by M. R. Utami and A. Darmawan (2019)
statement. and A. Yusena, R. Rahayu, and D. Yohana (2019) indicate
that ROE does not significant effect on stock price.
The information from the financial statement can
provide the information that determine the rise or fall of stock Contradicting research results were also found on the
prices. Companies with good financial condition would give effect of PER on stock price. Based on research by K. Y. D.
positive signal to investor to accumulate the company’s stock Safitri, I. M. Mertha, N. G. P. Wirawati, and A. A. Dewi.
due to investors expectation of the company’s performance in (2020), concluded that PER has a positive and significant
the future, and eventually would increase the company’s effect on stock price. Conversely, research conducted by
stock prices. On the contrary, companies that have

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Volume 6, Issue 9, September – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Y. Anwar and L. Rahmalia. (2019) concluded that PER does F. Market Value Ratio
not affect stock price. Market value ratios are financial ratios used to assess
the company's intrinsic value (Hery, 2018). In this research,
Based on the phenomenon of the IDX30 index the Price Earning Ratio is used to measure the market value
movement throughout the 2018 to 2020 period and several ratio.
differences in the previous researches, this research aims to
analyze and examine the effect of the profitability ratio and G. Price-to-Earning Ratio (PER)
market value ratio on a company’s stock price listed on the PER is a ratio that describes the number of dollars that
IDX30 index through 2018-2020 period. must be paid by an investor for every dollar of company
earnings obtained by the investor (E. Tandelilin, 2010). PER
II. LITERATURE REVIEW is estimated by dividing the stock price per share by earnings
per share. The higher PER means the expected earning
A. Signaling Theory growth will also increase.
Signaling theory is a theory that connects the
information contained in the financial statements with the H. Profitability Ratio
response that investors will take (Sulistiyanto, 2008). The Profitability ratios are financial ratios that describe the
response given by investors will be based on the information company’s ability to generate profits (Hery, 2018). There are
obtained in the financial statements. This form of response several types of profitability ratios, but in this research,
will manifest in the form of investor actions in buying or Return On Equity is used to measure the profitability ratios.
selling a stock. This theory emphasizes the importance of
information released by the company in influencing I. Return On Equity (ROE)
investment decisions made by investor. ROE is a ratio that describes the contribution of
company equity in creating net income (Hery, 2018). This
B. Stock Price ratio shows how much net profit the company can generate
According to Jogiyanto (2015), the stock price is the for every dollar of funds contained in the company’s equity.
price of a stock that occurs on the stock market at a certain ROE is calculated by dividing net income by shareholder’s
time that is determined by market participants as well as the equity. The higher the ROE, the greater amount of net profit
demand and supply of the shares in the capital market. In this generated for every dollar of funds embedded in equity.
research, the stock price is proxied by the closing price of
stock companies. J. Framework
The conceptual framework for this research can be
C. IDX30-Index described as the figure below:
The IDX30 index is an index on the Indonesia Stock
Exchange which is based on the thirty best company stocks
that have been selected from the LQ45 index with the criteria
that the shares in IDX30 have high liquidity, large
capitalization, and are supported by good company
fundamentals. Every six months, Indonesia Stock Exchange
makes a readjustment on the IDX30 index to evaluate a
company's stock that is eligible listed on the IDX30 index.

D. Financial Statements
Financial statements are the end product of a series of Fig. 1. Conceptual Framework
processes for recording and summarizing business
transactions (Hery, 2018). The existence of a financial report K. Hypothesis
aims to provide important information related to the financial Based on the findings of previous research, the
position, performance, and changes in the financial position following hypothesis can be developed:
of a company that could be useful as a basis for decision H1: Profitability Ratio has a positive and significant effect on
making. Stock Prices
H2: Market Value Ratio has a positive and significant effect
E. Financial Ratio on Stock Prices
Financial ratio is a ratio calculation using financial
statements as a basis and serves as a tool in assessing the III. RESEARCH METHOD
financial condition and performance of the company (Hery,
2018). Financial ratios are classified into several types, A. Type of Research
namely liquidity ratios, solvency ratios, activity ratios, This research uses a quantitative approach, by utilizing
profitability ratios, and market ratios. secondary data sources derived from financial statements,
annual reports, and historical stock prices of companies listed
on the IDX-30 Index that have already been published from
2018 to 2020.

