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Asian Journal of Management Analytics (AJMA)
Vol. 3, No. 4, 2024: 1233-1250
1233
(
DOI prefik: https://doi.org/10.55927/ajma.v3i4.12049
ISSN-E: 2963-4547
https://journal.formosapublisher.org/index.php/ajma
Decoding Stock Price Movements: How Net Profit Margin and
Debt-to-Equity Ratio Drive Value, with Earnings per Share as the
Game-Changer
Ahmad Bukhori Muslim1*, Dian Sulistyorini Wulandari2, Rahimi Annisa Sanjo
Rusyidi3
Universitas Pelita Bangsa
Corresponding Author: Ahmad Bukhori
ahmadbukhori@pelitabangsa.ac.id
A R T I C L E I N F O
A B S T R A C T
Keywords: Net Profit Margin,
Debt-to-Equity Ratio,
Earnings per Share, Stock
Prices, Financial Metrics,
Received : 30, August
Revised : 25, September
Accepted: 27, October
©2024 Muslim, Wulandari, Rusyidi:
This is an open-
access article
distributed under the terms
of the
Creative Commons Atribusi 4.0
Internasional.
This research investigates the relationships
between Net Profit Margin (NPM), Debt-to-
Equity Ratio (DER), Earnings per Share (EPS),
and stock prices within the context of the
Indonesian stock market. Utilizing a
quantitative analysis approach, the study
employs panel data regression to assess the
statistical significance of these financial metrics
on stock valuations. The findings reveal that
NPM has a meaningful and statistically
significant positive impact on stock prices,
indicating that higher profit margins are
associated with increased investor confidence
and market valuation. Conversely, the results
show that DER does not significantly influence
stock prices, suggesting that investors may
perceive high debt levels as a risk that
diminishes stock value. Furthermore, the study
finds that EPS does not moderate the
relationship between NPM and stock prices, nor
does it strengthen the effect of DER on stock
valuations. These conclusions contribute to
understanding financial determinants in stock
price movements, emphasizing the importance
of profit margins while highlighting the limited
role of leverage and earnings per share in this
context. The research provides
recommendations for investors and corporate
managers and suggests avenues for future
studies, including broader geographic
comparisons and integrating qualitative factors
into stock valuation analysis.
Muslim, Wulandari, Rusyidi
1234
INTRODUCTION
As an emerging economy with a rapidly growing capital market,
Indonesia relies heavily on robust financial indicators to attract domestic and
foreign investment. Understanding the influence of financial metrics like Net
Profit Margin (NPM) and Debt-to-Equity Ratio (DER) on stock prices,
moderated by Earnings per Share (EPS), can significantly impact investor
decisions and corporate financial strategies (Dasman et al., 2023).
In Indonesia, the capital markets are increasingly central to economic
growth, with the Indonesia Stock Exchange (IDX) serving as a critical platform
where companies seek capital to expand operations. For instance, sectors such
as banking and manufacturing are foundational to Indonesia’s economy and
are frequently traded on the IDX. Research has shown that NPM and DER affect
investor sentiment and stock prices in these sectors. A study by (Wibowo et al.,
2020) For banking firms listed on the IDX between 2018 and 2020, NPM
positively and significantly impacted stock prices, suggesting that higher
profitability reassures investors about future returns and stability. On the other
hand, DER, a measure of leverage, indicates the balance between debt and
equity financing. High DER values may imply greater risk, as they indicate a
reliance on debt, which could lead to financial strain during economic
downturns.
EPS is another powerful moderating factor directly linking corporate
earnings to shareholder value, often considered a critical metric by investors.
When EPS is high, the effects of NPM and DER on stock prices tend to be
enhanced. High EPS suggests that a company is not only profitable but also
efficient in generating income per share, which in turn boosts investor
confidence. Studies such as (Ferdila & Mustika, 2022) Indonesian companies
with high EPS tend to perform better in the stock market, highlighting EPS as
an essential moderating variable. By moderating the influence of NPM and
DER, EPS can amplify a stock's attractiveness, thus driving its price.
Several studies have highlighted the importance of these financial
metrics in Indonesia’s stock performance. For example, research on IDX-listed
manufacturing companies indicates that NPM and DER significantly influence
stock prices. At the same time, EPS can either strengthen or moderate this
impact based on the company’s profitability and debt levels. Additionally, in a
study focusing on the LQ45 index (a list of the 45 most liquid and well-
performing stocks on IDX), EPS, NPM, and DER were found to collectively
impact stock price movements, with EPS acting as a critical moderating factor
that can enhance the relationship between profitability and stock performance.
