Impact of free cash flow on profitability of firms listed On pakistan stock exchange

Abstract

The core objective of this study is to examine the result of free cashflow on profitability of firms listed in Pakistan stock exchange. This study is based on descriptive survey to analyzing the impact of free cash flow on profitability. The sample size choose for the research includes top 25 firms listed in Pakistan stock exchange. This research involved only non-financial firm, financial firms excluded because of their different mechanisms of accounting and auditing, the rules and regulations of financial firms are far different from non-financial firms. We used secondary data for data analyzation, this data was pull out from annual financial statements of the companies along with some helpful websites from time duration of 2013 to 2017. The financial statements involved in data collection are comprehensive income statement, balance sheet and cash flow statements. The accurate data collected, cleaned, arranged and then run in Eviews software. The data is examined through panel data regression as the data in quantitative in nature. The free cash flow is computed by formula which involve operating cash flow, capital expenditure, depreciation and amortization, changes in working capital. The operating cash flow, depreciation and cash flow is computed from cash flow statement, while working capital is calculated from balance sheet. Our results clearly show that free cash has positive relation with profitability if utilized efficiently. The p value of return on asset is less than 0.05 which shows that there is significant positive relation between free cash flow and return on equity, while the result also supports our second hypothesis as the p value for return on equity is 0.04 which is also less than 5%. The coefficient p value for return on asset is also positive which supports our first hypothesis while the constant p value for return on assets is 0.077 and positive which also supports our second hypothesis.