Effect of Free Cash Flow on Profitability of Firms in the Manufacturing and Allied Sector Listed at the Nairobi Securities Exchange for the Period 2013-2017

EFFECT OF FREE CASH FLOW ON PROFITABILITY OF FIRMS IN THE MANUFACTURING AND ALLIED SECTOR LISTED AT THE NAIROBI SECURITIES EXCHANGE FOR THE PERIOD 2013-2017

TRACY WANJIKU

UNITED STATES INTERNATIONAL UNIVERSITY- AFRICA

SPRING 2019

EFFECT OF FREE CASH FLOW ON PROFITABILITY OF FIRMS IN THE MANUFACTURING AND ALLIED SECTOR LISTED AT THE NAIROBI SECURITIES EXCHANGE FOR THE PERIOD 2013-2017

TRACY WANJIKU

A Research Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirements for the Degree of Masters in Business Administration (MBA)

UNITED STATES INTERNATIONAL UNIVERSITY- AFRICA

SPRING 2019

STUDENT’S DECLARATION I declare this work has not been submitted to any other university other than United States International University-Africa, it’s my original work which has been submitted for the Academic purposes.

Signed: ______Date: ______

Tracy Wanjiku (ID NO: 639808)

This project has been presented for examination with my approval as the appointed supervisor.

Signed: ______Date: ______

Mr. Kepha Oyaro

Signature ______Date______Dean, Chandaria School of Business

COPYRIGHT All rights reserved. No part of this project may be reproduced or transmitted in any form or by any means, electronic or otherwise, without prior written permission from the author. © Copyright by Tracy Wanjiku, 2019.

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ABSTRACT The general objective of the study was to determine the effect of free cash flow on profitability of firms in the manufacturing listed in Nairobi Securities Exchange. The study adopted the following specific objectives; to examine the effect of operating cash flows on the profitability, to establish the effect of investing cash flows on the profitability, and to determine the effect of financing cash flows on the profitability.

The study adopted a descriptive survey in analyzing the effect of free cash flow on the profitability of manufacturing firms listed at the Nairobi Securities Exchange. The population of interest in this study was secondary data from the Nairobi securities exchange where information was obtained for a period of five years for the listed Manufacturing and Allied companies in the Nairobi Securities Exchange. The researcher used of census sampling technique. For this study, the sampling frame was sourced from all the nine listed manufacturing companies in the Nairobi Securities Exchange. The study used both secondary data from annual reports and primary data from questionnaires. Secondary data was extracted from audited annual reports and financial statements of manufacturing firms sourced from Nairobi Securities Exchange and Companies websites for a period of five years (2013 –2017). The data was collected, coded and input to SPSS (Statistical Package for the Social Sciences Ver.25) for analysis. Descriptive statistics was used in terms of frequency distribution tables. Inferential statistics was used to draw conclusions about the effect of free cashflows on profitability of manufacturing firms using a regression model.

The results of the study on first objective indicated a correlation between operating cash flows and ROA in which there was a strong positive and statistically significant relationship between operating cash flows and ROA. The results of regression analysis showed that operating cash flows explain 80.9% of return on assets of manufacturing and allied firms.

The findings of the second objective showed that the correlation between investing cash flows and ROA and there was a strong positive and statistically significant relationship between Investing cash flows and return on assets as a measure of financial performance. The results of regression analysis showed that investing cash flows explains 96.3% of ROA of manufacturing and allied firms in the NSE.

The findings of the third objective showed that cashflows from financing and ROA indicating a strong positive and statistically significant relationship between financing cashflows and ROA. Regression analysis showed that financing cash flows explains 89.2% of ROA for the manufacturing and allied firms in the NSE.

The study concludes that operating cash flow management influence the profitability of manufacturing and allied firms in Kenya positively, operating cash flow is that manufacturing and allied firms generate money from their main business and are not facing a liquidity problem. Secondly, management of the listed firms of manufacturing firms should continue to invest in activities as it has positive implications towards its cashflows. Thirdly, cashflows from financing for the listed manufacturing have a positive impact towards this companies. The listed companies should take appropriate cashflows in financing their internal projects that are more profitable.

The study recommends that; management of the manufacturing firms should practice good cash management in their firms. It is essential for the company to maintain an appropriate level of cash from operating activities. Secondly, manufacturing and allied firms should seek internally generated funds since they are cheaper to finance their investment needs especially short-term projects and long-term projects that require immediate commitment. Lastly the financial efficiency is required in managing costs, increasing efficiency and financial performance of listed manufacturing companies in Kenya. The companies should not rely more on financing because it affects financial performance negatively and increases the risk of bankruptcy. The study recommends on further studies that further studies can be done in this area, they may include: the relationship between leverage and investments for the manufacturing and allied firms to quite clearly know the strength of the relationship and whether leverage can be indeed a factor that affects investment.

TABLE OF CONTENTS STUDENT’S DECLARATION ...... ii

ABSTRACT ...... iv

ACKNOWLEDGEMNT ...... ix

DEDICATION...... x

LIST OF TABLES ...... xi

LIST OF ABBREVIATIONS AND ACRONYMS ...... xiii

CHAPTER ONE ...... 1

1.0 INTRODUCTION...... 1

1.1 Background of the Study ...... 1

1.2 Statement of the Problem ...... 5

1.3 General Objective ...... 7

1.4 Specific Objectives ...... 7

1.5 Significance of the Study ...... 7

1.6 Scope of the study ...... 8

1.7 Definition of Terms...... 8

1.8 Chapter Summary ...... 9

CHAPTER TWO ...... 11

2.0 LITERATURE REVIEW ...... 11

2.1 Introduction ...... 11

2.2 Effects of Operating Cash Flows on Profitability ...... 11

2.3 Effects of Investing free cash flows on Profitability ...... 17

2.4 Effects of Financing Cash Flows on Profitability ...... 23

2.5 Chapter Summary ...... 29

CHAPTER THREE ...... 30

3.0 RESEARCH METHODOLOGY ...... 30

3.1 Introduction ...... 30

3.2 Research Design...... 30

3.3 Population and Sampling Design ...... 30

3.4 Data Collection Methods ...... 32

3.5 Research Procedures ...... 32

3.6 Data Analysis Methods ...... 32

3.7 Chapter Summary ...... 33

CHAPTER FOUR ...... 34

4.0 RESULTS AND FINDINGS ...... 34

4.1 Introduction ...... 34

4.2 Background Information ...... 34

4.3 Effects of Operating Cash Flows on Profitability ...... 35

4.4 Effect of Investing Cash flows on Financial Performance ...... 43

4.5 Effect of Financing cash flows on Financial Performance ...... 51

4.6 Chapter Summary ...... 58

CHAPTER FIVE ...... 59

5.0 DISCUSSIONS, CONCLUSIONS, AND RECOMMENDATIONS ...... 59

5.1 Introduction ...... 59

5.2 Summary ...... 59

5.3 Discussion ...... 60

5.4 Conclusions ...... 65

5.5 Recommendations ...... 65

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REFERENCES ...... 67

APPENDICES ...... 77

APPENDIX 1: INTRODUCTION LETTER ...... 77

APPENDIX II: COLLECTION CHECKLIST...... 78

Appendix II (a): B.O.C Kenya Ltd, Data Collection Instrument in Kshs. “000” ...... 78

Appendix II (b): British American Tobacco Kenya Ltd, Data Collection Instrument in Kshs. “000” ...... 79

Appendix II (c): Carbacid Investments Ltd, Data Collection Instrument in Kshs. “000” ...... 80

Appendix II (d): East African Breweries Ltd, Data Collection Instrument in Kshs. “000” ... 81

Appendix II (e): Mumias Sugar Co. Ltd, Data Collection Instrument in Kshs. “000” ...... 82

Appendix II (f): Unga Group Ltd, Data Collection Instrument in Kshs. “000” ...... 83

Appendix II (g): Eveready East Africa Ltd, Data Collection Instrument in Kshs. “000” ...... 84

Appendix II (h): Kenya Orchards Ltd, Data Collection Instrument in Kshs. “000” ...... 85

Appendix II (i): Flame Tree Group Holdings Ltd, Data Collection Instrument in Kshs. “000” ...... 86

APPENDIX III: SAMPLE FRAME...... 87

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ACKNOWLEDGEMNT

Above all, I thank God almighty for the grace and favor to begin and complete my project. He is my Lord Ebenezer. This far I have come by His Grace.

I sincerely acknowledge my supervisor, Mr. Kepha Oyaro, for his enabling support and guidance, his never-ending patience, good eye and sharp mind. His resilience on ensuring we followed the proper formatting and process resulted in receiving very positive comments. I know I will always be proud of this document in its entirety.

My humble gratitude goes to my family for their encouragement, endless morale support and simply believing in me, I am forever grateful.

DEDICATION This work is dedicated to my loving Mum who instilled in me the virtue of hard work from a tender age and for their support throughout my college.

LIST OF TABLES Table 4.1: B.O.C Kenya Ltd Net Operating Cashflows, ROE and ROA ...... 36 Table 4.2: BAT Kenya Ltd Net Operating Cashflows, ROE and ROA ...... 36 Table 4.3: Carbacid Investments Ltd Net Operating Cashflows, ROE and ROA ...... 37 Table 4.4: EABL Net Operating Cashflows, ROE and ROA ...... 38 Table 4.5: Mumias Net Operating Cashflows, ROE and ROA ...... 38 Table 4.6: Unga Group Net Operating Cashflows, ROE and ROA ...... 39 Table 4.7: Eveready East Africa Net Operating Cashflows, ROE and ROA ...... 39 Table 4.8: Kenya Orchards Ltd Net Operating Cashflows, ROE and ROA ...... 40 Table 4.9: Flame Tree Ltd Net Operating Cashflows, ROE and ROA ...... 41 Table 4.10: Correlations between Operating cash flows and Return on Assets ...... 41 Table 4.11: Model Summary for Operating cash flows and ROA ...... 42 Table 4.12: ANOVA between Operating Cash Flows and ROA...... 42 Table 4.13: Regression Coefficients between Operating cash flows and ROA ...... 43 Table 4.14: B.O.C Kenya Ltd Net Investing Cashflows, ROE and ROA ...... 44 Table 4.15: BAT Kenya Ltd Net Investing Cashflows, ROE and ROA...... 44 Table 4.16: Carbacid Investments Ltd Net Investing Cashflows, ROE and ROA ...... 45 Table 4.17: EABL Net Investing Cashflows, ROE and ROA ...... 45 Table 4.18: Mumias Net Investing Cashflows, ROE and ROA ...... 46 Table 4.19: Unga Group Net Investing Cashflows, ROE and ROA ...... 47 Table 4.20: Eveready East Africa Net Investing Cashflows, ROE and ROA ...... 47 Table 4.21: Kenya Orchards Ltd Net Investing Cashflows, ROE and ROA ...... 48 Table 4.22: Flame Tree Net Investing Cashflows, ROE and ROA ...... 49 Table 4.23: Correlations Analysis for Investing Cash Flows and ROA ...... 49 Table 4.24: Model Summary for Investing cash flows and ROA ...... 50 Table 4.25: ANOVA between Investing cash flows and ROA ...... 50 Table 4.26: Coefficients between Investing cash flows and ROA ...... 51 Table 4.27: B.O.C Kenya Ltd Net Financing Cashflows, ROE and ROA ...... 51 Table 4.28: BAT Kenya Ltd Net Financing Cashflows, ROE and ROA ...... 52 Table 4.29: Carbacid Net Financing Cashflows, ROE and ROA ...... 52 Table 4.30: EABL Net Financing Cashflows, ROE and ROA ...... 53 Table 4.31: Mumias Net Financing Cashflows, ROE and ROA ...... 53 Table 4.32: Unga Group Net Financing Cashflows, ROE and ROA ...... 54 Table 4 33: Eveready East Africa Net Financing Cashflows, ROE and ROA ...... 55 xi

Table 4.34: Kenya Orchards Ltd Net Financing Cashflows, ROE and ROA ...... 55 Table 4.35: Kenya Orchards Ltd Net Financing Cashflows, ROE and ROA ...... 56 Table 4.36: Correlations between Financing Cash Flows and ROA ...... 56 Table 4.37: Model Summary for Financing Cash Flows and ROA ...... 57 Table 4.38: ANOVA between Financing cash flows and ROA ...... 57 Table 4.39: Coefficients between Financing cash flows and ROA ...... 58

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LIST OF ABBREVIATIONS AND ACRONYMS ANOVA Analysis of Variance

EAC East Africa Community

EBIT Earnings Before Interest and Taxes FCF Free Cash Flow GDP Gross Domestic Product NSE Nairobi Securities Exchange ROA Return on Assets ROE Return on Equity SPSS Statistical Package for the Social Sciences

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CHAPTER ONE 1.0 INTRODUCTION 1.1 Background of the Study According to Richardson (2006), defined free cash flow as the net cash the firm earns from operating activities after making deduction from development costs; this cost is then added to research and development expenditures and finally investment expenditures of new projects are deducted from that. Free cash flow to the firm is the cash flows available to, respectively, all of the investors in a firm and to common stockholders. There is a strong association between cash flow and profitability of manufacturing firms listed in Nairobi, and this effect is greater for both shareholders and investors. When free cash flow increases, managers will have the incentive to engage in projects that have a negative return (Jensen, 1986). Free cash streams of a firm reflect commercial robustness of a business, so a financier uses this figure for a number of different benefits. They can be of substantial significance for lender, creditor and potential stakeholders.

The concepts of free cash flow (FCF) or idle cash flow are initiated by Michael Jensen (1986). According to Jensen (1986), having large free cash flow creates conflicts within the firm, i.e. between the interests of managers and shareholders, thereby negatively affecting its performance (Hau, 2017). Cash is the most important factor that can affects the profitability and survival of an organization. Cash flow according to Helen (2002) is one of the most common financial reports to assess the steps and decisions taken by management in the running of the organisation. Cash flow is a concept in accounting and finance used to describe the inflow and outflow of cash within an organization, inflow represent cash receipts while outflow relate to cash expenditure (Ogbonnaya, Ekwe, & Uzoma, 2016).

Cash Flow in this study is defined as the net amount of cash and cash-equivalents moving into and out of a business. Cash Flow Statement, on the other hand, is understood as a financial statement that shows how changes in balance sheet and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities which is concerned with the flow of cash in and out of the business (Osega, Chibi, & Aminu, 2017). The statement that shows cash inflows and outflows of a firm for a specified period is called the cash flow statement. Cash Flow Management means the process of monitoring, analyzing, and adjusting business cash flows which for small

1 businesses, is the most important aspect of cash flow management avoiding extended cash shortages, caused by having too great a gap between cash inflows and outflows. In this twenty-first century of competitive businesses, directors and management in various organizations assumed cash flow management as one of the most important tools for monitoring and controlling the normal functioning of the business (Osega et al., 2017).