Understanding these relationships is crucial for investors and
policymakers. Investors can better gauge stock performance by analyzing how
profitability (NPM) and leverage (DER) affect price, with EPS as a pivotal factor
that could either mitigate or amplify these effects. For policymakers, ensuring
transparency in reporting NPM, DER, and EPS helps foster a more informed
investment environment. This transparency can aid in stabilizing the capital
market by providing a clearer picture of financial health, which is particularly
Asian Journal of Management Analytics (AJMA)
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relevant in Indonesia’s economic climate as it seeks to attract more foreign
investment (Yulianti et al., 2024)
LITERATURE REVIEW
Signaling Theory
Signaling Theory suggests companies convey information about their
financial health and prospects through financial decisions and reported metrics
to the market. Originating from the work of Michael Spence (1973), signaling
theory in finance is primarily used to understand how companies use
observable financial indicators (such as profitability, debt ratios, and earnings)
to signal their quality and reliability to investors. This concept posits that
managers of well-performing companies tend to disclose favorable information
openly to differentiate their firms from others, especially those with weaker
financial standings. High-performance metrics like Net Profit Margin (NPM),
Debt-to-Equity Ratio (DER), and Earnings per Share (EPS) are thus used to
convey positive signals to the market.
Net Profit Margin (NPM) as a Signal in the Indonesian context, a higher
NPM often signals strong profitability, suggesting efficient management and
cost control, positively influencing investor confidence. Research by (Wibowo et
al., 2020) found that banking firms with higher NPMs experienced a positive
impact on their stock prices, as investors interpreted the high profitability as a
sign of strong future earnings and stability. This aligns with signaling theory,
where a higher NPM is a credible signal to investors about a firm's profitability
and competitive advantage.
The debt-to-equity ratio (DER) as a Risk Signal DER, a leverage ratio,
signals a firm’s financial structure and debt reliance. According to signaling
theory, a moderate DER may be positively interpreted as strategically using
debt to fund growth. At the same time, an excessively high DER could signal
financial risk and potential vulnerability to downturns. (Ferdila & Mustika,
2022) The high DER in Indonesian technology firms negatively affected stock
prices, as investors perceived the heightened debt as a signal of financial risk,
aligning with the signaling theory’s premise on leverage ratios.
Earnings per Share (EPS) as a Direct Signal of Shareholder Value EPS is
often considered one of the most direct financial signals to investors, as it
quantifies income per outstanding share. According to signaling theory,
companies with high EPS are likely to attract investors due to the promise of
higher returns. Research by (Dewi & Hanif, 2019) EPS positively influenced
stock prices in Indonesian consumer goods companies, as high EPS levels were
seen as indicators of solid financial performance and stability in earnings.
Additionally, EPS has been found to moderate the effects of NPM and DER on
stock prices by enhancing the credibility of the profitability and financial
structure signals provided by these metrics.
Muslim, Wulandari, Rusyidi
1236
Hypothesis of Research
The Effect of Net Profit Margin (NPM) on Stock Prices
Net Profit Margin (NPM) is a key indicator of a company's profitability,
reflecting the percentage of revenue remaining after all expenses, taxes, and
interest have been deducted. In the context of stock prices, a high NPM signals
efficient management and potential for consistent future earnings, which
attracts investors and positively impacts stock prices. Studies in recent years
have consistently found a strong correlation between NPM and stock price
performance, especially in sectors where profitability and financial stability are
highly valued.
Several recent studies on companies listed on the Indonesia Stock
Exchange (IDX) reinforce the positive impact of NPM on stock prices. For
instance, research by (Wahyudi & Hartono, 2021) on Indonesian manufacturing
companies demonstrates that companies with higher NPMs generally
experience more positive stock price trends, as investors interpret high margins
as a sign of efficient cost management and stable earnings potential. This study
found that investors reacted favorably to high NPM, translating to increased
demand and stock price appreciation.
Another study by (Wibowo et al., 2020) focused on the banking sector, a
key sector in Indonesia’s economy. They found a statistically significant
positive relationship between NPM and stock prices, indicating that
profitability in the banking sector is a critical factor in determining investor
confidence. Higher NPM was associated with positive investor perceptions,
leading to higher stock valuations.
Overall, these findings suggest that NPM plays a pivotal role in
influencing stock prices in various sectors within the Indonesian market. High
NPM acts as a signal of profitability and efficiency, key traits that investors
value when making investment decisions. Consequently, companies that
maintain a high NPM tend to experience stronger stock price growth, as they
can assure investors of stable financial health and potential for sustainable
future returns.
H1: NPM has a significant effect on stock prices
The Effect of Debt-to-Equity Ratio (DER) on Stock Prices
The Debt-to-Equity Ratio (DER) is a financial leverage metric that
indicates the proportion of a company's funding from debt relative to
shareholder equity. In the context of stock prices, DER is a signal of a
company's financial health and risk level. A moderate DER is often seen
positively by investors, as it suggests efficient use of debt to finance growth;
however, high DER levels can raise concerns about financial risk, potentially
deterring investment and negatively impacting stock prices.
