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Improvement of indicated thermal efficiency of internal combustion engines is required, and increasing the compression ratio is an effective solution. In this study, using a CAE analysis coupling a 0-dimensional combustion analysis and a 1-dimensional heat conduction analysis, the influence of compression ratio on indicated thermal efficiency and combustion was investigated. As a result, it was found that there was an optimal compression ratio that gave the best indicated thermal efficiency, because the increase of cooling loss caused by high compression was bigger than the increase of theoretical indicated thermal efficiency in some cases. Next, the influence of cooling loss reduction on the optimal compression ratio was investigated. It was found that indicated thermal efficiency improved by reducing cooling loss, because the compression ratio which made the best indicated thermal efficiency was shifted to higher compression ratio.