You are on page 1of 23

Determinant of Free Cash Flows Impact upon Financial Performance of

cement industry of Pakistan


2014

Muhammad Amjad Islam 57678 Page 1

POPULATION DATA OF THE PROJECT:
The population for my project study is those companies that produce cement and are listed in
KSE 100 index. Those companies are listed under Construction and Materials (Cement) sector.
Sample size:
From Karachi Stock Exchange website a list of companies were obtained which are listed under
Construction and Materials (Cement) sector. A list of 37 companies was found. Since the
population of the paper includes those companies which produce cement and are listed in KSE
100 index, those companies which do not produce cement were removed from the list. After
the removal of non-cement producing companies, a list of 21 companies were found. The
sample size of this paper will be consisting of five companies from cement industry. For the
data analysis, since the data source is secondary, I will be using the financial reports of those
companies from 2000-2014.
1 Attock
2 Best way
3 Central Forest
4 Cheerat
5 Dadabhoy
6 Dee wan
7 D.G.K.
8 Dandoot
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 2

9 Fuji
10 Fecto
11 Flyings.
12 Gharibwal
13 Javedan Corporation
14 Kohat
15 Lafarge Pak.
16 Lucky
17 Maple Leaf
18 Pioneer Cement
19 Power
20 Thataa
21 Zeal Pak.

Hence, the following five companies will be used as sample of the study:
Symbolic representation Name of the company Market value
ACPL ATTOCK CEMENT PVT LTD. 114,522,468
CHCC CHERAT CEMENT COMPANY 105,138,103
DGKC D.G KHAN CEMENT COMPANY 438,119,097
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 3

FCCL FAUJI CEMENT COMPANY LTD 1,331,115,839
KOHC KOHAT CEMENT COMPANY 154,508,688

ANALYSIS TECHNIQUE:
To analyze and formulate the Determinants for free cash flows impacts upon profitability of selected
companies I have decided to use ordinary Least Square regression will be applied. Firm value
(profitability) is dependent variable; Dividend, Manufacturing (labor cost), interest rate, and corporate
tax has been employed as one of the determinants of profitability

SAMPLING TECHNIQUES:
The techniques I have used to evaluate my project is Random Sample Sampling, of Probability Sampling
technique.
Since the researcher has access to the list of the population, this sampling technique is found most
appropriate here.
REASONS:
The main reason behind using the Random Sample Sampling, of Probability Sampling method is
easy to reduce complexity of the project. Additionally, it will reduce biasness in selection of
sample from the population, and produce more reliable results.
INSTRUMENT:
The sources that I have selected for my studies include; research papers, on Dividend, financial
leverage size of industry and corporate tax. Beside this, I have used companys official annual
reports and ms excel calculation of each individual variable to put valuable data on SPSS results.
VALIDATION OF THE INSTRUMENTS:
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 4

The data which I have gathered from various websites are legally formal and authentic sources as
involved in their financial statements report.

Dependent variable:
Y
i
=Firm value (profitability)
Independent variable:
Firm value is dependent variable; Dividend, corporate tax, interest rate, and size of the
company in term of market capitalization are Independent variables in this research and are
calculated by the following equation.
Y
i
=
1
+
2
X
2i
+
3
X
3i
+
4
X
4i
+ B
5
X
5i

Where
1 = Intercept
B2X2i = Dividend
B3X3i = labor cost
B4X4i = corporate tax
B5X5i = Interest rate
Dividend Yield:
The dividend yield variable will be calculated by sum of all the annual cash dividends part of net
income distributed among common stock holders.
Labor cost:
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 5

Labor cost, can be categorized as direct and indirect cost, is the total of monetary amount paid
to employees, which also includes the employee benefits cost. Direct costs, it is as, the amount
paid to the labors for making a physical product, as an example, workers on assembly line. On
the other hand, in direct cost is the amount of wages paid to the support labor, for example the
office staff, who dont take work in the operation area.
Interest rate:
Interest rate can be defined as the additional amount, charged by a lender to a borrower, on
the principal amount. Interest rates are mainly charge on annual basis, which is known as
annual percentage rate (APR). Inflation rate is directly proportional to the inflation rate of the
economy, which, subsequently affect the profitability of the firm.
Corporate Tax Rate:
levy placed on the profit of a firm, with different rates used for different levels of profits. A
corporation has to pay corporate tax, for a given taxable period, usually one year, against the
profit it has earned during that period. They are generally applied to companies' operating
earnings, after expenses such as COGS, SG&A and depreciation have been deducted from
revenues.