In recent studies of the Indonesian stock market, DER has shown
varying effects on stock prices, often depending on the sector and the level of
debt involved. (Ferdila & Mustika, 2022) examined technology firms on the
Indonesia Stock Exchange (IDX) and found that a high DER often negatively
influenced stock prices. Their study concluded that investors view high
leverage levels in this rapidly changing industry as risky, especially given the
Asian Journal of Management Analytics (AJMA)
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potential for fluctuating earnings. This aligns with the trade-off theory, where
the costs of high debt, particularly the risk of financial distress, can outweigh
the benefits, impacting investor perception and reducing stock valuations.
Similarly, (Wahyudi & Hartono, 2021) analyzed the effect of DER on
stock prices in Indonesian manufacturing firms. Their findings indicated that
investors generally perceived high DER unfavorably, with excessive leverage
creating concerns about financial stability and debt repayment obligations,
particularly in economic downturns. This risk was often reflected in lower stock
prices, as investors preferred companies with a more conservative financial
structure.
Recent studies emphasize that DER can significantly influence stock
prices, though its impact is highly contextual. While moderate DER is generally
acceptable and can indicate growth potential, excessive DER may lead to
negative investor perceptions, reducing stock valuations. The findings across
various sectors suggest that understanding industry-specific norms and
investor expectations is crucial when assessing DER's influence on stock prices.
H2: DER has a significant effect on stock prices
The Moderating Effect of Earnings per Share (EPS) on the Relationship Between Net
Profit Margin (NPM) and Stock Prices
Earnings per Share (EPS) is a widely used indicator of profitability and
a key metric in determining a company's financial performance. When acting as
a moderating variable, EPS can influence the strength and direction of the
relationship between Net Profit Margin (NPM) and stock prices. While NPM
alone gives insight into profitability as a percentage of revenue, EPS provides a
direct measure of the earnings attributable to each share, which can amplify or
diminish investor reactions to NPM. The interaction between NPM and EPS is
especially relevant in the Indonesian stock market, where investor sentiment
can be particularly sensitive to profitability indicators.
EPS can strengthen the impact of NPM on stock prices by confirming
the profitability signaled by NPM and increasing investor confidence. (Dewi &
Hanif, 2019) found that higher EPS levels enhance the positive effects of NPM
on stock prices in Indonesian consumer goods companies. The study suggested
that when both NPM and EPS are high, investors perceive the firm as profitable
and effective at generating shareholder returns, which can drive stock price
appreciation (Dewi & Hanif, 2019).
In manufacturing, (Kurniawati et al., 2020) found that companies with
moderate to high EPS values amplified the positive effects of NPM on stock
prices. The authors argue that in industries where operational efficiency is
essential, EPS serves as an additional assurance of financial health, which can
sway investor confidence toward firms showing profitability (through NPM)
and consistent earnings distribution (via EPS). This combination reduced
investor skepticism regarding profitability figures, driving a more favorable
stock price outcome.
The moderating role of EPS in the NPM-stock price relationship
underscores the importance of profitability measures and per-share earnings in
Muslim, Wulandari, Rusyidi
1238
shaping investor perceptions. In sectors ranging from banking to technology,
EPS can amplify the effects of NPM, confirming profitability signals and
enhancing stock price performance. NPM and EPS provide a more
comprehensive view of financial health and shareholder value, resulting in
increased investor confidence and potentially higher stock prices. Then, H3:
EPS moderates the relationship between NPM and stock prices, such that the
effect of DER on stock prices varies according to the level of EPS.
The Moderating Effect of Earnings per Share (EPS) on the Relationship Between Debt-
to-Equity Ratio (DER) and Stock Prices
Earnings per Share (EPS) reflects a company’s earnings allocated to
each outstanding share, providing insight into profitability and financial health
from an investor’s perspective. EPS can act as a moderating factor in the
relationship between the Debt-to-Equity Ratio (DER) and stock prices by
influencing how investors perceive the company’s ability to manage debt while
generating returns. A high EPS can help mitigate concerns related to high DER
by reassuring investors that the company is profitable and capable of covering
debt obligations, positively impacting stock prices.
Studies on companies listed on the Indonesia Stock Exchange (IDX)
illustrate EPS's impact in moderating DER’s effects on stock prices across
sectors. (Ferdila & Mustika, 2022) explored technology companies and found
that EPS significantly moderates the negative effects of high DER on stock
prices. In this sector, where innovation-driven growth often involves high
capital expenditure and debt financing, a high EPS helps reassure investors
about the company’s ability to meet obligations. As such, companies with high
EPS and DER were viewed more favorably, as the earnings indicated potential
stability despite leveraged financing.
Similarly (Kurniawati et al., 2020) EPS’s moderating effect in
manufacturing helps balance investor sentiment toward high DER.
