Effects of free cash flows on the profitability of five star hotels in Kenya
Abstract
The goal of every organization is always to improve its performance. Thus, managers in
corporate organizations do all that is necessary to improve their performance and
especially their profitability. Scholars have examined what factors influence firm
performance in a bid to recommend to practitioners on what needs to be done to improve
firm performance. Free cash flow hypothesis has been advanced in literature as one of the
determinants of firm performance. The objective of this study was to examine the effect
of free cash flow on the profitability of five-star hotels in Kenya. This was a descriptive
research. The population of this study was the 32 five star hotels in Nairobi. Since this
number is not large and the present study seeks to come up with a predictive model for
how cash flow affects profitability, all the 32 hotels were sampled. Thus, this was a
census study of all the five star hotels in Kenya. This study used secondary data. These
were collected from the financial statements of the hotels. The data was collected on the
variables of interest for three year period beginning 2011 to 2013. This period gave
enough data that was used in the analysis. Data was analysed using descriptive analysis,
correlation analysis, and regression analysis with the aid of SPSS version 22 analysis
software. The descriptive results showed that the mean ROA was 4% and free cash flow
had a mean of 0.0318. The correlation results showed that except for size and foreign
ownership, all the other independent variables were lowly correlated with each other thus
these were transformed using second differences. The regression results showed that the
model accounted for 81.7% of the variance in profitability, R2 = 0.817. The F-statistic
was 8.034 and was significant at 5% level, meaning that the model used was fit to predict
the relationship between free cash flows and profitability. The study found that free cash
flow had positive and significant effect on profitability, β = 0.371, p = 0.001. The study
found that size of the firm had a negative but insignificant effect on profitability, β = 0.049,
p = 0.089. The results showed that foreign ownership had a negative but
insignificant effect on profitability, β = -0.191, p = 0.120. The results showed that
leverage had a positive and significant effect on profitability, β = 0.140, p = 0.036. The
results also showed that age of the firm had a positive but insignificant effect on
profitability, β = 0.002, p = 0.276. The study concludes that free cash flows and leverage
influence profitability of hotels in Kenya while size of the firm, foreign ownership and
age of the firm do not. The study recommends that hotels in Kenya should use free cash
flow as a way of improving their profitability.