Cash flow of a company is a crucial factor that enhances its operations. According to Adelegan (2013), Due to the relevance of cash flows in the company’s operations and performance, corporate organizations need to develop a suitable cash flow mix and apply it in order to maximize shareholders values. Ikechukwu, Nwakaego, and Celestine, (2015) sees cash flows of an organization as those pool of funds that the company commits to its fixed assets, inventories, account receivables and marketable securities” that lead to corporate profit. The ability of the company to effectively choose adequate source of funds to fiancé its operations will differentiate strong cash flow governance and poorly managed cash flows (Adelegan, 2013). For the cash flows to be well structured and effectively utilized, a business firm must be able to devise various ways for selecting the best components of its cashflows which would be used in the company’s operation to raise its productivity or achieve performance. This process should be based on the criteria well drawn up by the finance manager after making a careful financial planning and control for the company (Ikechukwu et al., 2015).

For a business organization, the cash flow statement is one of the four major financial statements included in its annual report. Many cash flow metrics are available and can be derived from this financial statement. One important mean to measure the economic achievements of any entity is its free cash stream (Nobanee & Abraham, 2017). Companies that possess excess free cash flow are perceived to be more rewarding for any financiers who are always on their toes to find out great investment projects, so that they can invest their extra finances in marketplace. Potential financiers and lenders are all the time very eager to invest in businesses with very high surplus cash streams as they mostly appraise any business based on how much financially flexible a firm is and how easily a firm can pay off its credits and loans. If a business is unable to pay its cash loans, then profit earnings and credit reduction cannot be materialized (Kamran, Zhao, & Ambreen, 2017).

Performance can be measured through financial and non-financial performance. Among other non-financial performance can be measured by market share, degree of innovation, and customer satisfaction (Cyril, Lawretta, & Adakole, 2016). While financial measures can be seen through accounting measures such as return on assets, return on equity, EBIT. Profit and profitability are two different terms. Profit means as an absolute measure of earning capacity, while profitability is relative measure of earning capacity. Profit is defined as excess of return over outlay while profitability is defined as “the ability of given investment to earn a return from its use (Cyril et al., 2016). The words profitability is composed of two words profit and ability. The word profit has already been defined but the meaning of profit differs according to the use and purpose of the enterprise to earn the profits. Thus, the word profitability may be defined as the ability of given investment to earn a return from its use. Profitability ratios measure the firm’s ability to generate profits and central investment to security analysis, shareholders, and investors. Profitability is the primary measure of the overall success of enterprise.

The analysis of profitability ratios is important for the shareholders, creditors, investors, bankers, the government etc. Profitability is represented by the ratio of earnings before tax to total assets, a variable that reflects the firms' ability to generate earnings from its assets. The variables that are used to determine the firm's profitability include size, leverage, sales growth, investment and current assets (Lachheb & Slim, 2017). Profitability is a measure of evaluating the overall efficiency of the business. The best possible course for evaluation of business efficiency may be input-output analysis. Profitability can be measured by relating output as a proportion of input or matching it with the results of other firms of the same industry or results attained in the different periods of operations. Profitability of a firm can be evaluated by comparing the amount of capital employed i.e. the input with income earned i.e. the output. This is known as return on investment or return on capital employed (Liang & Gan, 2015).

Cash is more like an organization's engine on which the company runs. If cash management is not up to the standard required, then the company is likely to go bankrupt. Moreover, high profits do not in any way mean that the business enterprise is liquid. Cash flow analysis gives an insight into the core business activities and management decisions on which the company's profitability and sustainability linger (Akbar & Nahr 2015). For companies, often profit is the overriding objective but if cash is not sufficient, the

3 company's growth will slump and there may be a threat to its survival. Hence, cash flow is absolutely critical for the existence and survival of an organization and a company generating healthy cash balances will invariably have high profitability. To put in another way, cash is a need whereas profit is a want (Kadioglu, Kilic, & Yilmaz, 2017).

Effect of cash flow of the performance can be positive or negative. Cash flow has positive effect on performance because improving cash flow also increase company profit. Increasing corporate profits become an indication of good corporate performance. This result supports researches conducted by (Kristianti, 2016). Cash flow negatively effect on performance due to their weak cash flow management within the company so enable managers to pursue personal goals and the exclusion of shareholders' interests. In accordance with the Agency Theory that the agency conflicts arise because of differences of interest between shareholders to the manager. The main task of the manager is to manage the company resulting in a return / profit for shareholders and could increase net profit and cash flow (Kristianti, 2016).

Cash flow and profitability of firms are organizational objectives of interest which go hand in hand the two have a relationship to each other. A healthy cash flow position result in liquidity of a company which helps it sustain its operation resulting in generation of higher profits and prudent re-investment of the profits results in the growth of the firm (Nobanee & Abraham, 2017). Consistent positive cash flow position will facilitate higher profit levels and hence excess cash for investment. These objectives are determined by the strategic direction of the company, the nature of its business, the period of its existence and the influence of the environment around the company for example competition, government policies, customers, and staff among others. Profits reflect cash flow forecasts.

Nairobi Securities Exchange supports trading and clearing settlement of derivatives, debts, equities and five other related securities instruments. It is tasked with the mandate to list firms on the securities exchange and therefore facilitates the trading of securities by various investors. It thus maintains the health of exchange of securities. The Capital Markets Authority regulates the NSE. The structure of the Security exchange market is organized in such a way that allows buying and selling of various available securities. There are well defined regulations and rules that govern the sale and buying of securities. It is also tasked with protecting investors from unscrupulous brokers or firms so as to

4 maintain a high investor confidence in the securities market. Investors are availed with a platform to liquidate their investments in various securities in the market efficiently by the stock exchange. This ability to liquidate their investment efficiently and at minimal cost acts as a big incentive for investments in the NSE (NSE, 2018).

The manufacturing sector has a great potential on promoting economic growth in the country like Kenya. It is the third leading sectors contributing to GDP in Kenya. The sector has experienced the fluctuations over the years under different financial conditions. It experienced the lowest real GDP growth rates in 2008 to 2009 as 1.7 percent in 2008 and improved to 2.6 percent in 2009. In the financial year 2010, the real GDP growth rate was 5.6 percent, revealing the improvement (EAC, 2011). The lack of demand from the domestic market caused depreciation in Shilling and international demand was largely hit by global financial crises which caused the slower growth in the manufacturing sector. In terms of gross domestic product (GDP), the share of manufacturing sector maintained in the last 10 years from 2000-2001 as 10 percent to 2009-2010.

1.2 Statement of the Problem Free Cash flow influences the company’s performance has some problems to both investors and managers of business organizations who are either not aware of the importance of interdependence relationship that exist between investors and business organization. Managers tend to hold large proportion of firm assets in the form of cash and cash equivalents to reinvest on other physical assets, payments to stockholders and to keep cash inside the firm. The problem related to free cash flows was discovered when it was apparent that managers did not invest the free cash flows to the advantage of shareholders rather, they hold it and went for negative NPV projects which worked for their benefits, preferring bonuses and internal projects.

According to Zhou, Yang, and Zhang, (2012) examined the relationship between free cash flow and financial performance evidence from the listed Real estate’s companies in China. They used principal component analysis and regression analysis on the data from 2006-2011 of all listed Real estate companies in China. The study revealed that the free cash flow of a company is negatively linear correlated to its financial performance too much fee flow will lead the financial performance to decline. (Tsuji, 2013) carried out an investigation of comprehensive income and firm performance. The case of the electric appliance industry, of the Tokyo stock exchange. The resources use the data for the fiscal

5 year 2009 to 2011 and employ the pooled regressions (Panel Data regression analysis). The study revealed that cash flow and firm performance have a significant negative relationship. In addition, comprehensive incomes published by the firms were superior to other carryings or cash flow variables used in predicting their future stock returns.

According to Thanh and Ha (2013), carried out an investigation of comprehensive income and firm performance in Vietnam. They used the multiple regression to analyse the data, using a sample of 465 companies listed in Vietnam observed in period 2007 to 2010. The study revealed that firm performance decreases as number of bank relationship increase. Additionally, the study also indicate that cash flow has negative relationship with firms, return on equity, while assets have negative association with return on assets. In another study, Ogbonnaya et al., (2016), assessed the relationship between cash flow and financial performance of listed banks in emerging economies using Nigeria as case study. The study outcome revealed that operating cash flow has a significant and strong positive relation with performance in the Nigerian banking sector. Further results also showed that investing cash flow and financing cash flow had negative and weak relationship. The authors therefore recommended that the Nigerian financial regulatory authorities to scrutinize financial reports of quoted banks in Nigeria and make external auditors use cash flow ratios to evaluate performance for the purposes of helping investors make the right decision

According to Mong’o (2010), analyzed the impact of cash flow on profitability among commercial banks in Kenya over a period of five years from 2005- 2009. It was specifically conducted to explain the influence that various components of cash flows have on profitability growth. The objective of the study was to establish the causality that exists between the profitability and cash flow. This was prompted by the need to unravel the mystery on whether profits are driven by cash flow or the vice versa. This study by Mong’o (2010) relates to the topic of study as the objectives of the study are identical with the same variables in play. These studies did not investigate on the effect of free cash flow and the profitability of manufacturing firms listed on the Nairobi Securities Exchange therefore, this study attempted to fill this pertinent gap on the effect of free cash flow on profitability by firms listed on the Nairobi Securities Exchange.

1.3 General Objective The general objective of the study was to determine the effect of free cash flow on profitability firms in the manufacturing and allied sector listed in Nairobi Securities Exchange for the period 2013-2017.

1.4 Specific Objectives 1.4.1 To examine the effect of Operating cash flows on the Profitability of firms listed in Nairobi Securities Exchange. 1.4.2 To establish the effect of Investing cash flows on the Profitability of firms listed in Nairobi Securities Exchange. 1.4.3 To determine the effect of Financing cash flows on the Profitability of Manufacturing firms listed in Nairobi Securities Exchange.

1.5 Significance of the Study 1.5.1 Investors

This study is of great benefit to investors both foreign and local. Generation of cash is the main factor point for potential investors seeking various stocks. Asset values, dividends and earnings may be vital factors but a firm that is able to generate cash will fuel the growth of these factors. Higher free cash flows should be an indicator of rising or increasing stock prices. One method of determining the profitability of stocks is taking into consideration the ratio of stock price to FCF per share. Having a comparison of a firm’s ratio of price to FCF with those of other companies provides an analysis for relative value compared to the traditional price earnings ratio. Firms that have a low price to free cash flows ratio represent firms that have been neglected at attractive prices.

1.5.2 Government

The findings from this research is beneficial to the government as policy makers. This serves as a guide to them while making policies with regard profitability of manufacturing firms in Kenya as well as the Nairobi Securities Exchange. This finding give light that enable them to make informed decisions on matters appertaining the effect of free cash flow on investment while considering investment decisions and diversification of portfolios to increase profitability.

1.5.3 Scholars and Academicians

This paper is of great value to both academicians and researchers that are intending to use findings of this study as a basis for further research. The study is also be useful since it adds more knowledge on the effect of free cash flow on profitability by firms listed at the Nairobi Securities.

1.5.4 Financial Analysts

Financial analysts and consultants stand to benefit from the findings of this study enable them provide improved financial services especially on investment decisions in order to achieve an increase profitability. Analyst’s choice of all projects that have positive net present value and cost of capital can influence the measurement of FCF. Therefore, unless a standardized metric is agreed upon by academics and professionals, FCF will be more suitable for intra-company analysis, discussion and decision making rather than inter- company comparison. In spite of its limitations FCF is an interesting concept. It provides useful information to all stakeholders. Many investment advisory services and websites explain FCF and some business firms are voluntarily reporting FCF.

1.6 Scope of the study The study used secondary data from the Nairobi securities exchange where information will be obtained for a period of five years for the listed Manufacturing and Allied fims in the Nairobi Securities Exchange.They were nine manufacturing and allied firms in the Nairobi Securities Exchange they include; B.O.C Kenya Ltd, British American Tobacco Kenya Ltd, Carbacid Investments Ltd, East African Breweries Ltd, Mumias Sugar Co. Ltd, Unga Group Ltd, Eveready East Africa Ltd, Kenya Orchards Ltd, Flame Tree Group Holdings Ltd. The period of the study was from January 2019 to March 2019.

1.7 Definition of Terms 1.7.1 Free cashflows

Free cash flow (FCF) is the cash flow generated by a firm’s operations that is available to pay its financial obligations to those that have provided its funding. These include its equity shareholders and its lenders (Liang & Gan, 2015).

1.7.2 Profitability

Profitability has been defined as a measure of how well a firm uses its available resources in the generation of revenues, it provides a guideline that gives a way for future decisions relating to business developments, assets acquisitions and managerial control (Paymaster, 2014).

1.7.3 Nairobi Securities Exchange

Nairobi Securities Exchange is where shares or securities are issued and traded through exchanges or over the-counter markets. (Nairobi Securities Exchange, 2018).

1.7.4 Operating cash flows Cash flows from operating activities are primarily derived from the principal revenue- producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss (Cyril et al., 2016).

1.7.5 Investing cash flows Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company's cash position resulting from investment gains or losses and changes resulting from amounts spent on investments in capital assets, such as plant and equipment (Kristianti, 2016).

1.7.6 Financing cash flows Cash flow from financing (CFF) activities is a category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital (Kamran et al., 2017).

1.8 Chapter Summary The chapter has presented the background of the study, the statement of the problem, general objective of the study, specific research objectives, significance of the study to the different stakeholders, scope of the study and the definition of important terms used in the study. The next chapter discusses the literature review about the three specific objectives, chapter three presents the research methodology that was used in the study.

Chapter four presented the results and findings of the study while chapter five provided the discussion, conclusions, and recommendations of the study to the policy makers.

CHAPTER TWO 2.0 LITERATURE REVIEW 2.1 Introduction This chapter discusses essential issues that form the literature review of the study. It is organized systematically on the effects of effect of free cash flow on profitability. The specific objectives include; to examine the effect of Operating cash flows on the Profitability, to establish the effect of Investing cash flows on the Profitability, to the effect of Financing cash flows on the Profitability and finally, the chapter summary.

2.2 Effects of Operating Cash Flows on Profitability 2.2.1 Cash Flows from Operating Activities

Cash is a vital component of any business and required effective management because even profitable businesses can go bankrupt when they failed to manage their cash effectively, particularly if they operate in rapid-growth or seasonal industries (BDC, 2013), and without which a business may not survive. A firm being profitable does not mean the firm is also solvent since profit is not cash. According to Turcas (2011), the solvency, flexibility and the financial performance of the firm are set on the firm’s ability to generate positive cash flows from the operating, investing and financing activities. Hence, inadequate cash flow planning with regards to operating activities will have a negative impact on the financial performance by lowing cash inflow and increasing cash outflow (Turcas, 2011).

Ambreen and Aftab (2016) investigated the effect of free cash flow on the profitability of firms listed in automotive sector of Germany. The study adopted a descriptive survey that aimed at analysing the effect. Furthermore, the population of the study consisted of dominant and large firms, for simple random sampling method was used and all the firms within the automotive industry had equal chance of being studied, but only 5 firms were comparatively identified for the purpose of study from the population available and notably the secondary data used for the study were extracted from the audited annual reports and financial statements of the firms listed under the automotive industry of Germany for the period of ten years (2007-2016). Consequently, the regression results indicated that there was a positive relationship between the free cash flows and profitability of listed firms. However, Leverage has an inverse insignificant impact on profitability (ROA) and evidence for this comes from testing the proxies (Leverage,

Current asset, Firm size, Capital liquidity, Sales growth, FCF). The findings further denoted R-squared= 0.766504 which substantiates the regression model used for the study is a good predictor, and it explained 76.65% of the variation in profitability (ROA) of the firms.

