Relationship Between Free Cash Flows and Profitability of Firms Listed in the Nairobi Securities Exchange

Abstract

“Cash flows management are crucial issues that are at the heart of any organization. An organization must closely monitor free cash flows to profitability is not affected negatively in anyway. The sought to establish the effect of free cash flows on profitability of listed firms at the Nairobi Securities exchange. The study was based on free cash flows theory, modern portfolio theory and pecking order theory. The study adopted Descriptive survey. The target population was 61 listed companies in Nairobi securities exchange. Operations in investment sector and finance sector have different mechanisms and thus was not be considered because of the strict regulations in their different mechanisms. The remaining companies were 30 companies that formed the sample size. The research used secondary data sources. Secondary data was sourced from audited financial statements of the listed firms for a period of five years (2013 –2017). Data that was used in the study included detailed income statements, cash flow statements and their financial position as a whole as reflected in the annual financial statement. The data collected was examined before analysis commenced for completeness and consistency .The panel data was entered into STATA version 14. Descriptive statistics was be used in the analysis of panel data as well as the correlation and regression analysis. Measures of central tendencies together with dispersions was used in descriptive statistics. Inferential analysis such as the bivariate Pearson correlation multiple regressions. The results were presented in tables with their associated explanations. The study established that that free cash flows had a statistically significant negative effect on profitability of listed non-finance firms. Firm size had a statistically significant positive effect on profitability. The effect of firm size is positive since growth in firm size in terms of asset size can be used for investment purposes that intern improves the level of profitability. Finally, leverage had a statistically significant negative effect on profitability. The inverse relationship can be explained that the reasoning that increased leverage is associated with solvency risk that might impact on a business negatively as well as the high cost of debt finance hence negative relationship. The study recommend to management of listed firms to take issues of free cash flows seriously by practising better free cash flows management. The management should identify investments projects where excess free cash flows can be invested to improve profitability of the listed firms in Kenya. Additionally, execs free cash flows may be embezzled or mismanaged hence management of such firms should have strict rules on management of the free cash flows within the respective businesses. The study also recommend to capital market authority to follow up on issues of free cash flows on a serious note. The officers at capital market authority should come up with strict policies on how free cash flows may be used by listed firms to discourage mass failure of listed firms due to poor management of free cash flows that rode their capital base when mismanaged by the management of such firms.