The Correct Definition for the Cash Flows to Value a Firm (Free Cash Flow and Cash Flow to Equity)

Purpose – The purpose of this paper is to contribute to the debate and find out the impact of cash flow on changes in dividend payout decisions among non-financial firms quoted at Bursa Malaysia as compared to earnings. There has been renewed debate in recent finance and accounting literature concerning the key determinants of changes in dividends payout policy decisions in some jurisdictions. The conclusion in some is that firms base their dividend decisions on cash flows rather than published earnings. Design/methodology/approach – The research made use of panel data from 1999 to 2012 at Bursa Malaysia, using generalized method of moments as the main method of analysis. Findings – The research finds that Malaysia non-financial firms consider current earnings more important than current cash flow while making dividends payout decisions, and prior year cash flows are considered more important in dividends decisions than prior year earnings. We also found support for Jensen (1986) in Malaysia on agency theory, that managers of firms pay dividends from free cash flow to reduce agency conflicts. Practical implications – The research concludes that Malaysian non-financial firms use current earnings and less of current cash flow in making changes in dividends policy. The policy implication is that current earnings are dividends smoothing agents, and the more they are considered in dividends payout decisions, the less of dividends smoothing. Social implications – If dividends smoothing is encouraged, it could lead to dividends-based earnings management. Originality/value – The research is our novel contribution of assisting investors and government in making informed decisions regarding dividends policy in Malaysia.

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Financial sustainability in Italian farms: an analysis of the FADN sample

Agricultural Finance Review ◽

10.1108/afr-07-2020-0107 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Gabriele Dono ◽

Rebecca Buttinelli ◽

Raffaele Cortignani

Keyword(s):

Rural Development ◽

Cash Flow ◽

Production Systems ◽

Public Support ◽

Cash Flows ◽

Free Cash Flow ◽

Financial Sustainability ◽

Content Type ◽

Random Effects Models ◽

Financial Variables

PurposeThe paper examines the factors that influence the production of cash flows in a sample of Italian farm accountancy data network (FADN) farms to generate information useful for calibrating policies to support farmers' investments.Design/methodology/approachAn econometric analysis on the sample estimates the influence of structural, economic, commercial and financial variables on CAFFE, i.e. the cash flow that includes the payments to the farmer's resources and the free cash flow on equity (FCFE). The econometric problem of endogeneity is treated by adopting the Hausman test to choose between fixed and random effects models. The results for Italian agriculture and its types of farming (TFs) are examined based on the FCFE/capital depreciation ratio, where FCFE subtracts from CAFFE the opportunity cost payments to the farmer's resources. This ratio identifies TFs with problems of sustainability of the production system.FindingsThe results show that increasing the productive dimension, in particular the endowment of farmland and working capital, is still essential to stimulate the production of cash flows of Italian agriculture. Without this growth, increasing the depreciable capital base is ineffective. FCFE does not compensate for depreciation in several TFs, which in various cases could also improve by improving economic efficiency and commercial position.Research limitations/implicationsAssessing the factors that most influence cash flows can help to better calibrate rural development measures to the territories and farming types that most need public support. Our analysis procedure can be applied to all production systems equipped with farm accounting networks; however, the criteria for rewarding farmer resources and calculating the replacement value of agricultural capital need to be better discussed.Originality/valueThe specification of rural development policies rarely takes into account the financial sustainability conditions of farms, as well as the factors that determine them, in defining the support parameters and the selection criteria for funding. Our approach, based on the analysis of FADN data, considers these aspects and provides ideas for better calibrating public support for investments among agricultural territories, sectors and types of farms.