Manufacturing firms often leverage debt for expansion, and when coupled with
high EPS, this debt usage is interpreted positively, signaling that the debt is
effectively driving growth and profitability. As a result, high EPS can enhance
the positive impact of DER on stock prices in these settings by confirming that
debt is translating into earnings.
Overall, EPS is essential in moderating DER’s effects on stock prices
across various sectors. High EPS values counterbalance the risks associated
with high DER, as they signal profitability and financial health. This
moderating effect indicates that companies with high DER but robust EPS can
maintain positive stock performance by demonstrating to investors that they
can sustain high leverage without compromising earnings potential Thus H5:
EPS moderates the relationship between DER and stock prices, such that the
effect of DER on stock prices varies according to the level of EPS.
Asian Journal of Management Analytics (AJMA)
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METHODOLOGY
Research Design
This research employs a quantitative approach using panel data
analysis to examine the interaction between DER and EPS on stock prices. The
study will utilize secondary data from financial reports of publicly listed
companies on the Indonesia Stock Exchange (IDX) for a specified period (e.g.,
2019-2023). The sectors selected should ideally represent a range of industry
behaviors regarding DER and EPS, such as technology, manufacturing, and
banking.
Sample and Sampling Technique
The sample includes publicly listed companies on the IDX that meet the
following criteria:
1. Availability of complete financial data for DER, EPS, and stock prices during
the study period.
2. Inclusion of companies from diverse sectors to allow for comparisons across
industries.
3. Exclusion of companies with irregular trading patterns or significant outliers
in financial ratios.
A purposive sampling technique ensures that only companies with the
necessary financial data for DER, EPS, and stock prices are included.
Data Collection
Data will be collected from the official IDX website, company financial
reports, and relevant financial databases (e.g., Bloomberg or Reuters). The
variables include:
• Dependent Variable: Stock Price, measured as the average closing price at
the end of each financial year.
• Independent Variable: Debt-to-Equity Ratio (DER), measured as the ratio of
total liabilities to total shareholder equity.
• Moderating Variable: Earnings per Share (EPS), calculated as net income
divided by outstanding shares.
Operational Definitions of Variables
1. Stock Price: The average closing price of a company’s stock at the end of
each financial year.
2. Debt-to-Equity Ratio (DER): Financial leverage ratio calculated by dividing
total debt by shareholders' equity.
3. Earnings per Share (EPS): Indicator of company profitability, calculated by
dividing net income by the number of outstanding shares.
Data Analysis
1. Descriptive Statistics: Initial analysis to summarize and describe the
characteristics of DER, EPS, and stock prices within the sample.
Muslim, Wulandari, Rusyidi
1240
2. Multicollinearity Check Variance Inflation Factor (VIF) and tolerance tests
to ensure multicollinearity between DER, EPS, and other control variables (if
any) are within acceptable limits.
3. Panel Data Regression Analysis: The core analysis uses a hierarchical panel
regression model:
o Model 1 tests the direct effects of NPM on stock prices.
o Model 2 tests the direct effects of DER on stock prices
o Model 3 adds EPS as a moderating variable to examine whether it affects
the strength or direction of the NPM-stock price relationship.
o Model 4 adds EPS as a moderating variable to examine whether it affects
the strength or direction of the DER-stock price relationship.
4. Moderation Analysis: The analysis tests EPS's moderating role using
interaction terms (DER × EPS). If significant, EPS modifies the relationship
between DER and stock price, indicating that high EPS may either strengthen
or mitigate the effects of DER on stock prices.
Hypotheses Testing
The study will test the following hypotheses:
• H1: NPM has a significant effect on stock prices.
• H2: DER has a significant effect on stock prices.
• H3: EPS moderates the relationship between NPM and stock prices, such that
the effect of DER on stock prices varies according to the level of EPS.
• H4: EPS moderates the relationship between DER and stock prices, such that
the effect of DER on stock prices varies according to the level of EPS.
Software
The statistical analysis will use Eviews for descriptive, multicollinearity,
and regression analyses.
RESEARCH RESULT
Panel Data Regression Results
Table 1. Descriptive Statistics
EPS
NPM
DER
EPS
Mean
604.9608
-0.032901
0.103244
-10.23249
Median
41.0000
0.006636
0.879154
0.669882
Maximum
4900.000
0.406119
3.211416
140.8388
Minimum
105.0000
-0.988007
0.085255
-546.8664
Std. Dev
716.1405
0.195497
0.813846
95.66842
Skewness
4.407236
-2.596336
1.122365
-3.547139
Kurtosis
26.59767
13.48783
3.427977
20.74318
Jarque-Bara
1348.408
291.0367
11.09670
775.9424
Probability
0.000000
0.000000
0.003894
0.000000
Sum
30853.00
-1.677935
56.26545
-521.8572
Sum Sq. Dev.
