The Effects of Profitability and Solvability on Stock Prices: Empirical Evidence from Indonesia

This study aims to analyze the effect of the ratio of profitability and solvability (leverage) on the variable stock price, which is mediated (intervening) by the variable dividend policy. Using the financial reports of manufacturing companies in the consumer goods sector, we take profitability data (ROA, ROE, GPM, and NPM), solvability data (DAR, LTDER, and DER), dividend policy (DPR), and stock price (closing price) from 24 companies, which were selected as samples, from 2011 to 2018. Data was analyzed using the Structural Equation Modeling (SEM) method. The results show that profitability, solvability, and dividend policy affect changes in stock prices, respectively. On the other hand, profitability and solvability do not affect dividend policy. The indirect relationship (intervening) is assessed using a single test, resulting in a dividend policy that can intervene in the relationship between profitability and stock prices but cannot mediate the relationship between solvability and stock prices. The implication of this research is to provide knowledge to investors about the importance of knowing the company's financial performance. Companies with good financial performance will easily develop because there are sufficient funds for company operations. By analyzing financial ratios, investors can get signals to decide whether to invest in the company they want.