Effect of free cash flows on financial performance of manufacturing and allied firms listed at the Nairobi Securities Exchange

Abstract

The relation between Free Cash Flows (FCF) and financial performance (FP) have for long remained a contentious topic in academic circles. The results from prior studies show varied findings both in substance and form. There is little to no consensus on the matter. A number have found a positive linear correlation between FCF and FP in the absence of target FCF, others found a negative linear relation and others have found a non-conclusive relation between FCF and FP. The objective of this research study was assessing how free cash flow affects FP of NSE manufacturing listed firms. The population was the 9 NSE listed firms in this category. FCF was operationalized as the ratio of operating income plus depreciation minus interest expense, income taxes, dividends and loan repayment to total assets was the predictor variable. The control variables included leverage indicated by total debt to total assets, firm size given as the natural log of total annual assets and liquidity given by the ratio of current assets to current liabilities. FP given by ROA was the response factor. Secondary data for a period spanning five years was obtained (January 2016 to December 2020) annually. A Descriptive cross-sectional design was subsequently used in assessing the interaction between the variables. Data analysis was then performed using SPSS version 24. From the results, an R-square value of 0.433, was found which means 43.3 percent of ROA variations among the selected firms was the resulted from the four independent variables while 56.7% ROA variations of the firms was the result of additional factors not considered. From the findings, the independent variables exhibited a moderate association with the value of firms (R=0.658). ANOVA revealed an F statistic which was significant at 5% level with p=0.000. The implication in this case was that the regression was sufficient in explaining the impact of the independent variables on ROA. Additionally, the results revealed that free cash flow significantly and positively impacts ROA while liquidity and firm size had a similar impact on ROA as Free cash flows of NSE listed manufacturing firms. Financial leverage did not yield a significant impact in the study. It recommended that manufacturing firms with an NSE listing should aim at balancing the benefits associated with free cash flow and the opportunity costs while simultaneously enhancing the size of the firm and its positions as the three factors significantly impact FP.