25642862
1.910948
33.11723
457622.4
This table provides descriptive statistics for four financial metrics:
Earnings per Share (EPS), Net Profit Margin (NPM), Debt-to-Equity Ratio
(DER), and EPS again (likely a different data set or variable calculation). Each
Asian Journal of Management Analytics (AJMA)
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metric’s central tendency, variability, and distribution are summarized through
mean, median, maximum, minimum, standard deviation, skewness, kurtosis,
and the Jarque-Bera test for normality.
Analysis
1. Central Tendency and Dispersion:
The mean EPS is relatively high at 604.96, with a median of 41, suggesting a
wide range of values and potential outliers.
NPM shows a mean close to zero (-0.0329) but has a more centralized median
(0.0066), indicating a mix of profitable and unprofitable data points.
DER has a mean of 0.1032, showing relatively low leverage, with a median of
0.8791, which is closer to 1 and suggests that outliers may skew the data.
The standard deviation is high for EPS (716.14) and DER (0.8138), indicating
large variability.
2. Distribution and Normality:
Skewness: EPS and DER are positively skewed (4.4072 and 1.1224),
suggesting the presence of high outliers. NPM and the second EPS have
negative skewness (-2.5963 and -3.5471), indicating a significant number of
low or negative values.
Kurtosis: All variables have high kurtosis, particularly EPS (26.59),
suggesting a leptokurtic distribution with heavy tails, which confirms the
existence of extreme values or outliers.
Jarque-Bera Test: The probability values (all 0.000 or close) indicate
significant deviations from normality, confirming non-normal distributions
across variables.
3. Sum and Sum of Squared Deviations:
These values represent the total sum of each variable's values and the
squared deviations, respectively, highlighting the overall data dispersion.
In summary, the table suggests high variability, non-normal distribution, and
the presence of extreme values for EPS, NPM, and DER. The distribution of
values likely impacts the interpretation of financial performance and may
require data transformation or outlier adjustment for a more robust analysis.
Table 2. Chow Test Results
Effects Test
Statistic
d.f
Prob.
Cross-section F
1.481841
(16.31)
0.1695
Cross-section Chi-
square
28.970521
16
0.0241
The Chow Test in Table 2 determines whether a fixed effects model is
more appropriate than a pooled ordinary least squares (OLS) model. The results
of the Chow Test include two main components: the Cross-section F test and
the Cross-section Chi-square test, each of which assesses the significance of
cross-sectional effects in the data.
Interpretation of Results
Muslim, Wulandari, Rusyidi
1242
1. Cross-section F Test:
The Cross-section F statistic of 1.481841 with a p-value of 0.1695 indicates
that this test is not statistically significant at common significance levels (e.g.,
0.05). A non-significant p-value suggests that the fixed effects model may not
provide a significantly better fit than a pooled OLS model. In other words,
cross-sectional differences may not be strong enough to necessitate using a
fixed effects model.
2. Cross-section Chi-square Test:
The cross-sectional chi-square statistic of 28.970521 with 16 degrees of
freedom and a p-value of 0.0241 suggests a statistically significant result at
the 5% level (p < 0.05). This significance indicates that there are cross-
sectional effects, and using a fixed effects model rather than a pooled OLS
model may be beneficial. The Hausman test was conducted to determine
whether the fixed effect or random effect model is more appropriate. This
test compares the random cross-section probability value with 0.05; if the
value is less than 0.05, the fixed effect model is chosen. However, the random
effect model is selected if the probability value exceeds 0.05.
Table 3. Hausman Test Results
Test Summary
Chi-Sq. Statistic
Chi-Sq. d.f.
Prob.
Cross-section
random
2742072
3
0.4331
The Hausman Test in Table 3 is designed to determine the most
appropriate model between fixed effects and a random effects model for panel
data analysis. This test checks whether the individual effects (cross-sectional or
time-specific) are correlated with the regressors. If the test is significant, it
suggests that a fixed effects model is preferable; otherwise, a random effects
model is more suitable.
Interpretation of the Table
1. Chi-Square Statistic:
The Chi-Square Statistic value of 2.742072 with 3 degrees of freedom
indicates the test's calculated value for assessing the null hypothesis (which
assumes that the random effects model is consistent and efficient).
2. Probability (p-value):
The p-value of 0.4331 is greater than the common significance level of 0.05. A
p-value above 0.05 indicates that we failed to reject the null hypothesis,
implying no significant correlation exists between individual effects and the
explanatory variables.
Since the p-value is not statistically significant (p > 0.05), the Hausman
Test suggests that a random effects model is appropriate for this data set. This
means that the variation across entities (or cross-sections) is assumed to be
random and uncorrelated with the independent variables in the model, making
the random effects model a consistent and efficient choice for analysis.