A study by Liman and Mohammed (2018) examined the impact of operating cash flow and corporate financial performance of listed Conglomerate companies in Nigeria over a period of 10 years (2005 to 2014). Five listed Conglomerate companies from the population of six companies were studied. The study used secondary data collected from the Annual Reports and Accounts of the sampled firms for the period of the study. The data were analyzed using descriptive statistics, correlation analysis as well as regressions techniques to determine the variation in financial performance due to the variation in operating cash flow. A Panel Data Regression Technique was employed since the data has both time series and cross-sectional characteristics. Therefore, OLS and random effects regressions were applied to estimate the study models. The result shows a positive and insignificant impact between Cash Flow from Operating activities and financial performance proxied by ROA while the impact is positive and significant when financial performance was proxied by ROE of the listed conglomerate companies in Nigeria. The control variable Size and Financial Leverage have a positive and negative significant impact on ROA respectively, while their impact on ROE is positive and insignificant. The study recommends that although increasing financial leverage reduces agency cost associated with equity. Listed Conglomerate companies in Nigeria should not rely more on financial leverage because excessive leverage has a negative impact on financial performance and increases risk of bankruptcy. These companies should set a policy so as to keep bankruptcy cost at a lower level and also Management efficiency is required in managing costs, increasing efficiency and financial performance of listed Conglomerate companies in Nigeria.

In the context of financial accounting, operating cash flow is the cash generated from the day to day activities of a business, that is, the flow of cash made available from the core operations of a business entity (Heydari, Mirzaeifar, & Javadghayedi, 2014). Net cash flow from operating activities represent the net increase or decrease in cash and cash equivalent resulting from operations shown in the income statement in arriving at operating profit. In view of the fact that it adjusts for receivable, depreciation and liabilities, operating cash flow may be seen as a more accurate measure of how much a

12 company has generated, in comparison with the conventional profitability measures like net income and that a business entity is characterized by many fixed assets within its books of account, such as machinery and equipment which are more likely to reduce net income as a result of depreciation (Heydari et al., 2014). Nevertheless, the business entity’s operating cash flow would therefore provide a more accurate picture of the company's current cash holdings than the artificially low net income since depreciation is not a cash expense.

Cash flow is an index of the money that is actually received by or paid out by a firm for certain time period (Ambreen & Aftab, 2016). This index is not inclusive of non-cash accounting charges such as depreciation. Cash represents the firm’s vascular system, if it dwindles, the business will not survive. The fact that a firm is profitable does not mean that it is also solvent. The profit is not cash. The solvency, flexibility and the financial performance of the firm are set on the firm’s ability to generate positive cash flows from the operating, investing and financing activities (Turcas, 2011). Cash flows represent all inputs and outputs liquidities and cash equivalents. Liquidities represent cash on hand and demand deposits. Cash equivalents are short-term investments with a liquidity degree that can be easily converted into cash with an insignificant risk of value change. Cash flows are more direct measure of liquidity and a contributing factor in corporate performance. Cash flow information assists its financial statement users in obtaining the relevant information concerning the use of resources of virtually the entire financial resources over a given time period (Omai & Njeru, 2018).

A study by Ambreen and Aftab (2016) investigated the effect of free cash flow on the profitability of firms listed in automotive sector of Germany. The study adopted a descriptive survey that aimed at analyzing the effect. Secondary data used for the study were extracted from the audited annual reports and financial statements of the firms listed under the automotive industry of Germany for the period of ten years (2007-2016). Consequently, the regression results indicated that there was a positive relationship between the operating cash flows and profitability of listed firms. However, Leverage has an inverse insignificant impact on profitability (ROA) and evidence for this comes from testing the proxies (Leverage, Current asset, Firm size, Capital liquidity, Sales growth, FCF). The findings which substantiates the regression model used for the study was a good predictor, and it explained 76.65% of the variation in profitability (ROA) of the firms.

A study by Ikechukwu et al., (2015), which sought to ascertain the effect of cash flow statement on companies’ profitability in Nigeria. The study involved a survey of three Banks; Fidelity bank of Nigeria Plc, first bank of Nigeria Plc and First city monument Bank Plc. Information were obtained from the cash flow statements contained in the Annual reports of these banks in the year 2009-2013. Multiple regression was the Analytical tool used in testing the Hypotheses. The results of the study revealed that Operating and Financing cash-flows have significant positive effect on company’s profitability in the Banking sector of Nigeria. It was also empirically verified that Investing cash flow has significant negative effect on the profitability of these companies under study.

2.2.2 Effect of Financing on Financial Performance

Finance costs refers to interest on long-term debt. Finance costs can further be described by interest coverage ratio. This ratio recognizes the fact that firms nowadays lease assets thus incurring long-term financial obligations in form of finance charges under such lease agreements. Interest coverage ratio, also known as coverage ratio, is a measure of a firm’s capacity to meet its fixed financial charges or interest. It is calculated by dividing Earnings Before Interest and Taxes (EBIT) by interest expense. The reciprocal of this ratio measures a firm’s income gearing. When a firm’s coverage ratio is compared with an accepted industry standard, an investor can gauge that firm’s financial risk (Onyenwe & Ivie, 2017).

It is difficult to predict the tax effect on a firm’s profitability because the impact is dependent on tax deductibility principle of interest or finance charge on debt. Thus, if a firm fails to take advantage of this principle, the tax effect on profitability will be negative. On the other hand, if a firm takes advantage of the principle, the effect will be not significant or positive. According to Kebewar (2012), research on the effect of debt on profitability of 2,240 French non-listed service sector firms for the period 1999-2006, no relationship existed between debt and firm profitability irrespective of the firm size. Other studies with similar findings include: Kanwal and Nadeem (2013) research on the effect of real interest rate on 18 commercial banks listed in Pakistan for the period 2002- 2011.

Studies which exhibited negative relationship between interest paid and firm performance include: effect of interest rate on Return on Equity of listed commercial banks in Nigeria

14 for the period 1990-2013 the influence of multiple taxation on the financial performance of West African Ceramics (Adebisi & Gbegi, 2013). The contention that dividend payment is positively correlated with firm performance is supported by the following researches: Jackline and Ombui (2017) study on tea factories in Kericho, Kenya, profitability is highlighted by using the tax ratio in the regression equation. This ratio is calculated by dividing the tax paid to earnings before interest and taxes.

2.2.3 Effect of Tax on Financial Performance

Taxation of firms’ profits is a widely discussed topic in the field of public finance. Corporate revenue is subject to double taxation. First, profits are taxed at the corporate level and second, at the individual level after dividend has been paid or capital gains realized. Business entities, such as partnerships and sole proprietorships avoid double taxation by passing all profits and losses onto their shareholders (Zucman, 2014).

To understand why taxation in the corporate world is such a contested issue, critics contend that taxation discourages business enterprises from organizing themselves as taxable entities but encourages them to deviate away from socially effective decisions (Annuar, Salihu & Obid, 2014). Those critics argue that ineffective tax system may force firms to incur huge losses. To address this, firms need to embrace a tax system that does not misrepresent or falsify economic efficiency or tamper with an organization’s decision-making process. Proponents of corporate taxation on the other hand argue that business entities are separate entities and should be taxed distinctly from their owners. They also argue that being separate entities, firms should pay a fee and tax for the special privileges they do enjoy. Besides, corporate taxation inhibits shielding of individual income from taxation (Mankiw, Weinzierl & Yagan, 2009).

Several past researches have been done to test the effects of corporate taxation of firms’ performance. Although results of these studies vary from author to author, there is consensus that, to some extent, business taxation affects a wide range of decisions made by business enterprises. Debate still rages on regarding the overall impact of those effects on different economies. According to Gravelle (2014), discussion on corporate taxation is divided into three major issues: Firstly, under whose shoulders does the burden of corporate tax fall-labor, capital or consumers? In addition, what role does corporate tax play in a progressive tax system? Secondly, are distortions associated with excess

15 business tax significant enough? Thirdly, how can income raised from business tax be replaced?

2.2.4 Effect of Inventory on Financial Performance Stock accounts for a considerable proportion of current assets particularly in manufacturing and retail firms. To maintain this, a considerable amount of a firm’s financial resources should be committed to inventory. As a consequence, stock is one of the major components of a business organization’s working capital (Teale, 2015). The certainty or uncertainty of a firm’s growth depends upon the efficiency with which it manages its inventory. Thus, effective stock management in a firm should strive to operate with an optimal level of inventory that will guarantee continued operations within the firm at any given moment (Lwiki, Ojera, Mugenda & Wachira, 2013). Effective inventory management practices improve a firm’s bottom line due to reduced unnecessary investment in working capital. It is therefore imperative that inventory management should be captured as part of every organization’s overall strategic plan (Godana & Ngugi, 2014).

Inventory plays a crucial role in ensuring that a business enterprise remains a going concern lest it loses customers and its revenues will plummet. Prudent stock management reduces unnecessary wastages while at the same time ensuring that materials are available as and when required (Asaolu, Agorzie & Unam, 2012). Effective inventory management also ensures a firm’s survival and maximization of shareholders’ wealth. To be precise, an efficient inventory management guarantees a business enterprise with the balance between liquidity and profitability trade-offs (Aminu & Zainudin, 2015).

Inventory management is viewed as one of the tools that can be used to improve asset productivity, target customers and position a firm’s products in various markets. Effective inventory management may enhance a firm’s competitive ability and market share. Better managed inventories may give a firm a competitive advantage over its competitors thus improving its financial performance (Isaksson & Seifert, 2014). Inventory management is also key to the growth of a business since firm productivity is directly proportional to the volume of production which is further directly related with the quality of the product (Adesuyi, Nwekpa & Bassey, 2017).

2.2.5 Operating Cash Flows and Financial Performance

Operating cash flows affects financial performance of the companies significantly. This implies that firms that have more operating cash flows are in a position to generate higher profits since they can effectively pay their short-term obligations on demand or over a short notice. This operating cash flow levels can be sustained by maintaining short-term marketable securities which can easily and quickly be converted into cash whenever there is need (Ogbonnaya et al. 2016). Operating cash flows are core to the running of the day to day activities of an organization and fulfillment of short-term obligations. Its impact on profitability is evident because it is current activities that translate to future profits. However, managing operating cash flows require a lot of financial discipline, right controls and financial prudence.

A study by Ogbonnaya et al., (2016) which examined the relationship between cash flow and performance in the Banking sector of Nigeria. The study involved a survey of four Banks quoted in the Nigeria Stock Exchange. Data were obtained from the annual report and accounts of selected Banks. The data were subjected to statistical analysis using correlation technique. The result of the study revealed that operating cash flow has a significant and strong positive relation with performance in the Banking sector in Nigeria, it was also reified that investing cash flow and financing cash flow have negative and weak relationship. The study recommends that regulatory authorities should be securitizing their financial statement and also external auditors of the quoted Banks in the Banking sector to use cash flow ratio in evaluating performance which will help investors make good decisions.

2.3 Effects of Investing free cash flows on Profitability 2.3.1 Cash Flows from Investing Activities

The purchase and sale of long term assets form cash flows from investing activities (Ambreen & Aftab, 2016). Cash inflows are associated with the sale of long-term assets such as buildings. On the other hand, cash outflows occur through long term asset purchases. In general, there could be a cash inflow or outflow from investing activities. On the other hand, cash inflows may sometimes be equal to cash outflows. Future investments determine the growth and the chance of survival. As a result, cash is regularly invested in productive assets. Among these assets, property, plant and equipment are essential for growth. Moreover, there could be need for intangibles and

17 long-term securities of other companies (Heydari et al., 2014). As a consequence, useful information could be obtained with respect to management strategy and long-term financial planning. The cash inflows from the sale of long-lived assets occur because of various reasons. In the first place, the amount of cash from operating activities may not be sufficient. In the second place, there may be a good opportunity to dispose of those assets. Alternatively, assets may have completed their economic life, which also requires their removal. Nevertheless, it is important to highlight that selling assets may also arise because of companies’ lack of access to funds. Therefore, this may be regarded as a serious issue for companies (Turcas, 2011).

Cash flow is an essential element of financial management process which is important for the successful performance of business organizations. According to Titman, Keown and Martin (2011), cash flows create value. In addition, they are regarded as a real resource for company expenditures. In this respect, cash can be used for transactions such as the payment of wages, salaries and debt, acquisition of inventory or goods as well as the distribution of profits (Bhandari & Iyer, 2013). Specifically, banknotes and coins mean cash in daily transactions. On the other hand, short term investments and money at banks are additionally considered as an important liquidity source in accounting or financial analysis. Firms’ liquid assets consist of these near-cash assets which are called cash equivalents (Ogbonnaya et al., 2016). Cash equivalent as a short-term, highly liquid investment with an original maturity of less than three months.” The key financial statements provide the essential information for investors and analysts because of the accrual accounting system, which is compulsory for business transactions.

Accrual accounting system is the result of the revenue recognition and the matching principle in accounting. In this system, revenues and expenses are the major elements of income statements. Therefore, it is possible and even certain for a firm to have excessive cash outflows which arises during the fiscal year. This highlights the significance of cash basis accounting, which considers only cash receipts and cash payments in business transactions (Omag, 2016). The statement of cash flows is among the key financial statements which companies should prepare according to the Generally Accepted Accounting Principles. In Turkey, the uniform accounting system accepts the cash flow statement as a supplementary financial report. On the other hand, publicly traded companies prefer the Turkish Accounting Standards in preparing their cash flow

18 statements. Cash flows from financing activities form one of the major parts of this statement as the financial strategies of companies (Omag, 2016).

2.3.2 Investing Cash Flows and Financial Performance

Investment projects require heavy capital outflow, a reason why its returns have to be carefully accounted for in order to yield maximum returns. Thus, it’s important that the firm pays attention to investing cash flows to reap the maximum profits from investments made because of the high capital expenditure associated with investment projects. A study by Gheshlaghi, Ahamdzadeh and Faal (2014), carried out a research on the cash flow statement component effect on management performance using 138 firms listed on the Tehran Stock Exchange for the period of 5 years, 2008 – 2012. Using multiple linear regression on the variables Return on Assets (ROA) and Return on Equity (ROE) as performance measures and the independent variables Cash flow from Financing activities Cash flow from Investing activities, Cash flow from Operating activities and Cash flow from Return on Investment and Interest paid to finance. The research finding shows that there is negative relationship between cash flows from investments activities and return on assets. Also, there is no relationship between cash flows from operational activities and financing activities and return on assets.

Cash flow related to investing reflect how an organization’s cash is used to provide securities. Example include making capital expenditures, acquire property and equipment and to expand. Cash flows from investing activities measure a firm’s investment. This is where investment in other companies and capital expenditures are recorded. Capital expenditure relate to purchase of fixed assets such as plant and machinery. The figure is usually negative when the firm buys more of its assets than it is selling and vice versa (Frank & James, 2014).