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Volume 6, Issue 9, September – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
B. Population and Sample IV. RESULTS AND DISCUSSION
The research population is thirty companies listed on
the IDX30 index, based on Indonesia Stock Exchange A. Classical Assumption Tests Results
Announcement Letter number: No. Peng-00015/BEI.POP/01- 1) Normality Test
2020 regarding Major Evaluation on IDX30 Index. Research
16
sample determined by purposive sampling method with Series: Standardized Residuals
14 Sample 2018 2020
certain criteria, as stated on the table below: Observations 60
12
Mean -2.31e-17
10 Median 0.006788
Table 1: Sampling Criteria Maximum 0.327749
8 Minimum -0.345450
No. Criteria Samples Std. Dev. 0.114807
6
Companies listed in the IDX30 index based Skewness
Kurtosis
-0.181827
4.358381
4
1 on the Announcement Letter number: 30 Jarque-Bera 4.943604
2
No. Peng-00015/BEI.POP/01-2020 Probability 0.084433
0
Companies that are not consistently listed in -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3
2 (8)
the IDX30 index during 2018-2020 Fig. 2. Jarque-Berra Test Results
Companies in the IDX30 index that does not
3 generate sustainable profits during 2018- (2) The normality test is used to determine whether the data
2020 is normally distributed or not. The data are normally
Total sample studied during 2018-2020 20 distributed if the probability value of Jarque-Bera > the level
Total observations 20 x 3 years 60 of significance (α = 0.05). Based on the results of the Jarque-
Bera Test, it can be concluded that the data are normally
C. Data Collection Methods distributed (0.084 > 0.05).
Data collection conduct with the documentation
method. Data and information related to historical financial 2) Autocorrelation Test
information are sourced from financial statements and annual
reports, which are sourced from websites of companies and Table 2: Durbin-Watson Test Results
Indonesia stock exchange. Information regarding stock prices dl dU Durbin-Watson (dw)
of all companies that are sampled on this research is sourced 1.5144 1.6518 2.1232
from the yahoo finance website, which is data that have been
gathered is historical stock price data on closing price during It can be stated that there is no autocorrelation in the
2018-2020. regression model if there is no correlation between error
(residuals) in t period with t-1 period. According to Durbin-
D. Data Analysis Method Watson decision rule, there is no autocorrelation if
The analysis method uses multiple regression analysis dU < dw < 4-dU. With the result of 1.6518 < 2.1232 <
with the analysis process is done through EViews 9.0. The 2.3482, it can be concluded that there is no autocorrelation in
purpose of the analysis is to determine the effect of the the regression model.
independent variables (ROE and PER) on the dependent
variable (stock prices). Before testing the hypothesis in the 3) Heteroscedasticity Test
regression model, the classical assumption tested on the
regression model, which consists of the Normality Test Table 3: Glejser Test Results
through the Jarque-Bera test, The Autocorrelation Test Dependent variable: RESABS
through the Durbin Watson Test, the Heteroscedasticity Test Variable Coefficient Std. Error t-Statistic Prob.
through the Glejser Test, and Multicollinearity Test through C 0.065189 0.055021 1.184790 0.2435
correlation test between independent variables. Hypothesis LN_ROE 0.028840 0.038840 0.742531 0.4623
testing consists of t-test, F-test, and Coefficient of LN_PER 0.024829 0.034479 0.720118 0.4759
Determination Test (R2).
The heteroscedasticity test is used to assess whether
there is an inequality of residual variance between one
observation and another. Heteroscedasticity does not occur if
the regression model has a constant residual variance
(homoscedasticity). Based on table 3 above, the probability
value of ROE and PER is higher than the level of significance
(α = 0.05), thus giving the conclusion that the regression
model is homoscedastic (no symptoms of heteroscedasticity).

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Volume 6, Issue 9, September – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
4) Multicollinearity Test 3) Coefficient of Determination Test (R2)

