The impact of free cash flows on a firm’s performance: Evidence from textile sector of Pakistan

Isma Rasheed and Khurram Shahzad

Abstract

Free cash flows are the results of business activities. This study explores the association between free cash flows and the financial performance of firms
in order to improve the manager’s and investor’s financial decision. This study investigates the effect of free cash flow, sales growth and ownership
concentration on the performance of Textile sector of Pakistan as well as firm size and leverage are used as control variables. Firms owned by Families
always differ from public firms. The reason is strong control of members of the same family in ownership, management and strategic control. Our findings
provide a new perspective on the role of ownership concentration that it plays in corporate governance. The study presents empirical evidence by selecting a
sample of 126 Textile sector companies during 2010-2014. Data is collected from annual reports of the companies. The fixed effects regression model is
used for Panel data. Regression Results indicate that free cash flows are positively associated with the firm’s performance. While there is no significant
relationship exist between ownership concentrations and firm’s performance and there is a significant positive relationship exist between sales growth and
firm’s performance whereas leverage negatively influences the firm’s performance. Free cash flows relating to the firm’s performance are beneficial
for investor’s while evaluating a company as it provides better understanding of capability of the company to fund its progress and expansion. Free cash
flow offers investors a better measure of performance than widely used priceearnings ratios. Free Cash Flows have beneficial and essential applications for
managers and shareholders of any corporation. Free cash flows have significant role in most financial decisions. Cash flows available internally enable the management to operate with most efficient level and encourage and incorporates to make optimum decisions in operating, investing and financing context.
Keywords: Free cash flows, Return on Assets, Firm’s performance, Sales
growth, leverage.