| dc.description.abstract | The discourse objective of the study was to determine the effect of free cash flow on the profitability on firms listed at the Nairobi Securities Exchange. This study adopted a descriptive survey that aimed at analyzing the effect of free cash flow on the profitability of firms listed at the NSE. The population consisted of sixty one (61) companies listed at the NSE as at June 2014. A stratified sampling method was used to pick a sample of 30 companies listed at NSE. Firms under finance and investment sector were not considered because they use different mechanism in financing their operations. Financial firms were also subject to strict regulations and their accounting mechanism was different from that of other sectors. The objective of the study is to determine the effect of free cash flow on the profitability on firms listed at the Nairobi Securities Exchange.
Secondary data was extracted from audited annual reports and financial statements of firms sourced from NSE and CMA for a period of five years (2009 –2013).The annual financial statements included: the statement of comprehensive income and the statement of financial position. Data was sorted, cleaned and coded then entered into statistical package for social science (SPSS). Data analysis was done using a regression model since the nature of the data was quantitative. Data was collected from financial statements and published accounts. The amount of free cash flows available per year was used. Free Cash flow was measured using the following formula: Profit After Tax –[Changes in capital expenditure, Depreciations and Amortization –changes in working capital. Profit after tax was obtained from the Income statement, changes in Capital expenditure was obtained from Balance Sheets and Cash Flow Statements; Depreciation & Amortization was obtained from Prior & Current Balance Sheets: Current Assets and Liability accounts. Changes in Working Capital was obtained from the Balance Sheets and Cash Flow Statements.
Based on the regression results, it was found that the r-squared for the model was 0.745, meaning that the regression model used for this study is a good predictor. The independent variables explained 74.5% of the variation in profitability of listed firms. Only 25.5% of variation in profitability of listed firms is not explained by the regression model. The correlation between the variables was explained by (R=8.63) which shows there is a strong positive correlation between the two variables. Holding all other factors constant, an increase in one unit of the independent variables (free cash flows, capital liquidity and the size of the firm) results into a corresponding decrease in one unit of profitability of firms. Therefore, the study concluded that there existed an inverse relationship between free cash flows and profitability of listed firms in the Nairobi Securities Exchange. This is because independent variables in the regression model obtained p-values of more than 5% as shown in the Table 4.5 of the study findings. The findings are consistent with the study conducted by Gregory (2005) and Parsian & Amir (2013) who found that the independent variables of free cash flow and profitability current ratio have negative and significant impact on dividend payout ratio. | en_US |
