Effect of Free Cash Flow on Financial Performance of Firms Listed on the Nairobi Securities Exchange

Abstract

In an organization free cash flow increases the tendency to hold a large share of a firm’s assets in form of cash, which can be used in investment projects or payment of shareholders. Managers can decide to make profitable investments, which may end up increasing returns and the general profitability of the firm. However, poor investment and utilization of FCF have negative influence on the firms’ profitability. The main objective of this study was therefore to examine the effect of free cash flow on financial performance of listed firms in NSE. The researcher used a descriptive survey design and the target population comprised of 65 firms that were listed in Nairobi Securities Exchange from the year 2013 to December, 2017. This study made use of 30 per cent of the companies listed in Nairobi Security Exchange and hence the sample size was 19 companies, which were selected using systematic sampling technique. This study used secondary panel data, which was collected form Capital Market Authority and Nairobi Security Exchange. Secondary data comprised of quantitative data. Inferential and descriptive statistic was used to analysis the quantitative data. Descriptive statistic entailed calculation of percentage, frequency, standard deviation and mean. Multiple regression analysis was used during the study to determine the existing relationship between free cash flow (independent variable) and financial performance (dependent variable). The study found that free cash flow has significant effect on the financial performance listed firms in NSE. The results revealed that liquidity ratio, investment and leverage have a significant influence on the financial performance the listed firms in NSE. Further, the study established that the size of firm and sales growth had no significant effect on the financial performance of the listed firms in NSE. This study recommends that firms listed in NSE should increase their free cash flow so as to improve their profitability. Firms listed in Nairobi Securities Exchange should put their focus on increasing sales volume, revenue and reduce expenses so as to increase their free cash flow. In addition, managers in firms listed in Nairobi Securities Exchange should make informed decisions on their investments so as to ensure that the investments have low risk. In addition, companies listed in Nairobi Securities Exchange should develop or improve their liquidity management practices so as to ensure that their firms remain liquid throughout a month.