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The Investment Strategy of Free Cash Flow Multiple

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091598000223 ◽

1998 ◽

Vol 01 (03) ◽

pp. 355-367 ◽

Cited By ~ 1

Author(s):

Eric Liluan Chu

Keyword(s):

Cash Flow ◽

Abnormal Returns ◽

Investment Strategy ◽

Cash Flows ◽

Free Cash Flow ◽

Market Model ◽

Superior Performance ◽

Price Ratio ◽

Cumulative Abnormal Returns ◽

Daily Returns

This study applies the investment strategy recommended by Hackel and Livnat (1993), the free cash flow (FCF) multiple, in Taiwan after the promulgation of Taiwan's FASB No. 95 in 1989. The results indicate that the portfolio with the higher FCF/Price ratio significantly rewards returns in excess of the market. Instead of using earnings/price ratio in the forming portfolio, the study shows that the decile portfolio with the highest FCF/Price ratio significantly outperforms the market during the period from 1990 to 1994. If daily returns are adjusted by the market model, the decile portfolio presents an average 20.5268% cumulative abnormal returns in the testing period, which is statistically higher than zero. The results also indicate that the annual cumulative abnormal returns of the FCF/Price ratio based portfolio are all positive. The annual results also show that the decile portfolio performs much better when the market declines significantly. The outperformance still exists if returns are adjusted by the market without considering risk. The decile portfolio presents an average 8.198% abnormal with a significant t value returns. The superiority of free cash flow in forming portfolio exists but with a decreasing trend when the portfolio is enlarged. The result implies that either the firms with extremely high FCF/Price ratios are undervalued by the market or the market responses slowly to their superior performance in cash flows. The finding supports Hackel and Livnat's (1993) arguments. It suggests that free cash flow is useful information especially for the forming portfolio. The results also enhance the usefulness of the statement of cash flow.

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Effect of Operating Cash Flow on Stock Return of Firms Listed In Nairobi Security Exchange

Eastern Journal of Economics and Finance ◽

10.20448/809.6.1.26.35 ◽

2021 ◽

Vol 6 (1) ◽

pp. 26-35

Author(s):

Samoei Ben Kipngetich ◽

Joel Tenai ◽

Andrew Kimwolo

Keyword(s):

Panel Data ◽

Stock Returns ◽

Cash Flow ◽

Stock Return ◽

Random Effect ◽

Random Effect Model ◽

Secondary Data ◽

Cash Flows ◽

Free Cash Flow ◽

Operating Cash Flow

The main aim of the paper was to establish the effect of operating cash flow on stock return of firms listed in NSE. The study was informed by Free Cash Flow (FCF) theory. Census survey was adapted to review financial statements for 29 listed non-financial firms at NSE that had consistent data for all the study variables. Secondary data was extracted for 12 years from 2007-2019 with the aid of a data collection sheet. Explanatory research design which is panel in nature was followed by this study. Both descriptive and inferential statistics were used in data analysis. Panel data regression was used to make inferences and test research hypothesis. Fixed and Random effects methods were used to analyze the balanced panel data using STATA statistical package and Hausman test established that Random effect model was the most ideal method to analyze data in this study. The findings indicated that operating cash flow positively and significantly influenced the stock returns for firms listed at NSE. The study concludes that operating cash flow information affects stock returns. Therefore, the study advocates for firms to increase their levels of operating cash flows through prudent utilization of cash resources since it enhances the stock returns.

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An Empirical Research on Beximco Knitting Ltd: Ratio, DuPont, Valuation and Pro-Forma Analysis

Indian Journal of Finance and Banking ◽

10.46281/ijfb.v1i1.80 ◽

2017 ◽

Vol 1 (1) ◽

pp. 1-7

Author(s):

K.M. Anwarul Islam

Keyword(s):

