A STUDY OF CORRELATION BETWEEN SELECTED KEY FINANCIAL COMPONENTS AND STOCK PRICE: AN EXPERIENCE FROM INDONESIA LQ45 COMPANIES

• Main Author: AB RANTUNG (NIM 29316027) , ROSI
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/30690
• Institution: Institut Teknologi Bandung

The nature of stock price fluctuation affected by numerous factors. Investors often wondering about the factors for the rise and fall of stock prices in the stock exchange on regular basis even in minute by minute of trading. These factors are followed by analyses and interpretations that may be objective and true, but they may also be irrational and emotional, imaginative and far from reality, making it a perfect ground for wild rumours to spread and causing negative investment decisions. Subsequently, investors may fall into heavy loss in stock trading. <br /> <br /> <br /> <br /> The numerous factors can be categorized into four groups: (1) economic factors (can be globally, regionally or nationwide), (2) factors related to the company and its sector, (3) factors related to investors and stock traders in the market, (4) other factors such as force majeure or natural catastrophes. Many of these factors are difficult to quantify, predict or confirmed. One of the easiest instruments for the investors to use as a basis for a precise decision making is the company’s financial reports. From the financial report, investors can assess the overall performance of the company. Generally, the better of a company’s financial ratio, the more likely that the company is generating profit. The more profit often leads to higher dividend pay-out, which then secure the return investors. The higher the return, the higher the demand of that stock thus increasing stock price. <br /> <br /> <br /> <br /> Correlation analysis quantifies the extent of two variables, x and y associated to each other, the result is correlation coefficient which summarize the relationship strength between the two variables. This study delves into the relationship between stock price at the end of the year and the selected financial ratios and key components of financial report of that year, namely total assets, total liabilities, total equity, total revenues, profit of the year, debt-to-assets ratio, debt-to-equity ratio, return of assets, return of equity, gross profit margin and net profit margin of the 41 companies listed as LQ45 in Indonesia Stock Exchange per February-August 2017. The time-series of financial reports are ranging from December 2012 to December 2016. The correlation analysis of this study based on Pearson’s Product Moment Correlation Coefficient (PMCC) method. <br /> <br /> <br /> <br /> In this this study, author used secondary data from several sources such as Indonesia Stock Exchange (IDX), the audited respondent companies’ annual financial statements and other reliable sites. This study combined methods and tools from both financial and statistics. The first aim of this study is to measure the strength of the level of correlation coefficients of the stock prices with the selected financial ratios and key components of financial report, followed by determining the factors that have the most weight to generate a better decision-making for potential investors in buying and selling stocks. <br /> <br /> <br /> <br /> This study confirms that profit of a company has the strongest correlation with stock price. The average correlation coefficient between stock price and profit of the 41 companies is +0.578 with only 4 companies have negative correlation coefficient and 37 companies have positive correlation. Meanwhile, the weakest correlation with stock price is total liabilities with correlation coefficient of +0.029. The findings are important for potential investor to make decision in stock market transaction and give benefit to the public companies to improve their performances in stock market.