Capital expenditure is long term in nature and are usually very large. In order to match revenue with expenses in the Profit and Loss account, firms usually expense capital expenditure over the useful life of the affected asset. It is however important to note that capital expenditure effect on a firm’s cash flows works differently (Beatty & Riffe, 1997). During the initial year of an asset’s purchase, a substantial amount of cash is spent as initial outlay resulting in huge negative cash out-flow. This is good for the firm because it means that the company is spending money to build capacity aimed at expanding its

19 business. However, caution must be taken to ensure that the firm is only investing in worthwhile projects with future growth prospects (Arshad, 2012).

Since revenue is used to finance the purchase of fixed assets in a firm, it is important to ensure that growth in capital expenditure to boost a firm’s capacity matches with revenue growth. Otherwise, the firm may be faced with serious cash flow problems that may spell doom to its survival. Capital expenditure vary from industry to industry. Firms that require large machines for production such as manufacturing firms have higher capital expenditure than firms with a large amount of intellectual property or intangible assets for instance investment firms (Qandhari, Khan & Rizvi, 2016).

Other sources of cash flow from investing activities include; acquisitions and divestitures of subsidiaries, commodity hedges, currency hedges and investment in marketable securities. For financially sound firms, the figure for net cash flow from investing activities should be negative. This means that cash from operations is being driven back into the business for expansion to generate more profits (Omag, 2016). Purchase and sale of fixed assets constitute cash flows from investing activities. Sale and purchase of fixed assets such as buildings yield cash inflows and cash outflows respectively. Generally, cash flows from investing activities could take the form of cash outflow or cash inflow. However, sometimes, cash inflows may equal cash outflows (Lan, 2012).

A firm’s future investments can be used to gauge its growth and survival prospects. Thus, cash is invested in productive assets such as property, plant and equipment. However, there is also the need to invest in intangible assets and long-term securities of other firms. Consequently, long-term financial planning becomes crucial towards this end (Omag, 2016). Fixed assets may be sold to top up cash from operating activities or a better opportunity has arisen to dispose those assets. Alternatively, assets useful economic life may be over and urgent replacement is needed. Nonetheless, a firm may sell its assets to raise funds for expansion instead of going for debt or equity (Frank & James, 2014).

The economic sustainability of any firm is gauged by its ability to carefully monitor and manage its cash flow. The introduction of cash flow statements to replace funds flow statements is an improvement on the information made available to investors and other stakeholders who rely on this information for decision making. Cash is an important factor that has a direct relationship with a firm’s survival. Cash flow statements is a crucial financial report used to assess management ability to run an organization. It is an

20 accounting concept used to describe to inflow and outflow of cash within a firm. Inflow represents cash receipts whereas outflow represents cash expenditure (Kroes & Manikas, 2014).

Cash flow statements provide its users with information regarding the source and use of the entire financial period. According to Hamza, Mutala and Antwi (2015), a high cash flow permits a firm to expand its operations, replace worn out assets, take advantage of opportunities existing in the market, and pay dividend to its shareholders. It is important to note that creditors are concerned about a firm’s liquidity to settle their short-term maturing obligations. However, long-term investors such as bondholders are interested in a firm’s ability to generate enough cash flow in the medium-term and long-term to service associated debt.

Baveld (2012) investigated working capital management in the Netherlands. A sample of 37 out of the 50 largest firms in the country was used. Working capital management policies during the non-crisis period of 2004-2006 were compared with the policies during the crisis between 2008 and 2009. The findings of the study indicated that during crisis, Dutch firms did not need to change their policies on creditors and stock but needed to change policy on debtors to improve profitability. This is because, in the short-term, during crisis, debtors are positively correlated with the firm’s next year profits. In the long-term, benefits accrued from the short-term will grow due to the existence of future sales. Besides, risks taken by the aiding companies are low and relatively cheap for the large firms.

Ebrahimi and Chadegani (2011) studied the link between different earnings and cash flow measures of performance and stock returns among Iranian firms. Simple and multiple regression was used to analyze data for a nine-year period from 2003 to 2011. The study showed that firm performance and cash flows are significantly negatively correlated. Besides, earning based measures are more correlated with stock returns and portray a firm’s performance better than cash flow measures in some firms with higher accruals.

Hau (2017), study on effect of free cash flows on performance of manufacturing and real estate firms listed in Vietnam. The study revealed a positive relationship between cash flows and firm profitability in all sectors. However, the correlation was different among firms with and without investment opportunities. This is consistent with the free cash flow theory. Tu, Son and Khanh (2014) researched on the effect of Banking Relationship

21 on performance of Vietnam firms. Multiple regression was used to analyze data. 465 listed Vietnamese firms were sampled for the period 2007-2010. It was established that firm performance was inversely proportional to the number of bank relationships. In addition, cash flow is negatively related with firms’ ROE, while assets were negatively associated with ROA. Tsuji (2012), investigated about the relationship between comprehensive income and firm performance. The case involved Japanese electric appliances industry firms listed at the Tokyo Stock Exchange for the period 2009 to 2011. It was established that the relationship between cash flow and firm performance was significantly negative. In addition, income statements published by these companies predicted their future share returns better than their earnings or cash flow variables.

Arunkumar and Ramanan (2013) study on the effect of working capital management on manufacturing firms in India. Five-year data was sampled for 1,198 listed firms in India. The relationship of debtor’s turnover, stock turnover, creditor’s turnover, current ratio, quick ratio to total assets, assets turnover, financial assets to total assets, and return on assets were employed in the study. It was established that the various components of working capital management were significantly correlated with firms’ profitability.

Tijjani and Sani (2016), examined the effect of cash flow on dividend changes in Nigerian oil and gas companies. Firms were sampled for twelve-year period 2003-2014. The study revealed that free cash flow and dividend policy were positively correlated. Javed and Shah (2015) scrutinized the effect of retained earnings on share returns of food and personal care good firms listed in the Karachi Stock Exchange. Data was analyzed using Spearman’s correlation and simple regression methods of seven active firms for the period 2009-2014. The study found out that retained earnings and dividends paid were insignificantly related. But retained earnings were positively correlated with closing stock price. The study concluded that generally, retained earnings and stock returns were insignificantly or negatively related.

Chatterjee (2012), researched on the effect of working capital on the profitability of sampled 100 Indian firms quoted on the Bombay Stock Exchange for a two-year period 2010-2011. The following components of working capital management were used; average collection period, stock turnover in days, creditors payment period and the cash conversion cycle. Liquidity ratios used were the current ratio and quick ratio. Profit after tax was used as the dependent variable. The results depicted that cash conversion cycle

22 and liquidity ratios are inversely proportional to firms’ profitability. Chude and Chude (2015), study on the relationship between income tax and firm profitability of companies in Nigeria established that the two variables are significantly related. Secondary data was used for the listed firms.

2.4 Effects of Financing Cash Flows on Profitability 2.4.1 Cash Flows from Financing Activities

This is the third part of the statement of cash flows. Before explaining these activities, it is important to understand what financing means. Financing is the process of acquiring capital to fund a start-up, an expansion, basic operations or whatever else the company needs the extra funds for.” Financing could be either internal or external. Retained earnings are the resources for internal financing. However, external financing involves two key resources which are equity and debt. The sale of company shares to investors provides cash. Whereas, loans and the sale of bonds constitute the methods for debt financing. Consequently, financial markets should be used for external funds (Chughtai, Riaz, Noor, & Zafar, 2011). Cash flows from financing activities is defined as the remaining of activities that cannot be classified either as operating or investing. Precisely, cash investments of company owners, cash repayments of loans, cash dividends received by shareholders and the supply of stocks or bonds constitute these cash flows.

Cash investments of company owners refer to share repurchases which arise due to their sale by some shareholders. There are various reasons for this to occur. Firstly, there could be a decrease in share prices which provides a good opportunity for share acquisitions. Secondly, these shares could be a part of company strategy to protect itself from hostile takeovers. Thirdly, they could be given to key executives for additional compensation. Cash repayments of loans exist as a result of the loans which are provided for companies. In this respect, cash is necessary in satisfying the expectations of creditors. As a result, they influence financing activities adversely. On the other hand, cash dividends are one of the ways to utilize money in companies. Therefore, they have the same effect as cash repayments on cash flows from financing activities. Financing activities may produce cash inflows or outflows which are affected by financial strategies of companies. For instance, in the period of expansion, cash inflows are usually observed since there could be insufficient cash flows from operating activities which requires the sale of shares or

23 debt securities for the maintenance of company operations (Ebrahimi, & Aghaei Chadegani, 2011).

In contrast, operations need relatively lower amount of financing in the period of maturity. More specifically, the supply of stocks or bonds in financial markets could be regarded as the essential cash resources for firms. Furthermore, there are cash outflows related to financing activities of the companies listed on Istanbul Stock Exchange 100 Index. As a result, companies’ financial structure or the exchange of cash between the firm and its shareholders and creditors could be clearly observed by examining this part of the cash flow statement (Vause, 2015). In Turkey, most companies use their retained earnings and short-term bank credits for financing because of the insufficiency of long- term resources in capital markets. These resources are mostly used by the government through the issuance of government bonds due to budget deficits (Aclan, 2016). Therefore, companies, which have access to long-term resources, could be regarded as financially strong. The amount of these resources might be observed in financial statements. In this respect, cash flow statements help analysts to understand the use of long-term and short-term financial resources on cash basis.

A study by Paymaster and Oyadonghan, (2014), examined the relationship between cash flow and corporate performance in the Food and Beverages sector of Nigeria. The study involved a survey of Six Food and Beverages companies quoted in the Nigerian Stock Exchange. Data were obtained from the annual report and accounts of the selected companies under study. The relevant data were subjected to statistical analysis using the multiple regression technique. The results of the study revealed that operating and financing cash flows have significant positive relationship with corporate performance in the Food and Beverage Sector of Nigeria. It was also empirically verified that investing cash flow and corporate performance have significant negative relationship.

Financing activities relate to activities attributed to acquisition of capital to finance start- ups, expansion or financing of any other activity that the business organization needs extra funds for. Financing could take the form of internal or external source of financing. Retained earnings form the basis of internal financing while equity and debt financing form the basis of external financing. Cash may be obtained by selling company shares to investors. Sale of bonds on the other hand constitute debt financing by the firm. Thus, such funds are raised through financial markets (Omag, 2016).

Cash flows from financing activities may be defined as cash flows from those activities that are neither operating nor investing. To be specific, they include, loan repayments, investment by firm owners, dividends received by firm owners and supply of bonds or stocks. Cash investments by firm owners entail repurchase of shares due to sale by some shareholders. Share repurchase may occur due to the following reasons; firstly, scramble for shares by investors due to decrease in price. Secondly, as part of the wider strategy by the company to protect itself from possible hostile takeover. Thirdly, they could be used as additional compensation to a firm’s key executives (Sayari & Simga-Mugan, 2013). Loan repayment involves servicing of debt to satisfy creditor interests hence influencing financing activities adversely. It is worth noting that payment of cash dividends has the same effect as payment of cash as a financing activity.

Cash flows from financing activities are normally affected by a firm’s financial strategies. For instance, during expansion period, attention must be paid to cash inflows to avoid possibilities of experiencing insufficient cash flows from operating activities for the sustenance of firm operations. However, during periods of maturity, operations require comparatively lower amount of financing. Debt and equity are essential cash resources for any firm. In as far as financing of firms are concerned, cash flow patterns are dictated by business cycles. According to Omag (2016), the study found out that there are cash outflows associated with financing activities. Consequently, exchange of cash between a firm and its shareholders or creditors for that matter, could be observed by probing this portion of the cash flow statement. Studies in recent years have shown that, most firms use short-term loans and retained earnings to finance their activities because long-term resources are not sufficient in the capital markets. Governments take this advantage to issue government bonds to address the issue of budget deficits in their budgets. Thus, firms which are accessible to long-term resources, could be regarded as financially stable. The exact amount of these resources may be observed in the financial statements of the relevant firms (Caprio & Demirgu-Kunt, 1998).

According to Tariverdi and Teimoory (2013), cash ﬂows from ﬁnancing activities is made up of three major transactions: share transactions, debt transactions and dividend transactions. Although cash is received when a firm issues stock, ownership is diluted. Raising capital through issue of additional stock is not a bad thing per se so long as the firm is not expanding at unacceptable rate. It is also important to note that when additional shares are sold in a firm, less income is attributable to stockholders. Stock

25 repurchase increases shareholders’ ownership in a firm but decreases cash. When debt is issued, a business enterprise receives cash that is repayable later. The period between debt issuance date and debt repayment date, interest is being paid. Repayment of debt issued is considered a cash outflow. Interest payment is not a financing activity but an operating activity which is considered as a normal business operation. Interest expense however is not further broken out in the operating activities section of the cash flow statement because it is already computed into net income.

Dividend payments are outflows because it entails cash payment to a firm’s shareholders. Stockholders view firms that pay out dividends positively than those firms which do not pay out dividends (Budagaga, 2017). A decrease in dividend payment is often viewed as a signal that a firm is faced with a myriad of problems, particularly if the downward trend is not directly proportional with the reduction in the number of outstanding shares. It is however not uncommon for a firm not to pay dividends. Firms experiencing significant growth may opt not to pay dividends to their shareholders but invest the extra income that would otherwise be distributed and paid as dividend in projects aimed at expanding their business. The figure for the net cash from financing activities may be used to gauge its effect on a firm’s overall cash flow position. However, a study of how a firm raising cash or repaying cash for the individual line items is more important (Budagaga, 2017).

Andani and Al-hassan (2007) describe financing as the process of acquiring capital to fund a start-up, an expansion, basic operations or whatever else the company needs the extra funds for. Financing could take the form of either internal or external. Retained earnings is the major source of internal financing. Debt and Equity are the major sources of external financing. Cash is obtained from sale of firm shares to investors. Sale of long- term securities and loans constitute debt financing. Thus, security markets are good avenues to be used to raise external funds from the public (Dagar, 2014).

According to Omag (2016), cash flows from financing activities is defined as “…the remaining of activities that cannot be classified either as operating or investing”. Specifically, it is composed of shareholders’ cash investments, cash used to service debt, cash dividends paid to shareholders and the supply of shares or long-term securities (Lan, 2012). Shareholders’ cash investments refer to stock repurchases due to their sale by some stockholders (Liu & Wang, 2015). Sale of shares may arise due to the following reasons namely; decrease in share price which encourages share purchase, purchase of

26 shares as a strategy to protect a firm from possible hostile takeover and shares could be given to firm executives as compensation (Schwert, 2000).

