Free Cash Flow and Short-term Debt of Firms Listed at the Nairobi Securities Exchange Kenya

Abstract

The short-term debt account's value is crucial in assessing the performance of the business. Free cash flow is the amount of money a business has left over after covering its cash outflows for operating costs and capital asset maintenance. If a company takes on more debt, it will have less free cash flow available for equity in the current year. Since the debt has been paid off and does not need to be repaid, this decrease is offset in the upcoming years by a rise in free cash flow to equity. The exact opposite occurs if the company takes on additional debt. The study was anchored on free cash flow theory and trade off theory. The study applied secondary data obtained from the firms from 2007-2011. Panel data was used to increase data observations. The data was initially analysed using pooled ordinary least squares (OLS) regression model. The result showed a positive and significant relationship between free cash flow and short term debt of firms. With this result, it is recommended that managers of listed firms on NSE should assess the company’s overall financial flexibility and short term debt needs to determine the optimal balance between free cash flow and short term debt as excessive reliance on free cash flow for short term debt repayment may increase vulnerability.