Table 4: Correlation Test Between Independent Variable Table 7: Coefficient of Determination Test Results
Results Cross-section fixed (dummy variables)
LN_ROE LN_PER R-squared 0.990365
LN_ROE 1.000000 -0.335740 Adjusted R-squared 0.985040
LN_PER -0.335740 1.000000 S.E. of regression 0.143055
Sum squared resid 0.777661
There is no multicollinearity in the regression model if Log likelihood 45.23798
there is no linear connection between independent variables.
According to Widarjono (2018), if the correlation coefficient The Coefficient of Determination measures the
value between independent variables is higher than 0.85, it percentage of variability within the dependent variable that
can be stated that there is multicollinearity in the regression can be explained by the independent variable. For simple
model. Based on table 4 above, it can conclude that there is linear regression, the Coefficient of Determination can be
no multicollinearity in the regression model. measured by R2. However, if the regression model using
multiple linear regression, then adjusted R2 is used as the
B. Hypothesis Test Results Coefficient of Determination. Based on table 7 above, the
Adjusted R2 value of 0.985040, this value illustrates that the
1) t-test stock price can be explained by the ROE and PER variables
of 98.5%, while the remaining 1.5% is explained by other
Table 5: t-test results variables that are not included in this research.
Dependent variable: LN_StockPrice
Variable Coefficient Std. Error t-Statistic Prob. C. Discussion of Research Results
C 7.981072 0.116455 68.53349 0.0000
LN_ROE 0.656783 0.082206 7.989479 0.0000 1) Effect of Profitability Ratio on Stock Price
LN_PER 0.642030 0.072975 8.797902 0.0000 Based on hypothesis test results, the profitability ratio
(proxied by ROE) has a significant and positive effect on the
The t-test is used to identify how each independent company’s stock price listed on the IDX30 index through the
variable partially affects the dependent variable. If probability 2018-2020 period. ROE describes how every rupiah of
value of t < α, then it concludes that independent variables company equity can generate profit. Higher Return on Equity
partially have a significant effect on the dependent variables. indicates that the company's management can optimize equity
to create the company’s profits. These will be reflected in the
Based on t-test results (table 5), the results of the t-test form of information contained in the company's financial
can be explained as follows: statements and will provide a good signal to investors who
 ROE variable has a coefficient of 0.656 and a probability receive the information. Following signaling theory, a good
value of t < α (0.000 < 0.05), thus the decision is to reject signal from the information will make the value of the
H0 and accept H1. So it concludes that the ROE variable company increase in the eyes of investors, which will be
has a positive and significant effect on the stock price. reflected in the increases in the company's stock price. The
 PER variable has a coefficient of 0.642 and a probability results of the research are in line with the research by E. D.
value of t < α (0.000 < 0.05), thus the decision is to reject Astutik, Surachman, and A. Djazuli (2014) and H. Lusiana
H0 and accept H2. So it concludes that the PER variable (2020) which concludes that Return On Equity has a positive
has a positive and significant effect on the stock price. and significant effect on stock price.

2) F-test 2) Effect of Market Value Ratio on Stock Price

Based on hypothesis test results, the market value ratio
Table 6: F-test results (proxied by PER) has a significant and positive effect on the
Cross-section fixed (dummy variables) company’s stock price listed on the IDX30 index through the
F-statistic 185.9972 2018-2020 period. PER is measured by comparing stock price
Prob(F-statistic) 0.000000 per share by earning per share. Higher PER indicates that
investors are willing to pay higher for the company’s stock,
The F-test is used to determine whether the independent based on how the company can generate profits. The
variable can simultaneously explain the dependent variable or willingness of the investor to pay higher for stock price,
not. Based on table 6 above, the probability value of based on investor confidence that the company has good
F-statistics < α (0.000 < 0.05), meaning that the independent performance and growth prospect in the future. The
variable can simultaneously explain the dependent variable or confidence in company value would continue to appreciate,
ROE and PER can simultaneously explain stock prices. then eventually would reflect on increases in the company’s
stock price. The results of this research are also supported by
the research result by K. Y. D. Safitri, I. M. Mertha, N. G. P.
Wirawati, and A. A. Dewi (2020), concluding that PER has a
positive and significant effect on stock prices. The results of
those studies also stated that the higher PER indicates that

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Volume 6, Issue 9, September – 2021 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
investors have more confidence in the company's [10]. Sulistiyanto, ‘Manajemen Laba: Teori dan Model
performance and the demand for shares will increase, which Empiris’. Jakarta: Grasindo, 2008.
will increase the company's stock price. [11]. Y. Anwar and L. Rahmalia, ‘The Effect of Return On
Equity, Earning Per Share, and Price Earning Ratio on
V. CONLUSION Stock Prices’, Vol. 4, no. 1, pp: 57-66, 2019.

In summary, the purpose of this research is to

investigate the effect of the profitability ratio and market
value ratio on a company’s stock price that's listed on the
IDX30 index through 2018-2020 period. The main results in
this research reveal that Profitability Ratio (proxied by ROE)
and Market Value Ratio (proxied by PER) have a significant
and positive effect on company’s stock price that's listed on
the IDX30 index in 2018-2020 period.

Based on the results and conclusions obtained from this

research, retail investors and fund managers could observe
the company’s ROE and PER condition before making
investment decisions on the company’s stock that is listed in
the IDX30 index. For the companies, this research can
provide insight regarding factors that need to focus on in
terms of increasing the company’s value for shareholders.

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