Servicing of loans through interest payment is due to long-term loans advanced to companies. Thus, cash becomes necessary to satisfy creditors’ expectations. Consequently, a firm’s financing activities are adversely affected. Cash dividends on the other hand can be used as a means of utilizing money in a firm. Their effect is similar to the influence cash repayments have on financing activities cash flows (Attah-Botchwey, 2014). Financing activities may result in cash outflows or inflows which are affected by a firm’s financial strategies. For example, during firm expansion, lack of adequate cash inflows may compel a firm to sale securities or bonds for the maintenance of firm operations. However, during maturity stage, firm operations require comparatively lower amount of financing. Supply of securities in financial markets is an essential source of cash for firms (Gambacorta, Yang & Tsatsaronis, 2014). Cash flow patterns may be described by considering business cycles (Nyamache, Nyambura & Mishra, 2013).

In Turkey, most firms use internal sources of financing and short-term debt because long- term financing sources are insufficient in the capital market. The government heavily borrows from the securities market through issuance of treasury bonds to bridge its budget deficits. Therefore, it is only a few financially stable firms that could compete with the government for long-term financing through the securities market (Eroglu & Picak, 2011). The amount of these resources could be observed in the financial statements. Hence, cash flow statements help financial analysts to comprehend the use of short-term and long-term financial resources of a firm on cash basis (Motlagh, 2013). To evaluate the effect of cash flow on financial performance of investment firms listed in the Nairobi Securities Exchange, the study will use net cash flows from operating activities, investigating activities and financing activities as the independent variables. The dependent variables to be used as proxies for profitability are net operating income and return on equity.

2.4.2 Effect of Debt on Return on Assets

Explaining role of financing activities in firms’ financial performance is one of the key objectives of modern research. However, this role has remained a questionable subject and it has continued attracting the attention of many researchers. Researchers have analyzed the debt equity ratio with the aim of establishing whether an optimal mix of debt

27 and equity and other sources of financing exist or not. Optimal debt equity ratio aims at minimizing the cost of capital for a firm, while at the same time maximizing the value of a firm. Thus, it is a ratio that maximizes the profitability of a firm (Kebewar, 2012).

Scholars have come up with three theories to describe the effect of debt on firm profitability namely; signaling theory, agency theory and influence of tax. According to the signaling theory, the relationship between debt and equity is positive under circumstances of information asymmetry. According to the agency costs theory, debt is positively correlated with firm profitability due to agency costs of equity that exists between shareholders and managers. This relationship is however negative due to agency costs of debt that exist between firm owners and lenders. Lastly, the effect of taxation on corporate profitability is difficult to predict since it is affected by various factors such as income tax rate, non-debt tax advantage and the principles of tax deductibility of interest (Mostafa & Boregowda, 2014).

Inverse relation between debt and profitability was confirmed by Kebewar (2012), Shubita & Alsawalhah (2012) and Yoon & Jang (2005). On the other hand, Alkhatib (2012) found a positive effect while Bhutta and Hasan (2013) revealed both influences in its studies. Several reasons may be attributed to differences in empirical study results. For instance, use of different sample types, use of different measures of profitability as the dependent variables and varying independent variables. Lastly, the studies adopted different research methodologies.

2.4.3 Effect of Net profit on Profitability

Net Profit is income left available to a firm after preference dividend has been paid to shareholders. The discretion to pay retained earnings lies with a firm’s directors despite the fact that they belong to the firm owners (Thirumalaisamy, 2013). For a loss, making firm, retained earnings equals accumulated losses. These losses are cumulative since a firm’s incorporation. It is therefore possible for an organization to have retained income despite recording losses over some time (Javed & Shah, 2015). Previous empirical studies revealed that retained earnings are positively related with firm performance measured in terms of share price (Ebrahimi & Chadegani, 2011). However, Thuranira (2014), study on the same revealed a negative relationship. Jagongo and Mutswenje (2014) on the other hand, argue that shareholders invest in securities mainly for speculative purposes. The study further argues that if a firm retains reasonable amount of profits as retained

28 earnings, such a firm stands a higher chance to grow and report an improvement in its share price in the securities exchange market. Other studies in which a positive relationship was found to exist between retained earnings and corporate performance measured in terms of share price include: Al-Debi’e and Al-Rai (2012) and Javed and Shah (2015).

2.5 Chapter Summary Cash flow has a great influence on profit of firms. This implies that increase in financing cash flows by way of either borrowing or floating equity to the market positively contributes to the profitability as the company is able to meet its liquidity needs which is essential for day to day operation and overall growth of a firm. The next chapter presented the research methodology that was used in conducting the study.

CHAPTER THREE 3.0 RESEARCH METHODOLOGY 3.1 Introduction This chapter explains the various stages and phases that was followed in researching study. It is a blueprint for the design, collection, measurement and analysis of data. It gives the plan and structure envisaged to aid in answering the research questions. Specifically, research design, target population, data collection instruments, data collection procedures and finally data analysis and presentation.

3.2 Research Design The study adopted a descriptive survey in analyzing the effect of free cash flow on the profitability of manufacturing firms listed at the Nairobi Securities Exchange. Descriptive research, also known as statistical research, describes data and characteristics about population or phenomenon being studied. According to Fetters, and Creswell (2013), a descriptive survey was used to obtain information concerning the current status of the phenomena to describe with respect to variables or conditions in a situation. The methods involved ranging from the survey which describes the relationship between the variables under the study.

Descriptive research design assisted the researcher establish the relationship between free cash flows and financial performance of firms in the study. This research used the net cash flows from operating activities, investing activities and financing activities as the independent variables. The dependent variables included profit after tax and return on assets.

3.3 Population and Sampling Design 3.3.1 Population

According to Kamau, Ngechu, Haile, and Mwitari, (2014), population is well-defined or set of people, services, elements, events, group of things or households that are being investigated. The study adopted the use of secondary data from the Nairobi securities exchange where information was obtained for a period of five years for the listed Manufacturing and Allied companies in the Nairobi Securities Exchange.They were nine manufacturing firms in the Nairobi Securities Exchange which include; B.O.C Kenya Ltd, British American Tobacco Kenya Ltd, Carbacid Investments Ltd, East African Breweries Ltd, Mumias Sugar Co. Ltd, Unga Group Ltd, Eveready East Africa Ltd, Kenya Orchards

Ltd, Flame Tree Group Holdings Ltd. The period of the study was as from January 2019 to March 2019. The population was picked for the study because the information is readily available from the audited financial statements for the last five years.

3.3.2 Sampling Design

3.3.2.1 Sampling Frame

A simple definition of a sampling frame is the set of source materials from which the sample is selected. The definition also encompasses the purpose of sampling frames, which is to provide a means for choosing the members of the target population that are to be interviewed in the study (Fowler, 2013). For this study, the sampling frame was sourced from all the nine listed manufacturing companies in the Nairobi Securities Exchange.

3.3.2.2 Sampling Technique

Sampling technique is a procedure of selecting part of population on which research can be conducted, which ensures that conclusions from the study can be generalized to the entire population. The researcher adopted the use of census sampling technique. The study used census technique for all the nine listed firms in the manufacturing sector for the chosen study. McMillan (2014), define a census as a study where all members of the population take part in a study. Census increases the level of accuracy and reliability of a study.

3.3.2.3 Sample Size

A sample is a finite part of a statistical population whose properties are studied to gain information about the whole population (Mugenda & Mugenda 2008). When dealing with people, it can be defined as a set of respondents (people) selected from a larger population for the purpose of a survey. The sample size included all the listed nine manufacturing and allied firms in the Nairobi Securities Exchange.

The method that was used to decide on a given number or all the elements from the population to represent the whole population in research is referred to as sampling technique. More often than not, a researcher was required to decide on the appropriate and representative sample size to be used in the study (Winter, 2013). Since the study

31 adopted census sampling technique, all the manufacturing firms listed in the Nairobi Securities Exchange was used in the study. The Nairobi Securities Exchange was used as the source of the sample frame for the study. According to Etikan, Musa and Alkassim (2016), total population sampling is defined as the study which includes all members of the population in the study. Census survey improves the accuracy and reliability levels in a study.

3.4 Data Collection Methods According to Creswell (2003) distinguishes basic sources of data; questionnaire, secondary data, observations, interviews, documents, audio-visual materials. The study used secondary data which was extracted from audited annual reports and financial statements of manufacturing firms sourced from Nairobi Securities Exchange and Companies websites for a period of five years (2013 –2017). The annual financial statements included: the statement of comprehensive income, the statement of financial position and the cash flow statement. The research compared the free cashflows on the financial performance of manufacturing firms listed in the Nairobi Securities Exchange. Secondary data was obtained from the annual financial reports. Using both forms of data is selected to gain a more thoroughly understanding of the effect of cashflows on the profitability of manufacturing firms.

3.5 Research Procedures Research procedures are guidelines used by the researcher to conduct study. It includes; data collection procedures, correct sampling of respondents, ethical permission seeking among others (Creswell, 2013). The study begun with seeking approval from the finance managers of the all the eight listed manufacturing firms to conduct the study. The researcher tested the correlation between free cash flows and financial performance using financial information obtained from manufacturing firms. The researcher sought permission from the research office for consent to carry out the study on the manufacturing firms listed in the Nairobi Securities Exchange. Quantitative data from financial statements of manufacturing firms was used to determine operating cashflows, investing cashflows and financing cashflows.

3.6 Data Analysis Methods Data analysis is the process of bringing order, structure and meaning to the mass of information collected (Mugenda & Mugenda,2008). The data was collected, coded and

32 input to SPSS (Statistical Package for the Social Sciences Ver.25) for analysis. Descriptive statistics was used in terms of mean, and standard deviation. Inferential statistics was used to draw conclusions about the effect of free cashflows on profitability of manufacturing firms using a regression model.

Y= βο + β1X1 + β2X2 + β3X3 + e Where: Y= Profitability βο = constant

X1= Operating Cashflows

X2= Investing Cashflows

X3= Financing Cashflows e= Standard error term. β1, β2, β3, β4 = Regression coefficients.

Comparison and analysis of ratios was used to determine the effect of cashflows on profitability. To establish the relationship among the different variables in the study, a paired t-test at 5% significance level was conducted on the mean of return of assets, return of equity. The ratios return on assets, free cash flow, return on equity was calculated. The analyzed data was presented by use of tables. The presented data was then used to make conclusions which was in turn formed the basis for recommendations.

3.7 Chapter Summary The chapter presents research methodology that was used by the researcher. The chapter also discusses research design, population and sampling, data collection, research procedure and data analysis methods. Chapter four presented results and findings of the study.

CHAPTER FOUR 4.0 RESULTS AND FINDINGS 4.1 Introduction The presents the results and findings of the study collected from the financial reports such as the statement of the financial position, income statement, and statement of cashflows obtained from the Nairobi Securities Exchange. The chapter is organized into difference sections; gave background information for the listed manufacturing companies; the next section discusses operating cash flows and financial performance, investing cash flows and financial performance, and financing cash flows financial performance. the last sections give the summary of the study.

4.2 Background Information The purpose of the research was to determine the effect of cash flow on financial performance of Manufacturing firms listed on the Nairobi Securities Exchange. The specific objectives of the study were; the effect of operating cash flows, effect of investing cash flows and the effect of financing cash flows on firms’ profitability. The Manufacturing firms under examination were; the dependent variables representing profitability were the profit after tax and return on equity.

4.2.1 B.O.C Kenya Ltd

The principal activity of the Group is the manufacture and sale of industrial gases, medical gases and welding products.

4.2.2 British American Tobacco Kenya Ltd BAT Kenya is a strategic manufacturing hub, exporting tobacco products to thirteen countries in Africa, cutting across the East African Community (EAC) and the Community of East and Southern Africa (COMESA). It generated approximately Kshs. 8.8 billion in export sales in 2016 and Kshs. 9.9 billion in 2015.

4.2.3 Carbacid Investments Ltd

The company is an investment & Holding company with three subsidiaries. The principal activities of Carbacid (CO2) Limited involve the mining and sale of Carbon dioxide gas while Goodison Twenty-Nine Limited and Goodison Forty-Seven Limited are investment companies.

4.2.4 East African Breweries Limited

East African Breweries Limited (EABL) is East Africa’s leading branded alcohol beverage business with an outstanding collection of brands that range from beer, spirits and adult nonalcoholic drinks (ANADs) reaffirming our standing as a total adult beverage (TAB) company. With breweries, distilleries, support industries and a distribution network across the region, the group’s diversity is an important factor in delivering the highest quality brands to East African consumers and long-term value to East African investors.

4.2.5 Mumias Sugar Co. Ltd

The principal activities of the company are the production and sale of sugar, ethanol, water and the generation and sale of electricity.

4.2.6 Unga Group Ltd

Unga Group Limited is a Kenya-based holding company that has a majority shareholding in companies involved with the manufacture and marketing of a broad range of human nutrition, animal nutrition and animal health products. 4.2.7 Eveready East Africa Ltd

Eveready East Africa is a Kenyan manufacturer and marketer of battery brands.

4.2.8 Kenya Orchards Ltd

The manufacturer currently produces food products.

4.2.9 Flame Tree Group Holdings Ltd

FTG Holdings Ltd - Flame Tree is a leading regional manufacturing Group. It operates in fmcg, plastics and trading, with a brand portfolio that includes Roto Tanks, Jojo Tanks, Rino Tanques, Zoe, Cerro, Alana, Beauty Plus, Blackangel, Miss Africa, Suzie Beauty, Siora, Happy’s, Chigs, Nature's own, Gonuts, HoneyComb, and Buildmart

4.3 Effects of Operating Cash Flows on Profitability 4.3.1 B.O.C Kenya Ltd Net Operating Cashflows, ROE and ROA

The study sought to understand the operating cashflows and financial performance of B.O.C Kenya Limited. The results of the study show that there was a decline of financial

35 performance as measured by return on equity and return on assets. In the year 2013 ROE was at 13% and ROA was at 28%, which declined to 2% for ROE and ROA as 2% in the years 2017. The Table 4.1 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA. Table 4.1: B.O.C Kenya Ltd Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 139,192 35% 28%

2014 103,325 -13% -10%

2015 207,104 4% 3%

2016 84,602 7% 6%

2017 175,540 2% 2%

4.3.2 BAT Kenya Ltd Net Operating Cashflows, ROE and ROA

The study sought to understand the operating cashflows and financial performance of BAT Kenya Limited. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 74% and ROA was at 36%, which declined to 70% for ROE and ROA as 30% in the years 2017. The Table 4.2 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.2: BAT Kenya Ltd Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 3,420 74% 36%

2014 4,781,110 73% 38%

2015 3,930,350 73% 41%

2016 5,161,435 72% 40%

2017 4,713,472 70% 30%

4.3.3 Carbacid Investments Ltd Net Operating Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of Carbacid Investments Ltd. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 43% and ROA was at 42%, which declined to 11% for ROE and ROA as 10% in the years 2017. The Table 4.3 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the company. Table 4.3: Carbacid Investments Ltd Net Operating Cashflows, ROE and ROA

Years Net Operating Cash Flows ROE ROA

2013 447,301 43% 42%

2014 533,344 37% 36%

2015 560,378 16% 13%

2016 374,074 10% 8%

2017 326,574 11% 10%

4.3.4 EABL Net Operating Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of East African Breweries Ltd. The results of the study show that there was an increase of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 54% and ROA was at 14%, which increases to 84% for ROE and ROA as 45% in the years 2017. The Table below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.4: EABL Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 8,302,865 54% 14%

2014 6,193,290 75% 19%

2015 14,526,842 71% 22%

2016 18,577,235 93% 47%

2017 13,914,471 84% 45%

4.3.5 Mumias Net Operating Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of Mumias sugar Ltd. The results of the study show that there was a decrease of profitability as measured by return on equity and return on assets. In the year 2013 ROE was at -11% and ROA was at -5%, which decreased to -90% for ROE and ROA as -37% in the years 2017. The Table below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.5: Mumias Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 932,444 -11% -5%

2014 801,431 -26% -12%

2015 -662,594 -79% -183%

2016 (2,675,076) 20% 76%

2017 (2,359,580) -90% -37%

4.3.6 Unga Group Net Operating Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of East African Breweries Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 17% and ROA was at 9%, which decreased to 5% for ROE and ROA as 4% in the years 2017. The Table 4.6 below shows the findings of the study for net

38 operating cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.6: Unga Group Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 411,617 17% 9%

2014 469,489 35% 32%

2015 505,450 42% 38%

2016 666,294 6% 6%

2017 1,595,319 5% 4%

4.3.7 Eveready East Africa Net Operating Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of Eveready East Africa Ltd. The results of the study show that there was an increase of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 12% and ROA was at 5%, which increases to 50% for ROE and ROA as 47% in the years 2017. The Table 4.7 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the firm.

