Interplay of Inflation, Profitability, and Leverage: Determinants of Stock Returns in Capital Market

Abstract

The capital market plays a vital role in supporting the national economy as a medium for investment and as an indicator of a country’s overall economic stability and growth. This study aims to analyze the effect of inflation, profitability, and leverage on stock returns of companies listed on the Indonesia Stock Exchange. The research method applied is a comprehensive literature review sourced from various indexed scientific journals to obtain a broad understanding of these financial relationships. The results of the review indicate that inflation has a negative effect on stock returns due to the increase in production costs and the decline in public purchasing power, which reduces company profitability. In contrast, profitability has a positive effect because it reflects the company’s efficiency in managing assets and maintaining financial performance. Meanwhile, leverage exerts a negative influence as it increases financial risk and decreases investor confidence. Internal factors such as profitability are found to be more dominant than external factors like inflation in determining stock returns. The findings of this research are expected to provide valuable insights for investors in making informed investment decisions within the Indonesian capital market.