Abstract:
Purpose – The main objective of this study is to find out the impact of free cash flow on
firm profitability and its performance based on the data collected from companies annual
reports, kse and open doors.
Design/methodology/approach – Multiple statistical tools are used to examine the
empirical finding of this study based on sample data. Regression models are used for
finding the relationship between free cash flow and firm’s financial performance. Two
dependent variables are used to measure the financial performance: Tobin’s q, stock
return (ROA), and ROE the independent variable are the free cash flow. Three control
variables are used in this study: Size, debt to asset ratio and market return. The sample
data collected from the open door and KSEfor the time period of five years from 2005 to
2009. The regression model is used to find the impact of free cash flow on firm
profitability and firm performance.
Results – The results that we get after running the regression on the petroleum companies
data listed in the Karachi stock exchange I come up with the three major concluding
points. It has been observed that the free cash flow has a significant effect on the
organization cost but this effect is conflicting. Due to the efficient use of the assets the
FCF is generated so that there must be a negative effect of FCF on the organization cost.
While on the other side when the firm has an excess of free cash flow then it provide
incentives to the management so that they can consume more and provide them
maximum personal benefit. Secondly on the basis of the results and due to insufficient
evidence supporting the FCF hypothesis we can say that there is a positive relationship
between the free cash flow and firm profitability.
Originality/value – This is the study that conducted on petroleum companies of Pakistan
listed in Karachi stock exchange and concludes the result that what is the impact of free
cash flow on firm profitability and performance in developing country like Pakistan.
