Effects of free cash flows on the profitability of five star hotels in Kenya

Abstract

The goal of every organization is always to improve its performance. Thus, managers in corporate organizations do all that is necessary to improve their performance and especially their profitability. Scholars have examined what factors influence firm performance in a bid to recommend to practitioners on what needs to be done to improve firm performance. Free cash flow hypothesis has been advanced in literature as one of the determinants of firm performance. The objective of this study was to examine the effect of free cash flow on the profitability of five-star hotels in Kenya. This was a descriptive research. The population of this study was the 32 five star hotels in Nairobi. Since this number is not large and the present study seeks to come up with a predictive model for how cash flow affects profitability, all the 32 hotels were sampled. Thus, this was a census study of all the five star hotels in Kenya. This study used secondary data. These were collected from the financial statements of the hotels. The data was collected on the variables of interest for three year period beginning 2011 to 2013. This period gave enough data that was used in the analysis. Data was analysed using descriptive analysis, correlation analysis, and regression analysis with the aid of SPSS version 22 analysis software. The descriptive results showed that the mean ROA was 4% and free cash flow had a mean of 0.0318. The correlation results showed that except for size and foreign ownership, all the other independent variables were lowly correlated with each other thus these were transformed using second differences. The regression results showed that the model accounted for 81.7% of the variance in profitability, R2 = 0.817. The F-statistic was 8.034 and was significant at 5% level, meaning that the model used was fit to predict the relationship between free cash flows and profitability. The study found that free cash flow had positive and significant effect on profitability, β = 0.371, p = 0.001. The study found that size of the firm had a negative but insignificant effect on profitability, β = 0.049, p = 0.089. The results showed that foreign ownership had a negative but insignificant effect on profitability, β = -0.191, p = 0.120. The results showed that leverage had a positive and significant effect on profitability, β = 0.140, p = 0.036. The results also showed that age of the firm had a positive but insignificant effect on profitability, β = 0.002, p = 0.276. The study concludes that free cash flows and leverage influence profitability of hotels in Kenya while size of the firm, foreign ownership and age of the firm do not. The study recommends that hotels in Kenya should use free cash flow as a way of improving their profitability.