Table 4.7: Eveready East Africa Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 191,384 12% 5%

2014 (146,233) -79% -19%

2015 1,196 73% 39%

2016 (107,475) -40% -73%

2017 (253,632) 50% 47%

4.3.8 Kenya Orchards Ltd Net Operating Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of Kenya Orchards Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 97% and ROA was at 22%, which decreased to 24% for ROE and ROA as 5% in the years 2017. The Table 4.8 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the firm.

Table 4.8: Kenya Orchards Ltd Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 (317,395) 97% 22%

2014 (282,720) -16% -74%

2015 271,639 50% 46%

2016 (1,974,352) 59% 9%

2017 4,055,857 24% 5%

4.3.9 Flame Tree Group Holdings Ltd Net Operating Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of Flame Tree Group Holdings Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 74% and ROA was at 124%, which decreased to 4% for ROE and ROA as 83% in the years 2017. The Table below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the Flame Tree Group Holdings Ltd.

Table 4.9: Flame Tree Ltd Net Operating Cashflows, ROE and ROA

Years Net operating cash flows ROE ROA

2013 107,183,594 74% 124%

2014 (11,210,914) 39% 56%

2015 130,973,685 38% 53%

2016 39,908,812 51% 83%

2017 (38,239,984) 4% 8%

4.3.10 Correlations between Operating cash flows and Return on Assets Pearson Correlation Coefficient is the most widely used method of measuring the degree of relationship between two variables. The coefficient ranges from -1 to +1 with correlation coefficient of -1 indicating a perfect negative correlation, 0 indicating no correlation while +1 indicating there was perfect positive correlation between the two variables. The Pearson correlation of independent variable versus the dependent variable was computed and the results are shown in the Table 4.10 below. The correlation between independent variable operating cash flows and dependent variable return on assets was (r=0.899, p-value=0.000). Therefore, there was a strong positive and statistically significant relationship between operating cash flows and return on assets as a measure of financial performance.

Table 4.10: Correlations between Operating cash flows and Return on Assets

Operating Return on Assets cash flows Return on Assets Pearson Correlation 1 .899** Sig. (2-tailed) .000 N 45 45 Operating cash flows Pearson Correlation .899** 1 Sig. (2-tailed) .000 N 45 45 **. Correlation is significant at the 0.01 level (2-tailed).

4.3.11 Regression Analysis between Operating Cashflows and ROA Regression analysis was used to model, examine, and explore the relationships between the independent variable’s dependent variable. The dependent variable financial performance (ROA) used for the study is important in measuring the extent to which changes in one or more variables jointly affected changes in another variable. This shows the summary of the regression analysis as shown in the regression model below. Below are the findings in the Table. The table shows the coefficient of correlation (R-squared) of 0. 809.. The coefficient of determination indicates that Operating cash flows explain 80.9% of return on assets of manufacturing and allied firms in the NSE whereas 19.1% to be influenced by other factors that was not captured in this model of the study.

Table 4.11: Model Summary for Operating cash flows and ROA

Model Summary

Std. Error of the Model R R Square Adjusted R Square Estimate 1 .899a .809 .805 .03878 a. Predictors: (Constant), Operating cash flows

The Table 4.12 below shows the ANOVA result for the effect of operating cash flows on return on assets of Manufacturing and allied firms in Kenya. The F-value of the ANOVA was found to be 203.219 while p-value was 0.000 which is < 0.05. These results indicated that the model is statistically significant. Consequently, Operating cash flows collectively have a significant effect on return on assets of Manufacturing and allied firms in the NSE. Hence, Operating cash flows is good predictors of financial performance for the listed firms.

Table 4.12: ANOVA between Operating Cash Flows and ROA

ANOVAa Sum of Model Squares df Mean Square F Sig. 1 Regression .306 1 .306 203.219 .000b Residual .072 43 .002 Total .378 44 a. Dependent Variable: Return on Assets b. Predictors: (Constant), Operating cash flows

The researcher conducted regression analysis to determine the relationship between Operating cash flows and return on assets of Manufacturing and allied firms in the NSE. The results of this analysis are as provided below in Table. According to this model when Operating cash flows is at zero, return on assets will have a score of 1.073. The results in Table 4.13 indicated that Operating cash flows has a significant positive effect on return on assets of Manufacturing and allied firms in the NSE because the p-value is less than 0.05. These results imply that a unit increase in Operating cash flows could result to increase in ROA by 0.160. From the Coefficients the regression model can be derived from the unstandardized coefficients as follows; ROA = 1.073 + 0.160 Operating cash flows.

Table 4.13: Regression Coefficients between Operating cash flows and ROA

Standardized Unstandardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) 1.073 .007 159.840 .000 Operating .160 .011 .899 14.255 .000 cash flows a. Dependent Variable: Return on Assets

4.4 Effect of Investing Cash flows on Financial Performance 4.4.1 B.O.C Kenya Ltd Net Investing Cashflows, ROE and ROA

The study sought to understand the net investing cashflows and financial performance of B.O.C Kenya Limited. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 35% and ROA was at 28%, which declined to 2% for ROE and ROA as 2% in the years 2017. The Table 4.14 below shows the findings of the study for net investing cashflows and financial performance as measured by ROE and ROA.

Table 4.14: B.O.C Kenya Ltd Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 (1429) 35% 28% -10% 2014 70607 -13% 3% 2015 (169726) 4% 6% 2016 (304675) 7%

2017 (71482) 2% 2%

4.4.2 BAT Kenya Ltd Net Investing Cashflows, ROE and ROA

The study sought to understand the net investing cashflows and financial performance of BAT Kenya Limited. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 74% and ROA was at 36%, which declined to 70% for ROE and ROA as 30% in the years 2017. The Table 4.15 below shows the findings of the study for net investing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.15: BAT Kenya Ltd Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 -967,170 74% 36%

2014 -1,520,456 73% 38%

2015 -559,295 73% 41%

2016 -286,353 72% 40%

2017 -378,605 70% 30%

4.4.3 Carbacid Investments Ltd Net Investing Cashflows, ROE and ROA The study sought to understand the investing cashflows and financial performance of Carbacid Investments Ltd. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 43% and ROA was at 42%, which declined to 11% for ROE and ROA

44 as 10% in the years 2017. The Table 4.16 below shows the findings of the study for net investing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.16: Carbacid Investments Ltd Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 24027 43% 42%

2014 (286773) 37% 36%

2015 (325022) 16% 13%

2016 (136011) 10% 8%

2017 (352146) 11% 10%

4.4.4 EABL Net Investing Cashflows, ROE and ROA The study sought to understand the net investing cashflows and financial performance of East African Breweries Ltd. The results of the study show that there was an increase of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 54% and ROA was at 14%, which increases to 84% for ROE and ROA as 45% in the years 2017. The Table 4.17 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.17: EABL Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 (6,047,823) 54% 14%

2014 (4,683,695) 75% 19%

2015 (6,738,131) 71% 22%

2016 (1,329,944) 93% 47%

2017 (4,667,568) 84% 45%

4.4.5 Mumias Net Investing Cashflows, ROE and ROA The study sought to understand the investing cashflows and financial performance of Mumias sugar Ltd. The results of the study show that there was a decrease of profitability as measured by return on equity and return on assets. In the year 2013 ROE was at -11% and ROA was at -5%, which decreased to -90% for ROE and ROA as -37% in the years 2017. The Table 4.18 below shows the findings of the study for net investing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.18: Mumias Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 (1,234,054) -11% -5%

2014 (494,363) -26% -12%

2015 (52,146) -79% -183%

2016 (143,623) 20% 76%

2017 (19,388) -90% -37%

4.4.6 Unga Group Net Investing Cashflows, ROE and ROA The study sought to understand the net investing cashflows and financial performance of East African Breweries Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 17% and ROA was at 9%, which decreased to 5% for ROE and ROA as 4% in the years 2017. The Table 4.19 below shows the findings of the study for net investing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.19: Unga Group Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 (210,313.00) 17% 9%

2014 (517,863.00) 35% 32%

2015 (15,426.00) 42% 38%

2016 (470,859.00) 6% 6%

2017 (801,854.00) 5% 4%

4.4.7 Eveready East Africa Net Investing Cashflows, ROE and ROA The study sought to understand the investing cashflows and financial performance of Eveready East Africa Ltd. The results of the study show that there was an increase of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 12% and ROA was at 5%, which increases to 50% for ROE and ROA as 47% in the years 2017. The Table 4.20 below shows the findings of the study for net investing cashflows and financial performance as measured by ROE and ROA for the firm.

Table 4.20: Eveready East Africa Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 (50,624) 12% 5%

2014 (11,134) -79% -19%

2015 56,213 73% 39%

2016 74 -40% -73%

2017 1,142,483 50% 47%

4.4.8 Kenya Orchards Ltd Net Investing Cashflows, ROE and ROA The researcher sought to understand the net investing cashflows and financial performance of Kenya Orchards Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 97% and ROA was at 22%, which decreased to 24% for ROE and ROA as 5% in the years 2017. The Table 4.21 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the firm.

Table 4.21: Kenya Orchards Ltd Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 (55,000.00) 97% 22%

2014 (55,000.00) -16% -49%

2015 (55,000.00) 50% 46%

2016 (55,000.00) 59% 9%

2017 (7,023,275.00) 24% 5%

4.4.9 Flame Tree Net Investing Cashflows, ROE and ROA The study sought to understand the operating cashflows and financial performance of Flame Tree Group Holdings Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 74% and ROA was at 124%, which decreased to 4% for ROE and ROA as 83% in the years 2017. The Table 4.22 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA for the Flame Tree Group Holdings Ltd.

Table 4.22: Flame Tree Net Investing Cashflows, ROE and ROA

Years Net Investing Cash flows ROE ROA

2013 (9,799,379.00) 74% 124%

2014 (5,358,871.00) 39% 56%

2015 (92,668,742) 38% 53%

2016 (124,503,569) 51% 83%

2017 (96,094,679) 4% 8%

4.4.10 Correlations Analysis for Investing Cash Flows The Pearson Correlation of independent variable versus the dependent variable was computed and the results are shown in the Table 4.23 below. The correlation between independent variable Investing cash flows and dependent variable return on assets was (r=0.981, p-value=0.000). Therefore, there was a strong positive and statistically significant relationship between Investing cash flows and return on assets as a measure of financial performance.

Table 4.23: Correlations Analysis for Investing Cash Flows and ROA

Correlations Investing Return on Assets cash flows Return on Assets Pearson Correlation 1 .981** Sig. (2-tailed) .000 N 45 45 Investing cash flows Pearson Correlation .981** 1 Sig. (2-tailed) .000 N 45 45 **. Correlation is significant at the 0.01 level (2-tailed).

4.4.11 Regression Analysis between Investing cash flows and ROA

Regression analysis shows the model summary as indicated in the Table 4.24 below. The table shows the model summary in which coefficient of correlation (R-squared) of 0.963. The coefficient of determination indicates that investing cash flows explains 96.3% of

49 return on assets of manufacturing and allied firms in the NSE whereas 3.7% is influenced by other factors that was not captured in this model of the study.

Table 4.24: Model Summary for Investing cash flows and ROA

Model Summary Std. Error of the Model R R Square Adjusted R Square Estimate 1 .981a .963 .962 .01709 a. Predictors: (Constant), Investing cash flows

The Table 4.25 below shows the ANOVA result for the effect of investing cash flows on return on assets of Manufacturing and allied firms in Kenya. The F-value of the ANOVA was found to be 245.415 while p-value was 0.000 which is less than 0.05. These results indicated that the model is statistically significant. Investing cash flows has a significant effect on return on assets of Manufacturing and allied firms in the NSE. Hence, Operating cash flows is good predictors of ROA as a measure of financial performance for the listed firms.

Table 4.25: ANOVA between Investing cash flows and ROA

ANOVAa Sum of Model Squares df Mean Square F Sig. 1 Regression .364 1 .364 245.415 .000b Residual .014 48 .000 Total .378 49 a. Dependent Variable: Return on Assets b. Predictors: (Constant), Investing cash flows

The results of this analysis are as provided below in Table 4.26. According to this model when Investing cash flows is at zero, return on assets will have a score of 1.058. The results in Table indicated that Investing cash flows has a significant positive effect on return on assets of Manufacturing and allied firms in the NSE because the p-value is less than 0.05. These results imply that a unit increase in Investing cash flows could result to increase in ROA by 0.354. From the Coefficients the regression model can be derived from the unstandardized coefficients as follows; ROA = 1.058 + 0.639 Investing cash flows

Table 4.26: Coefficients between Investing cash flows and ROA

Coefficientsa Unstandardized Standardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) 1.058 .003 338.827 .000 Investing .639 .018 .981 35.290 .000 cash flows a. Dependent Variable: Return on Assets

4.5 Effect of Financing cash flows on Financial Performance 4.5.1 B.O.C Kenya Ltd Net Financing Cashflows, ROE and ROA

The researcher sought to understand the net financing cashflows and financial performance of B.O.C Kenya Limited. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 35% and ROA was at 28%, which declined to 2% for ROE and ROA as 2% in the years 2017. The Table 4.27 below shows the findings of the study for net operating cashflows and financial performance as measured by ROE and ROA.