Cash Flow ◽

Market Price ◽

Cash Flows ◽

Free Cash Flow ◽

Share Price ◽

Operating Efficiency ◽

Analysis Model ◽

Present Value ◽

Lower Efficiency ◽

Pro Forma

Beximco Knitting Ltd belongs to the Textile Industry. This paper examines some ratio analysis that showed the overall internal liquidity position of the company, that is not satisfactory; because of the entire ratio performance is not good, operating efficiency ratio is not good, indicates that lower efficiency generate capacity in terms of sale, debt-equity ratio is increasing overtime in order to employ the more debt financing as long-term borrowing compare to the equity financing, which make the firm more risky. Beximco Knitting Ltd is more sensitive to leverage compare to net profit margin and Asset turnover Discounted Cash Flow Analysis Model is using for valuation of the Beximco Knitting Ltd‘s prospective analysis. Forecasting the cash flow we have to use 2016-2017 as the base year of foresting cash flow for 2018-2020.The terminal growth rate of free cash flow is 2% and the present value of free cash flow is arrived using the 'Exit Multiple' model.Free cash flow to equity is discounted 10.77% to arrive at an estimated present value of free cash flows available to equity (debt and equity holders as a group), which is also known as Enterprise Value. Equity value per share (142.07) on the other hand, the market price of Beximco Knitting is 47.5tk per share, which indicates the share price is undervalued. Under pro-forma analysis we find out that all items of the financial statement is improving based on the assumption, but as investor‘s perspective we think investing in that company is not beneficial over the long run.Because the company can‘t earn positive return until 2020. Findings of the artcle are to really negative signs in accordance the investor‘s perspective, because its earnings per share are not attractive as much to invest.

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Interactions between free cash flow, debt policy and structure of governance: Three stage least square simultaneous model approach: evidence from the Tunisian stock exchange

Corporate Ownership and Control ◽

10.22495/cocv9i2art2 ◽

2012 ◽

Vol 9 (2) ◽

pp. 21-40 ◽

Cited By ~ 1

Author(s):

Ben Moussa Fatma ◽

Jameleddine Chichti

Keyword(s):

Cash Flow ◽

Stock Exchange ◽

Cash Flows ◽

Free Cash Flow ◽

Least Square ◽

Agency Conflicts ◽

Governance Mechanism ◽

Free Cash Flows ◽

Debt Policy ◽

Simultaneous Model

This research tests the efficiency of the ownership structure and the debt policy as mechanism of resolution of agency conflicts between shareholders and managers due to the problem of overinvestment, in the limitation of the problem of the free cash flow, by estimating three stage least square simultaneous model and on the basis of a sample of 35 non-financial Tunisian listed companies selected for the period 1999–2008. Our results are in favour of the theory of free cash flows of Jensen (1986) that stipulates that the debt policy represents the principal governance mechanism that can limit the risk of free cash flow. However, the ownership concentration and managerial ownership increase the risk of the free cash flow.

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ANALISIS RASIO ARUS KAS UNTUK MENGUKUR KINERJA KEUANGAN PADA PT KALBE FARMA Tbk.

10.31227/osf.io/ezsx3 ◽

2018 ◽

Author(s):

Meldawati ◽

Febryandhie Ananda

Keyword(s):

Cash Flow ◽

Capital Expenditure ◽

Secondary Data ◽

Analytical Techniques ◽

Cash Flows ◽

Position Statement ◽

Free Cash Flow ◽

Coverage Ratio ◽

Income Statement ◽

Statement Of Cash Flows

This study aims to determine how the use of analytical techniques in the current ratios measure the financial performance of PT Kalbe Farma Tbk. In this study the authors use secondary data from financial statements of PT Kalbe Farma Tbk for 5 years (2008-2012). The analytical method used is a form where the ratio of the value in the statement of financial position, statement of comprehensive income, statement of changes in equity and statement of cash flows into the simplified ratios. Data were analyzed using 8 cash flow ratio is the ratio of operating cash flow, cash flow coverage ratio, interest coverage ratio of the cash, the cash coverage ratio of current liabilities, capital expenditure ratio, the ratio of total debt, the ratio of net cash flow and free cash flow adequacy ratio. The results of this study indicate each cash flow ratios from 2008 to 2012 average ratio produced tends to be low and has decreased every year

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