The Indonesian capital market has experienced major volatility over the past six years. During this period, investors increasingly relied on financial statements to evaluate company performance and predict future returns. Understanding which financial indicators truly influence stock returns has become critical for investors, policymakers, and businesses navigating uncertain economic conditions.
Why company fundamentals matter
Stock returns are widely known to fluctuate due to market conditions, but company fundamentals often play an equally important role. Profitability, financial structure, and company size are frequently used by investors as key indicators when assessing investment opportunities and risks.
The researchers highlight three main indicators:
- Return on Assets (ROA) — measures how efficiently a company generates profit from its assets.
- Debt to Equity Ratio (DER) — reflects how much debt a company uses relative to its equity.
- Firm Size (SIZE) — usually measured by total assets and associated with stability and risk.
According to financial theory, these indicators act as “signals” to investors. Strong profitability signals good performance, balanced debt suggests strategic financing, and large company size often implies operational stability. However, previous studies have produced mixed results, especially during periods of economic uncertainty such as the pandemic. This gap motivated the new research.
How the study was conducted
The team analyzed 119 companies listed on the Indonesia Stock Exchange using financial data from 2019 to 2024, producing 714 observations. Only companies with consistent listing status, complete financial statements, available stock prices, dividend payments, and non-zero stock returns were included.
The analysis used panel data regression to examine how the three variables influence stock returns simultaneously and individually. Statistical tests confirmed that the Fixed Effects Model was the most appropriate approach for analyzing the data.
In simple terms, the researchers compared company performance indicators with stock return movements across time to identify which factors consistently influenced investor gains.
Key findings: What drives stock returns in Indonesia
The results provide a clear message for investors and corporate leaders. Profitability and capital structure play a significant role in shaping stock returns in Indonesia.
Main results
Why these findings matter
The study provides practical insights for several groups:
For investors
The findings suggest that profitability and capital structure should be primary considerations when selecting Indonesian stocks. Investors may benefit from focusing on companies with strong asset efficiency and balanced debt management.
For companies
Corporate managers are reminded that financial performance and capital structure send powerful signals to the market. Improving profitability and maintaining optimal leverage can increase investor confidence and potentially improve stock performance.
For policymakers and regulators
The results highlight how company fundamentals interact with market dynamics. This evidence can support policies aimed at improving transparency, financial reporting quality, and corporate governance.
Insights from the authors
The researchers emphasize that financial performance acts as a signal to investors. Strong profitability indicates efficient management and reduces concerns about agency conflicts between managers and shareholders. Debt, when controlled, can discipline management and enhance corporate performance.
However, they also note that company size alone does not guarantee better stock returns. External economic factors and market conditions may outweigh the benefits of being a large firm.
The study also acknowledges limitations. Only three independent variables were analyzed, and no moderating or mediating variables were included. Future research could examine additional factors such as macroeconomic conditions, corporate governance, or investor sentiment.
Researcher profiles
Source of the research
This research strengthens the growing evidence that profitability and capital structure remain the most reliable signals for predicting stock returns in Indonesia’s evolving capital market.
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