Table 4.27: B.O.C Kenya Ltd Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 (110,319) 35% 28%

2014 (93,722) -13% -10%

2015 (101,532) 4% 3%

2016 -321,605 7% 6%

2017 2,526.00 2% 2%

4.5.2 BAT Kenya Ltd Net Financing Cashflows, ROE and ROA

The researcher sought to understand the net financing cashflows and financial performance of BAT Kenya Limited. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 74% and ROA was at 36%, which declined to 70% for ROE and ROA as 30% in the years 2017. The Table 4.28 below shows the findings of the study

51 for net financing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.28: BAT Kenya Ltd Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 (2,903,200.00) 74% 36%

2014 (3,700,000.00) 73% 38%

2015 (4,250,000.00) 73% 41%

2016 (4,950,000.00) 72% 40%

2017 (4,300,000.00) 70% 30%

4.5.3 Carbacid Net Financing Cashflows, ROE and ROA The study sought to understand the net financing cashflows and financial performance of Carbacid Investments Ltd. The results of the study show that there was a decline of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 43% and ROA was at 42%, which declined to 11% for ROE and ROA as 10% in the years 2017. The Table 4.29 below shows the findings of the study for net financing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.29: Carbacid Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 696,934.00 43% 42%

2014 742,816.00 37% 36%

2015 (74,121.00) 16% 13%

2016 203,268.00 10% 8%

2017 109,449.00 11% 10%

4.5.4 EABL Net Financing Cashflows, ROE and ROA The researcher sought to understand the net financing cashflows and financial performance of East African Breweries Ltd. The results of the study show that there was an increase of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 54% and ROA was at 14%, which increases to 84% for ROE and ROA as 45% in the years 2017. The Table 4.30 below shows the findings of the study for net financing cashflows and financial performance as measured by ROE and ROA for the company. Table 4.30: EABL Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 (6,947,804.00) 54% 14%

2014 4,229,806.00 75% 19%

2015 (734,873.00) 71% 22%

2016 (977,891.00) 93% 47%

2017 8,255,362.00 84% 45%

4.5.5 Mumias Net Financing Cashflows, ROE and ROA The study sought to understand the financing cashflows and financial performance of Mumias sugar Ltd. The results of the study show that there was a decrease of profitability as measured by return on equity and return on assets. In the year 2013 ROE was at -11% and ROA was at -5%, which decreased to -90% for ROE and ROA as -37% in the years 2017. The Table below shows the findings of the study for net financing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.31: Mumias Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA 2013 641,518 -11% -5% 2014 -695,626 -26% -12% 2015 414,300 -79% -183% 2016 2,626,300 20% 76% 2017 1,872,781 -90% -37%

4.5.6 Unga Group Net Financing Cashflows, ROE and ROA The researcher sought to understand the net financing cashflows and financial performance of East African Breweries Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 17% and ROA was at 9%, which decreased to 5% for ROE and ROA as 4% in the years 2017. The Table 4.32 below shows the findings of the study for net financing cashflows and financial performance as measured by ROE and ROA for the company.

Table 4.32: Unga Group Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 54,414.00 17% 9%

2014 276,658.00 35% 32%

2015 (140,484.00) 42% 38%

2016 (290,017.00) 6% 6%

2017 (191,113.00) 5% 4%

4.5.7 Eveready East Africa Net Investing Cashflows, ROE and ROA The researcher sought to understand the net financing cashflows and financial performance of Eveready East Africa Ltd. The results of the study show that there was an increase of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 12% and ROA was at 5%, which increases to 50% for ROE and ROA as 47% in the years 2017. The Table 4.33 below shows the findings of the study for net financing cashflows and financial performance as measured by ROE and ROA for the firm.

Table 4 33: Eveready East Africa Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 (91,629) 12% 5%

2014 (2,364) -79% -19%

2015 (57,083) 73% 39%

2016 383,558 -40% -73%

2017 (643,969) 50% 47%

4.5.8 Kenya Orchards Ltd Net Financing Cashflows, ROE and ROA The researcher sought to understand the net financing cashflows and financial performance of Kenya Orchards Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 97% and ROA was at 22%, which decreased to 24% for ROE and ROA as 5% in the years 2017. The Table 4.34 below shows the findings of the study for net financing cashflows and financial performance as measured by ROE and ROA for the firm

Table 4.34: Kenya Orchards Ltd Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 (337,720) 97% 22%

2014 147,711,609 -16% -49%

2015 227,888,413 50% 46%

2016 (2,352,993) 59% 9%

2017 (5,320,411) 24% 5%

4.5.9 Flame Tree Net Financing Cashflows, ROE and ROA The study sought to understand the net financing cashflows and financial performance of Flame Tree Group Holdings Ltd. The results of the study show that there was a decrease of financial performance as measured by return on equity and return on assets. In the year 2013 ROE was at 74% and ROA was at 124%, which decreased to 4% for ROE and ROA as 83% in the years 2017. The Table 4.35 below shows the findings of the study for net

55 financing cashflows and financial performance as measured by ROE and ROA for the Flame Tree Group Holdings Ltd. Table 4.35: Kenya Orchards Ltd Net Financing Cashflows, ROE and ROA

Years Net Financing Cash flows ROE ROA

2013 303,618,263 74% 124%

2014 491,073,661 39% 56%

2015 (461,535.00) 38% 53%

2016 (105,472,539) 51% 83%

2017 (109,743,291) 4% 8%

4.5.10 Correlations between Financing Cash Flows and ROA The Pearson Correlation of independent variable versus the dependent variable was computed and the results are shown in the Table below. The correlation between independent variable equity and dependent variable return on assets was (r=0.981, p- value=0.000). Therefore, there was a strong positive and statistically significant relationship between financing cashflows and return on assets as a measure of financial performance.

Table 4.36: Correlations between Financing Cash Flows and ROA

Financing cash Return on Assets flows Return on Assets Pearson Correlation 1 .945** Sig. (2-tailed) .000 N 45 45 Financing cash flows Pearson Correlation .945** 1 Sig. (2-tailed) .000 N 45 45 **. Correlation is significant at the 0.01 level (2-tailed).

4.5.11 Regression Analysis between Financing Cash Flows and ROA

Regression analysis shows the model summary as indicated in the table below. Below are the findings of the study. The Table 4.37 shows the model summary in which coefficient of correlation (R-squared) of 0.892. The coefficient of determination indicates that financing cash flows explains 89.2% of return on assets of manufacturing and allied firms in the NSE whereas 10.8% is influenced by other factors that was not captured in this model of the study.

Table 4.37: Model Summary for Financing Cash Flows and ROA

Model Summary Std. Error of the Model R R Square Adjusted R Square Estimate 1 .945a .892 .890 .02912 a. Predictors: (Constant), Financing cash flows

The Table 4.38 below shows the ANOVA result for the effect of equity on return on assets of Manufacturing and allied firms in Kenya. The F-value of the ANOVA was found to be 397.451 while p-value was 0.000 which is < 0.05. These results indicated that the model is statistically significant. Financing cash flows has a significant effect on return on assets of Manufacturing and allied firms in the NSE. Hence, Financing cash flows is good predictors of ROA as a measure of financial performance for the listed firms.

Table 4.38: ANOVA between Financing cash flows and ROA

ANOVAa Sum of Model Squares df Mean Square F Sig. 1 Regression .337 1 .337 397.451 .000b Residual .041 48 .001 Total .378 49 a. Dependent Variable: Return on Assets b. Predictors: (Constant), Financing cash flows

According to this model when Financing cash flows is at zero, return on assets will have a score of 1.001. The results in Table 4.39 indicated that financing cash flows has a significant positive effect on return on assets of Manufacturing and allied firms in the NSE because the p-value is less than 0.05. These results imply that a unit increase in

Financing cash flows could result to increase in ROA by 0.354. From the Coefficients the regression model can be derived from the unstandardized coefficients as follows; ROA = 1.001 + 0.354 Financing cash flows.

Table 4.39: Coefficients between Financing cash flows and ROA

Coefficientsa Unstandardized Standardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) 1.001 .008 132.035 .000 Financing cash .354 .018 .945 19.936 .000 flows a. Dependent Variable: Return on Assets

4.6 Chapter Summary The chapter has provided results and findings based on secondary data obtained from published accounts of the Manufacturing firms listed on the Nairobi Securities Exchange. The chapter has analyzed; the effect of operating, investing and financing cash flows on firms’ net operating income, return on equity and firms’ share performance respectively. The next chapter provides the summary, discussions, conclusions and recommendations of the findings.

CHAPTER FIVE

5.0 DISCUSSIONS, CONCLUSIONS, AND RECOMMENDATIONS

5.1 Introduction The objective of the study was to determine the effect of free cash flow on profitability of manufacturing firms listed in Nairobi Securities Exchange. This chapter is a recap of the findings detailed in the previous chapters and make recommendations for further research to researchers and policy makers. The significant findings are summarized, and conclusions drawn.

5.2 Summary The general objective of the study was to determine the effect of free cash flow on profitability of manufacturing firms listed in Nairobi Securities Exchange. The study adopted the following specific objectives; to examine the effect of operating cash flows on the profitability, to establish the effect of investing cash flows on the profitability, and to determine the effect of financing cash flows on the profitability.

The study adopted a descriptive survey in analyzing the effect of free cash flow on the profitability of manufacturing firms listed at the Nairobi Securities Exchange. The population of interest in this study was secondary data from the Nairobi securities exchange where information was obtained for a period of five years for the listed Manufacturing and Allied companies in the Nairobi Securities Exchange. The study adopted the use of census sampling technique. For this study, the sampling frame was sourced from all the nine listed manufacturing companies in the Nairobi Securities Exchange. The study used both secondary data from annual reports and primary data from questionnaires. Secondary data was extracted from audited annual reports and financial statements of manufacturing firms sourced from Nairobi Securities Exchange and Companies websites for a period of five years (2013 –2017). The data was collected, coded and input to SPSS (Statistical Package for the Social Sciences Ver.25) for analysis. Descriptive statistics was used in terms of frequency distribution tables. Inferential statistics was used to draw conclusions about the effect of free cashflows on profitability of manufacturing firms using a regression model.

The results of the study on first objective indicated a correlation between operating cash flows and ROA was (r=0.899, p-value=0.000), in which there was a strong positive and

59 statistically significant relationship between Operating cash flows and return on assets as a measure of financial performance. The results of regression analysis showed that operating cash flows explain 80.9% of return on assets of manufacturing and allied firms.

The findings of the second objective showed that the correlation between investing cash flows and ROA was (r=0.981, p-value=0.000) and there was a strong positive and statistically significant relationship between Investing cash flows and return on assets as a measure of financial performance. While the results of regression analysis showed that investing cash flows explains 96.3% of ROA of manufacturing and allied firms in the NSE.

The findings of the third objective showed that cashflows from financing and ROA had (r=0.981, p-value=0.000), indicating a strong positive and statistically significant relationship between financing cashflows and ROA. Regression analysis showed that financing cash flows explains 89.2% of ROA for the manufacturing and allied firms in the NSE.

5.3 Discussion 5.3.1 Effect of Operating Cash Flows on the Profitability

The results of the correlation analysis a strong positive and statistically significant relationship between operating cash flows and return on assets as a measure of financial performance. The results of regression analysis indicated that operating cash flows explains 80.9% of return on assets of manufacturing and allied firms in the NSE. The ANOVA result for the effect of operating cash flows on return on assets of manufacturing and allied firms in Kenya. The F-value of the ANOVA was found to be 203.219 while p- value was 0.000 which is < 0.05. These results indicated that the model was statistically significant. Consequently, Operating cash flows collectively have a significant effect on return on assets of Manufacturing and allied firms in the NSE. Hence, operating cash flows is good predictors of financial performance for the listed firms. The findings revealed that operating cash flow management had positive influence on the financial performance (ROA and ROE) of manufacturing and allied firms in Kenya.

The findings are supported by Ghodrati and Abyak, (2014) whose results showed a positive relationship and that there was meaningful relationship between operating cash flow and are Ogbonnaya, Ekwe, and Ihendinihu, (2016) showed that cash flow from operating activities had a significant and strong relationship with performance. The

60 findings are in line with the study by Habib (2011) who found out that there is, and additionally operating cash flow is positively related to stock return while profitability is short-term. The results of Acaranupong, (2017) showed that current operating cash flows are positively associated with future operating cash flows and future stock prices. The findings are consistent with study done by Al-Debi'e (2011) who found that there was a meaningful positive relationship among the operating cash flows, investment and dividends. The findings contradict agency theory and free cash flow theory and the findings by Guda, (2013) that operating cash flow management was found to be negatively related financial performance.

The study is also in agreement with that of Ambreen & Aftab, (2016), who investigated the effect of free cash flow on the profitability of firms listed in automotive sector of Germany. The regression results indicated that there was a positive relationship between the operating cash flows and profitability of listed firms. The regression results indicated that there was a positive relationship between the free cash flows and profitability of listed firms. However, Leverage has an inverse insignificant impact on profitability (ROA) and evidence for this comes from testing the proxies (Leverage, Current asset, Firm size, Capital liquidity, Sales growth, FCF). The findings which substantiates the regression model used for the study was a good predictor, and it explained 76.65% of the variation in profitability (ROA) of the firms.

The findings is also supported by Liman and Mohammed, (2018) who examined the impact of Operating Cash flow and Corporate financial performance of listed Conglomerate companies in Nigeria. The result showed a positive and insignificant impact between Cash Flow from Operating activities (CFO) and financial performance proxied by ROA while the impact is positive and significant when financial performance was proxied by ROE of the listed conglomerate companies in Nigeria. The results of the study is also supported by Ikechukwu et al., (2015), which sought to ascertain the effect of cash flow statement on companies’ profitability in Nigeria. The results of the study revealed that Operating and Financing cash-flows have significant positive effect on company’s profitability in the Banking sector of Nigeria.

5.3.2 Effect of Investing Cash Flows on the Profitability

The findings of the study on correlation analysis indicated a strong positive and statistically significant relationship between investing cash flows and return on assets as a

61 measure of financial performance. The results of regression analysis showed investing cash flows explains 96.3% of ROA for manufacturing and allied firms in the NSE. The ANOVA result for the effect of investing cash flows on return on assets of Manufacturing and allied firms in Kenya. The F-value of the ANOVA was found to be 245.415 while p- value was 0.000 which is less than 0.05. These results indicated that the model is statistically significant. Investing cash flows has a significant effect on return on assets of Manufacturing and allied firms in the NSE. The findings disagrees with that of Tsuji (2012), who investigated about the relationship between comprehensive income and firm performance. It was established that the relationship between cash flow and firm performance was significantly negative. In addition, income statements published by these companies predicted their future share returns better than their earnings or cash flow variables.

The findings are supported by Robert and Hamacher (2015) investigating the effect of cash flow management on performance of mutual funds in America, concluded that the improvement in cash flows positively affected the financial performances measured by ROA. A study by Turcas (2011) found out that the solvency, flexibility and the financial performance of the Bucharest firms are set on the firm’s ability to generate positive cash flows from the operating cash flow, investing cash flow and financing cash flow. In Zimbabwe, Mauchi, Nzaro and Njanike (2011) found out that there was a positive relationship between the level of cash flow and the profitability of the company. In Kenya; Ndungu and Oluoch (2016) studied Effect of cash flow management on market performance of public manufacturing companies in Kenya and concluded that cash flow management has significant relationship on market performance. In Nigeria, a study carried out by Amah, Micheal and Ihendinihu (2016) examined the relationship between cash flow and financial performance of listed banks in Nigeria. The findings indicated that Net profit as performance proxy was used and the study revealed that cash flow from operating activities has a significant and strong relationship with performance of the sampled banks. Cash flow management is a challenge in developing countries in general and Kenya in particular did not address the effect of cash flow management on financial performance of mutual funds.