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Table 3. Lagrange Multiplier Test Results
Test Hypothesis
Cross - Section
Time
Both
Breusch-Pagan
0.669980
(0.4131)
0.082546
(0.7739)
0.752526
(0.3857)
The Lagrange Multiplier (LM) test in Table 3 evaluates whether a
random effects model is preferable to a simple pooled Ordinary Least Squares
(OLS) model. The test considers cross-sectional and time-specific effects, with
results provided for three hypotheses: cross-section, time, and both.
Interpretation of Results
1. Breusch-Pagan Cross-Section Test:
The Cross-Section Breusch-Pagan statistic is 0.669980 with a p-value of
0.4131.Since the p-value is greater than 0.05, this result suggests that cross-
sectional random effects are insignificant, meaning there is no strong
evidence that cross-sectional variation influences the data enough to justify a
random effects model based on cross-sectional differences alone.
2. Breusch-Pagan Time Test:
The Time Breusch-Pagan statistic is 0.082546 with a p-value of
0.7739.Similarly, the high p-value (above 0.05) indicates that time-specific
effects are not significant, suggesting that changes over time do not
significantly contribute to the variability in the data for this model.
3. Breusch-Pagan Both Test:
Both Breusch-Pagan statistics are 0.752526 with a p-value of 0.3857.This
result implies that neither cross-sectional nor time effects contribute
significantly when considered together. With a p-value above 0.05, we fail to
reject the null hypothesis, supporting using a simple pooled OLS model over
a random effects model.
The Effect of Net Profit Margin (NPM)on Stock Prices
Table 4. Panel Least Squares
Variable
Coefficient
Std Error
t-Statistics
Prob.
C
X1
626.3225
649.2789
101.1237
515.0264
6.193625
1.260671
0.0000
0.0134
The results indicate that the Net Profit Margin (NPM) has a
meaningful and statistically significant influence on stock prices, H1 Accepted.
As a company's NPM changes, its stock price tends to be reflected. A higher
NPM, which shows the company's profitability after all expenses, generally
signals to investors that it is efficient at generating profit, making it an attractive
investment. This positive outlook usually leads to an increase in stock price.
The statistical significance of the results suggests this relationship is unlikely
due to chance, reinforcing the importance of NPM as a factor in determining
stock value.
Muslim, Wulandari, Rusyidi
1244
The Effect of Debt-to-Equity Ratio (DER)on Stock Prices
Table 5. Panel Least Squares
Variable
Coefficient
Std Error
t-Statistics
Prob.
C
X2
588.1817
15.20885
171.7149
125.6879
3.425339
0.121005
0.0013
0.0042
The results show that the Debt-to-Equity Ratio (DER) has a meaningful
and statistically significant effect on stock prices, H2 Accepted. This suggests
that changes in a company's DER, which measures its financial leverage by
comparing debt to equity, can influence investor perception and, consequently,
stock price. A higher DER generally indicates more debt relative to equity,
which can be considered a risk if it implies difficulty meeting debt obligations.
This can lead to lower investor confidence and potentially decrease stock prices.
Conversely, an optimal DER can signal efficient capital use, appeal to investors,
and boost the stock price. The statistical significance indicates that this impact is
likely real and not due to random chance, highlighting DER as an important
factor in stock price movements.
The Moderating Effect of Earnings per Share (EPS) on Net Profit Margin (NPM)
and Stock Prices
Table 6
Panel Least Squares 1
Variable
Coefficient
Std Error
t-Statistics
Prob.
C
X1
Z
627.0112
608.3744
0.198825
102.2216
573.3352
1.171600
6.133841
1.061115
0.169704
0.0000
0.2939
0.8660
Table 7
Panel Least Squares 2
Variable
Coefficient
Std Error
t-Statistics
Prob.
C
X1
Z
X1Z
585.1119
1207.194
0.695294
8.288210
111.2604
848.3943
1.281954
8.649174
5.258940
1.422916
0.542370
0.958266
0.0000
0.1614
0.5901
0.3428
The analysis reveals that the interaction between Net Profit Margin
(NPM) and Earnings per Share (EPS), acting as a moderating variable, does not
significantly influence stock prices. This conclusion is supported by T-Statistic
probability values, with Panel Least Squares 1 showing a probability of 0.8660
and Panel Least Squares 2 showing 0.3428—both exceeding the alpha
significance level. Consequently, it can be concluded that EPS does not
strengthen the effect of NPM on stock prices, leading to the rejection of
hypothesis H3.
The Moderating Effect of Earnings per Share (EPS) on Debt-to-Equity Ratio
(DER) and Stock Prices
Asian Journal of Management Analytics (AJMA)
Vol. 3, No. 4, 2024: 1233-1250
1245
Table 8
Panel Least Squares 1
Variable
Coefficient
Std Error
t-Statistics
Prob.
