Free Cash Flow Impact on Firm’s Profitability: An Empirical Indication of Firms listed in KSE, Pakistan

Abstract

This study determines the significance of free cash flows on the profitability of firms listed at the Karachi Stock Exchange. Descriptive statistics was used to analyze the impact of free cash flow on the profitability of firms listed at the KSE. The population consisted of 580 companies listed in KSE as on March 7^th, 2015. Data were obtained from audited annual reports and financial statements of firms sourced from KSE for a period of five years (2010 –2014). Regression model was used to analyze the quantitative data.  Research indicates that free cash flow is significantly and positively correlated with profitability of firms on the basis of obtained data. This is evidence that free cash flow is a crucial prerequisite for a firm’s profitability. The study concludes that free cash flows enhance the firm performance but excess free cash flows create the agency problem due to this the conflict of interest increased between owner and management and because of such conflict firm performance decrease.