The results of the study is supported by Hau (2017), who investigated on effect of free cash flows on performance of manufacturing and real estate firms listed in Vietnam. The study revealed a positive relationship between cash flows and firm profitability in all

62 sectors. Tu, Son and Khanh (2014), researched on the effect of Banking Relationship on performance of Vietnam firms. It was established that firm performance was inversely proportional to the number of bank relationships. In addition, cash flow is negatively related with firms’ ROE, while assets were negatively associated with ROA. Baveld (2012) investigated working capital management in the Netherlands. The findings of the study indicated that during crisis, Dutch firms did not need to change their policies on creditors and stock but needed to change policy on debtors to improve profitability.

The findings of the study disagree with that of Ahamdzadeh and Faal (2014), who carried out a research on the cash flow statement component effect on management performance using 138 firms listed on the Tehran Stock Exchange for the period of 5 years, 2008 – 2012. The research finding shows that there is negative relationship between cash flows from investments activities and return on assets. Also, there is no relationship between cash flows from operational activities and financing activities and return on assets. Another study that disagrees with the results is that of Ebrahimi and Chadegani (2011) who studied the link between different earnings and cash flow measures of performance and stock returns among Iranian firms. Simple and multiple regression was used to analyze data for a nine-year period from 2003 to 2011. The study showed that firm performance and cash flows are significantly negatively correlated.

5.3.3 Effect of Financing Cash Flows on the Profitability

The findings of correlation indicated a strong positive and statistically significant relationship between financing and return on assets as a measure of financial performance. The results of regression analysis showed that financing cash flows explains 89.2% of return on assets of manufacturing and allied firms in the NSE. The ANOVA result for the effect of financing cashflows on profitability as a measured by ROA of Manufacturing and allied firms in Kenya. The F-value of the ANOVA was found to be 397.451 while p-value was 0.000 which is < 0.05. These results indicated that the model was statistically significant. Financing cash flows has a significant effect on return on assets of Manufacturing and allied firms in the NSE. Hence, Financing cash flows is good predictors of ROA as a measure of financial performance for the listed firms. The results are in agreement with that of Guda (2013) who examined the relationship between cash flow and profitability of small and medium enterprise in Nairobi. The study revealed that there is a significant relationship between profitability and cash flow.

The findings of the study are supported by Jintaviwatwong and Suntraruk (2012) who examined current earnings and current financing cash flows of nonfinancial firms listed on the Stock Exchange of Thailand. The results from the regression analysis revealed that current earnings and current financing cash flows are positively associated with future financial performance. Another study that is in agreement is that of Paymaster and Oyadonghan, (2014), examined the relationship between cash flow and corporate performance in the Food and Beverages sector of Nigeria. The results of the study revealed that operating and financing cash flows have significant positive relationship with corporate performance in the Food and Beverage Sector of Nigeria. It was also empirically verified that investing cash flow and corporate performance have significant negative relationship.

The findings was in disagreement with that of Ogbonnaya et al., (2016) which examined the relationship between cash flow and performance in the Banking sector of Nigeria. The study involved a survey of four Banks quoted in the Nigeria Stock Exchange. The result of the study revealed that operating cash flow has a significant and strong positive relation with performance in the Banking sector in Nigeria, it was also reified that investing cash flow and financing cash flow have negative and weak relationship. The findings of the study disagreed with that of Amah, Micheal and Ihendinihu (2016) who examined the relationship between cash flow and financial performance of listed banks in Nigeria. Net profit as performance proxy was used and the study revealed that cash flow from operating activities has a significant and strong relationship while cash flow from investing and financing activities has negative and weak relationship with performance of the sampled banks.

The study findings also disagreed with that of Ahamdzadeh and Faal (2014) who carried out a research on the cash flow statement component effect on management performance using 138 firms listed on the Tehran Stock Exchange for the period of 5 years, 2008 – 2012. The research finding shows that there was negative relationship between cash flows from investments activities and return on assets, and no relationship between cash flows from operational activities and financing activities and return on assets.

5.4 Conclusions 5.4.1 Effect of Operating Cash Flows on the Profitability

It can be concluded that operating cash flow management influence the profitability of manufacturing and allied firms in Kenya positively. The effect of operating cash flow management on ROA was significant and positive. The study indicates that the contribution of net operating cash flow on ROA is due to either direct or indirect way which is linked directly to ROA. The overall implication of the study is that operating cash flow is that manufacturing and allied firms generate money from their main business and are not facing a liquidity problem.

5.4.2 Effect of Investing Cash Flows on the Profitability

The results of the study indicate that there was a positive and significant relationship between cashflows from investing and financial performance as measured by ROA. Therefore, the board and management of manufacturing of the listed firms should continue to invest in activities as it has positive implications towards its cashflows.

5.4.3 Effect of Financing Cash Flows on the Profitability

The study established that cash flows from financing for the manufacturing and allied firms in the NSE which is significant and positive effect on companies’ profitability. Cashflows from financing for the listed manufacturing have a positive impact towards this companies. The listed companies should take appropriate cashflows in financing their internal projects that are more profitable.

5.5 Recommendations 5.5.1 Recommendations for Improvement

5.5.1.1 Effect of Operating Cash Flows on the Profitability

The management of the manufacturing firms should practice good cash management in their firms. It is essential for the company to maintain an appropriate level of cash from operating activities in order to continue its operations and improve its shareholders’ wealth since operating activities are regarded as the main sources of cash for the companies. As a consequence, it should focus on developing strategies to achieve this objective in the future. One of these strategies could be the utilization of dividend policy which may support the continuous improvement of stockholder equity through gradual

65 increase of retained earnings. This is an effective way of creating a very valuable internal financing that would support a sustainable growth of the firm.

5.5.1.2 Effect of Investing Cash Flows on the Profitability

From the listed in the NSE, it was established that there is a positive significant relationship between free cash flows from investment and ROA. Manufacturing and allied firms should seek internally generated funds since they are cheaper to finance their investment needs especially short-term projects and long-term projects that require immediate commitment. This is before they seek other sources of financing investment projects, like debt and external equity.

5.5.1.3 Effect of Financing Cash Flows on the Profitability

The study recommends that financial efficiency is required in managing costs, increasing efficiency and financial performance of listed manufacturing companies in Kenya. The companies should not rely more on financing because it affects financial performance negatively and increases the risk of bankruptcy. The management should finance the activities in their companies as it has positive impact on their income statement.

5.5.2 Recommendation for Further Studies

This study advocates that further studies can be done in this area, they may include: the relationship between leverage and investments for the manufacturing and allied firms to quite clearly know the strength of the relationship and whether leverage can be indeed a factor that affects investment. Further research to be done to know whether free cash flows relate to investment among the private manufacturing companies.

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APPENDICES APPENDIX 1: INTRODUCTION LETTER

Tracy Wanjiku United States International University-Africa, P.O. Box 14634, 00800. Nairobi. Dear Sir/ Madam, RE: REQUEST FOR DATA COLLECTION IN YOUR FIRM I am carrying out a study on the effect of free cashflows on profitability of manufacturing firms listed on the Nairobi Securities Exchange for the period 2013 - 2017. This is a requirement towards attainment of master’s in business administration (MBA) degree Program at the United States International University.

Kindly furnish me with financial information for your firms as per attached data collection sheet and the questionnaire.

Thank you in advance.

Yours sincerely,

Tracy Wanjiku

APPENDIX II: COLLECTION CHECKLIST Appendix II (a): B.O.C Kenya Ltd, Data Collection Instrument in Kshs. “000”

B.O.C Kenya Ltd 2013 2014 2015 2016 2017

Net operating cash flows 139,192 103,325 207,104 84,602 175,540

Net Investing Cash flows (1,429) 70,607 (169,726) (304,675) (71,482.00)

Net Financing Cash flows (110,319) (93,722) (101,532) -321,605 2,526.00

Net Operating Income 731,568 -235,150 68,450 126,323 39,379

Shareholders’ Equity 2,076,060 1,747,188 1,714,106 1,689,449 1,611,082

Total Assets 2,633,093 2,300,320 2,320,956 2,223,838 2,228,669

Return on Equity 35% -13% 4% 7% 2%

ROA 28% -10% 3% 6% 2%

Appendix II (b): British American Tobacco Kenya Ltd, Data Collection Instrument in Kshs. “000”

British American Tobacco Kenya Ltd 2013 2014 2015 2016 2017

Net operating cash flows 3,420.0 4,781,110 3,930,350 5,161,435 4,713,472

Net Investing Cash flows -967,170 -1,520,456 -559,295 -286,353 -378,605

Net Financing Cash flows -2,903,200 -3,700,000 -4,250,000 -4,950,000 -4,300,000

Net Operating Income 3,723,691 4,255,314 4,976,256 4,850,732 3,343,434

Shareholders’ Equity 7,571,608 8,126,922 8,853,178 8,796,789 7,840,223

Total Assets 10,204,821 11,070,605 12,080,481 12,153,840 11,230,945

Return on Equity 74% 73% 73% 72% 70%

ROA 36% 38% 41% 40% 30%

Appendix II (c): Carbacid Investments Ltd, Data Collection Instrument in Kshs. “000”

Carbacid Investments Ltd 2013 2014 2015 2016 2017

Net operating cash flows 447,301 533,344 560,378 374,074 326,574

Net Investing Cash flows 24,027 -286,773 -325,022 -136,011 -352,146

Net Financing Cash flows 696,934 742,816 -74,121 203,268 109,449

Net Operating Income 475,541 436,309 393,316 261,051 331,504

Shareholders’ Equity 1,098,113 1,184,646 2,477,026 2,674,198 2,924,084

Total Assets 1,129,506 1,213,723 2,968,727 3,081,768 3,306,974

Return on Equity 42% 36% 13% 8% 10%

ROA 42% 36% 13% 8% 10%

Appendix II (d): East African Breweries Ltd, Data Collection Instrument in Kshs. “000”

East African Breweries Ltd 2013 2014 2015 2016 2017

Net operating cash flows 8,302,865 6,193,290 14,526,842 18,577,235 13,914,471

Net Investing Cash flows -6,047,823 (4,683,695) (6,738,131) -1,329,944 -4,667,568

Net Financing Cash flows -6,947,804 4,229,806 (734,873) -977,891 8,255,362

Net Operating Income 4,514,452 6,833,549 9,423,375 10,137,589 10,022,003

Shareholders’ Equity 8,302,835 9,100,848 13,353,183 10,867,246 11,988,170

Total Assets 31,687,489 35,405,293 42,009,009 21,556,281 22,134,600

Return on Equity 14% 19% 22% 47% 45%

ROA 14% 19% 22% 47% 45%

Appendix II (e): Mumias Sugar Co. Ltd, Data Collection Instrument in Kshs. “000”

Mumias Sugar Co. Ltd 2013 2014 2015 2016 2017

Net operating cash flows 932,444 801,431 -662,594 (2,675,076) (2,359,580)

Net Investing Cash flows -1,234,054 -494,363 -52,146 (143,623) (19,388)

Net Financing Cash flows 641,518 -695,626 414,300 2,626,300 1,872,781

Net Operating Income -1,455,096 -2,740,685 -4,709,761 1,488,383 -6,803,384

Shareholders’ Equity 13,382,490 10,641,805 5,932,044 7,559,964 7,565,800

Total Assets 27,281,993 23,563,086 2,568,095 1,956,462 18,602,910

Return on Equity -11% -26% -79% 20% -90%

ROA -5% -12% -183% 76% -37%

Appendix II (f): Unga Group Ltd, Data Collection Instrument in Kshs. “000”

Unga Group Ltd 2013 2014 2015 2016 2017

Net operating cash flows 411,617 469,489 505,450 666,294 1,595,319

Net Investing Cash flows -210,313 -517,863 -15,426 -470,859 -801,854

Net Financing Cash flows 54,414 276,658 -140,484 -290,017 -191,113

Net Operating Income 754483 497,996 611,885 93,070 70,818

Shareholders’ Equity 4503915 1,438,524 1,442,936 1,460,297 1,455,408

Total Assets 8316927 1,565,332 1,597,021 1,688,769 1,722,506

Return on Equity 17% 35% 42% 6% 5%

ROA 9% 32% 38% 6% 4%

Appendix II (g): Eveready East Africa Ltd, Data Collection Instrument in Kshs. “000”

Eveready East Africa Ltd 2013 2014 2015 2016 2017

Net operating cash flows 191,384 (146,233) 1,196 (107,475) (253,632)

Net Investing Cash flows (50,624) (11,134) 56,213 74 1,142,483

Net Financing Cash flows (91,629) (2,364) (57,083) 383,558 (643,969)

Net Operating Income 45,411 (173,453) 587,823 (195,911) 272,792

Shareholders’ Equity 394,770 218,465 806,288 486,578 549,370

Total Assets 940,653 930,057 1,511,665 266,553 577,860

Return on Equity 12% -79% 73% -40% 50%

ROA 5% -19% 39% -73% 47%

Appendix II (h): Kenya Orchards Ltd, Data Collection Instrument in Kshs. “000”

Kenya Orchards Ltd 2013 2014 2015 2016 2017

Net operating cash flows (317,395) (282,720) 271,639 (1,974,352) 4,055,857 Net Investing Cash flows (55,000.00) (55,000.00) (55,000.00) (55,000.00) (7,023,275.00) Net Financing Cash flows (337,720) 147,711,609 227,888,413 (2,352,993) (5,320,411) Net Operating Income 2,415,340 (252,615,470) 28,915,648.00 5,734,649 3,763,108 Shareholders’ Equity 2,481,451 22,835,096 57,698,183.00 9,733,660.00 15413309

Total Assets 10968436 33,741,500 62,297,478 66,005,586 71685235

Return on Equity 97% -16% 50% 59% 24%

ROA 22% -49% 46% 9% 5%

Appendix II (i): Flame Tree Group Holdings Ltd, Data Collection Instrument in Kshs. “000” Flame Tree Group Holdings Ltd 2013 2014 2015 2016 2017

Net operating cash flows 107,183,594 -11,210,914 130,973,685 39,908,812 (38,239,984)

Net Investing Cash flows -9,799,379 -5,358,871 (92,668,742) (124,503,569) (96,094,679)

Net Financing Cash flows 303,618,263 491,073,661 -461,535 (105,472,539) (109,743,291)

Net Operating Income 146,171,709 160,154,164 219,834,010.00 137,244,923.00 10,144,470

Shareholders’ Equity 198,127,718 407,786,357 581,921,879 269,204,519 257,510,912

Total Assets 117,943,950 287,227,510 411,504,268 165,969,389 124,583,530

Return on Equity 74% 39% 38% 51% 4%

ROA 24% 56% 53% 83% 8%

APPENDIX IV: SAMPLE FRAME Manufacturing firms listed in the Nairobi Securities Exchange as at 31st December 2017

1) B.O.C Kenya Ltd

2) British American Tobacco Kenya Ltd

3) Carbacid Investments Ltd

4) East African Breweries Ltd

5) Mumias Sugar Co. Ltd

6) Unga Group Ltd

7) Eveready East Africa Ltd

8) Kenya Orchards Ltd

Source: NSE 2018