C
X2
Z
571.6505
37.59257
0.797804
174.0788
130.0672
1.106474
3.283861
0.289024
0.721033
0.0019
0.7738
0.4744
Table 9
Panel Least Squares 2
Variable
Coefficient
Std Error
t-Statistics
Prob.
C
X2
Z
X2Z
577.7094
14.84398
3.242633
-1.492999
174.5992
132.8533
2.970017
1.682551
3.308775
0.111732
1.091789
-0.887343
0.0018
0.9115
0.2805
0.3794
The analysis reveals that the interaction between the Debt-to-Equity
Ratio (DER) and Earnings per Share (EPS), acting as a moderating variable,
does not significantly influence stock prices. This conclusion is supported by T-
Statistic probability values, with Panel Least Squares 1 showing a probability of
0.4744 and Panel Least Squares 2 showing 0.3794—both exceeding the alpha
significance level. Consequently, it can be concluded that EPS does not
strengthen the effect of the Debt-to-Equity Ratio (DER) on stock prices, leading
to the rejection of hypothesis H4.
DISCUSSION
The Effect of Net Profit Margin (NPM)on Stock Prices
The results indicate that Net Profit Margin (NPM) has a meaningful and
statistically significant influence on stock prices. This finding aligns with
previous research suggesting that NPM is a crucial indicator of a company's
profitability and operational efficiency, which investors consider when valuing
a stock. A higher NPM suggests that a company retains a larger portion of its
revenue as profit, signaling effective cost management and pricing strategies.
This can increase investor confidence, subsequently driving up the stock price.
For instance, research conducted by (Husain & Azhar, 2020) in
Indonesia demonstrated that companies with higher NPM tend to exhibit
stronger stock performance due to positive market perception. Similarly,
Rahmawati and (Dewi & Hanif, 2019) found a significant relationship between
NPM and stock prices in the manufacturing sector, highlighting that investors
are more likely to invest in companies with higher profitability margins. This is
consistent with signaling theory, which posits that financial metrics like NPM
communicate information about a company's value and prospects to the
market, influencing stock price movements.
These findings emphasize the importance of NPM as a key metric for
investors, providing insights into how effectively a company converts sales into
actual profits, thereby impacting its market valuation (Mardiana, 2020).
Consequently, NPM not only reflects a company's current performance but also
Muslim, Wulandari, Rusyidi
1246
serves as an indicator of its potential for future growth, further reinforcing its
significance in stock price determination.
The Effect Debt-to-Equity Ratio (DER)on Stock Prices
The results suggest that the Debt-to-Equity Ratio (DER) has a
statistically significant impact on stock prices, meaning that changes in DER
levels are likely to influence investor perceptions and the market value of a
company's stock. A higher DER implies increased leverage, which can lead to
higher risk and potentially greater returns if leveraged resources generate
substantial profits. This relationship between DER and stock price is significant
as it reflects how investors weigh financial risk and reward based on firms'
capital structure.
Research supports these findings. For instance, (Solihati, 2021) study on
Indonesian banking companies concluded that DER, along with other financial
ratios like the Current Ratio and Net Profit Margin, has a notable influence on
stock prices, reinforcing the perspective that capital structure impacts investor
behavior and stock valuations. The study highlights that investors consider
firms with higher DER as potentially lucrative and risky, impacting stock
valuation and trading volumes.
In Indonesian contexts, this relationship is particularly relevant given
the unique financial environment, where high leverage can signal aggressive
growth strategies. Still, it may also raise concerns over sustainability during
economic downturns. Therefore, understanding DER's effect is essential for
firms and investors as it contributes to informed investment decisions and
corporate financial strategies in Indonesia.
The Moderating Effect of Earnings per Share (EPS) on Net Profit Margin (NPM)
on Stock Prices
The conclusion that Earnings per Share (EPS) does not strengthen the
effect of Net Profit Margin (NPM) on stock prices indicates that while both
metrics are relevant to investors, they do not interact in a way that amplifies
their individual impacts on market value. This suggests that EPS does not act as
a moderating factor in the relationship between NPM and stock prices, meaning
that the profitability represented by NPM alone is sufficient to convey a
company's financial health without the need for EPS to enhance that message.
Research by (Santosa & Purnamasari, 2020) supports this notion,
indicating that while EPS and NPM are important indicators of a company's
performance, their combined influence on stock prices may not be synergistic.
Similarly, (Sari & Fitria, 2021) found that NPM held a stronger predictive power
over stock prices than EPS, implying that investors primarily focus on
profitability margins rather than earnings alone when evaluating stock
performance.
This conclusion can also be linked to the concept of signaling theory,
where NPM serves as a clear signal of a company's operational efficiency and
profitability potential. If NPM is already providing a strong signal to investors,
the additional information provided by EPS may not significantly alter investor
perception or stock valuations (Yuliana & Hasan, 2021). Thus, the relationship
Asian Journal of Management Analytics (AJMA)
Vol. 3, No. 4, 2024: 1233-1250
1247
between NPM and stock prices remains robust without the moderating effect of
EPS.
The Moderating Effect of Earnings per Share (EPS) on Debt-to-Equity Ratio
(DER) on Stock Prices
The conclusion that Earnings per Share (EPS) does not strengthen the
effect of the Debt-to-Equity Ratio (DER) on stock prices is supported by recent
empirical research. This finding indicates that while both DER and EPS are
significant financial metrics, they do not interact to enhance each other's
influence on market value.
Studies have shown that DER can negatively affect stock prices,
particularly when investors perceive high debt levels as risky. For instance,
Marfuatun and Indarti (2012) found that although DER can indicate a
company's leverage, it has a positive but statistically insignificant effect on stock
prices. This suggests that increasing debt levels may raise concerns about
financial stability, which could offset any potential benefits derived from higher
equity financing
On the other hand, EPS is often viewed as a strong indicator of a
company’s profitability and ability to generate shareholder returns.
(Munggaran & Mukaram, & Sarah, 2017) concluded that EPS positively impacts
stock prices, as higher earnings per share generally signal better financial health
and profitability, increasing investor confidence. However, despite the positive
correlation between EPS and stock prices, it does not enhance the influence of
DER on stock prices. Instead, the relationship between DER and stock prices
tends to operate independently of EPS.
CONCLUSIONS AND RECOMMENDATIONS
This research provides valuable insights into the relationships among
financial metrics—Net Profit Margin (NPM), Debt-to-Equity Ratio (DER), and
Earnings per Share (EPS)—and their impacts on stock prices. The findings
confirm that NPM has a statistically significant positive influence on stock
prices, reinforcing the notion that investors perceive companies with higher
profit margins as more efficient and financially stable. Conversely, the analysis
indicates that DER does not exhibit a statistically significant impact on stock
prices. While a higher DER may reflect a company's reliance on debt for
financing, it does not necessarily correlate with increased stock value.
Furthermore, the research concludes that EPS does not serve as a moderating
factor in the relationship between NPM and stock prices, nor does it enhance
the effect of DER on stock prices. This indicates that while EPS is a crucial
measure of profitability, it may not significantly influence investor perceptions
of how NPM or DER affect stock value.
Based on these findings, several recommendations can be made for
various stakeholders in the financial market. For investors, it is advisable to
focus on NPM as a key indicator when assessing potential investment
opportunities. By prioritizing companies with strong profit margins, investors
Muslim, Wulandari, Rusyidi
1248
may improve their chances of selecting financially healthy organizations likely
to perform well in the stock market.
Corporate management should also take note of the importance of
enhancing profit margins. By implementing effective cost management
strategies and operational improvements, companies can increase their NPM,
which in turn may lead to higher stock prices. A focus on profitability can
attract investors and improve market perceptions.
For financial analysts, the emphasis should shift towards analyzing
profitability metrics like NPM rather than solely relying on DER. Given the
insignificant relationship between DER and stock prices, analysts might
provide more relevant insights by concentrating on profitability indicators. This
approach may yield better recommendations for investors looking to navigate
the complexities of stock valuation.
ADVANCED RESEARCH
Several avenues for future studies are suggested to build on the
findings of this research and address its limitations. Firstly, expanding the
geographic scope of research to include comparisons across different countries
could enhance understanding of how regional economic conditions and cultural
factors influence the relationships among NPM, DER, EPS, and stock prices.
Such cross-national studies could highlight how varying market structures
affect investor perceptions.
Secondly, future research should consider incorporating additional
financial and non-financial variables that might impact stock prices. For
example, exploring the effects of macroeconomic factors, investor sentiment,
and industry-specific trends could provide a broader understanding of the
determinants of stock valuations. Studies that integrate these dimensions may
offer more comprehensive insights.
Thirdly, employing a mixed-methods approach that combines
quantitative analysis with qualitative research could enhance the richness of
future investigations. Interviews or surveys with investors and analysts could
show how these stakeholders perceive the relationships among financial
metrics, allowing for deeper insights into investment decision-making
processes.
Lastly, conducting longitudinal studies that track changes over time
could offer valuable insights into the long-term effects of NPM, DER, and EPS
on stock prices. Such research could examine how these relationships evolve
during different economic cycles and market conditions, contributing to a
deeper understanding of financial dynamics.
ACKNOWLEDGMENT
I would like to express my heartfelt gratitude to my colleagues, who
offered invaluable suggestions and insights throughout the development of this
research. Their constructive feedback and encouragement were crucial in
refining my ideas and enhancing the overall quality of the paper. I deeply
appreciate the collaborative spirit and support from everyone involved in this
endeavor.
Asian Journal of Management Analytics (AJMA)
Vol. 3, No. 4, 2024: 1233-1250
1249
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