INTERPRETATION AND RESULT

HYPOTHESIS #1
TAXATION EFFECT:
The regression analysis is used to achieve the result of a paper by testing the entire set of
variables. For this paper, the dependent variable, Profitability is tested with the independent
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 6

variable Corporate Tax. After entering the data in SPSS and running the regression tool I have
received the following Descriptive Statistics table.

From the above table I have come to conclusion that Mean of Profitability, Corporate Tax, are
13.9773 respectively. And as so the Std. Deviation of above variables, in the sequence as
mentioned, is 14063. This gives us the conclusion that the data is equally distributed and taken
from random sampling technique..

The above table shows the summary of regression analysis. Here in this table we have R as .862,
which shows a relation between the independent variables, corporate tax, but it suggests that
they have significant impact on the dependent variable Profitability. The R square approves this
with its high value of 0.744. Is a significant indicator that all the independent variables are
giving strong influence on the dependent variable. The adjusted R square which is the variance
is 0.74, which means that the dependent variable like Corporate tax responsible only for 74%
of change in the Profitability, and this is not a good indicator to conclude that these
independent variables has any strong influence to bring a change in the Profitability.
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 7

The value of R Square was 0.741, while the value of adjusted R square was 0.7480 we can see
the value of R Square is greater than Adjusted R Square which shows that there is a
improvement required.




Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 8

The value of ANOVA is helpful to describe the importance of a research hypothesis. In this
paper is 0.592 and value of significance level is 0.00. From the Sum of squares we find that
regression is .592 and residual is .796. The P-Value is less than as compared to my alpha =0.05
it is significant linear equation and on basis of this significance level which is less than , we
accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation
74.10%.






Table value of Coefficients gives us the (linear regression) (Y: a + bX) Driven. Thus, our forecast
equation for the research two variables is Profitability
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 9


It can be observe that the data is skewed which might be the cause of higher standard deviation
than mean.
HYPOTHESIS#2
Interest rate & finance cost:
The regression analysis is used to achieve the result of a paper by testing the entire set of
variables. For this paper, the dependent variable, Profitability is tested with the independent
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 10

variable Finance cost (Interest Rate). After entering the data in SPSS and running the regression
tool I have received the following Descriptive Statistics table.

From the above table I have come to conclusion that Mean of Profitability, Interest Rate are
13.67, 7.9636, and .0561 respectively. And as so the Std. Deviation of above variables, in the
sequence as mentioned, is .10371. This gives us the conclusion that the data is equally
distributed and taken from random sampling technique.

The above table shows the summary of regression analysis. Here in this table we have R as .505,
which shows a relation between the independent variables finance cost (Interest rate) but it
suggests that they have significant impact on the dependent variable Profitability. The R square
approves this with its high value of 0.904. Is a significant indicator that all the independent
variables are giving strong influence on the dependent variable. The adjusted R square which is
the variance is 0.814, which means that the dependent variable like finance cost (Interest rate)
are responsible only for 44% of change in the Profitability, and this is not a good indicator to
conclude that these independent variables has any strong influence to bring a change in the
Profitability.
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 11

The value of R Square was 0.816, while the value of adjusted R square was 0.814 we can see the
value of R Square is lesser than Adjusted R Square which shows that there is a improvement
required.




The value of ANOVA is helpful to describe the importance of a research hypothesis. In this
paper is 0.904 and value of significance level is 0.650. From the Sum of squares we find that
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 12

regression is .650 and residual is 146. The f-Value is less than as compared to my alpha =0.05
it is significant linear equation and on basis of this significance level which is less than , we
accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation
74.10%.





Table value of Coefficients gives us the (linear regression) (Y: a + bX) Driven. Thus, our forecast
equation for the research two variables is Profitability
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 13


It can be observe that the data is skewed which might be the cause of higher standard deviation
than mean.
HYPOTHESIS#3
LABOR (MANUFACTURING COST)
The regression analysis is used to achieve the result of a paper by testing the entire set of
variables. For this paper, the dependent variable, Profitability is tested with the following
independent variables, Manufacturing cost (Labor Cost). After entering the data in SPSS and
running the regression tool I have received the following Descriptive Statistics table.
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 14


From the above table I have come to conclusion that Mean of Profitability, Corporate Tax,
Interest Rate, and Labor Cost and Dividend are 13.67 and 1.11. And as so the Std. Deviation of
above variables, in the sequence as mentioned, is .10371, 0.1717. This gives us the conclusion
that the data is equally distributed and taken from random sampling technique.

The above table shows the summary of regression analysis. Here in this table we have R as .781,
which shows a relation between the independent variable manufacturing (Labor cost) but it
suggests that they have significant impact on the dependent variable Profitability. The R square
approves this with its low value of 0.610. Is a significant indicator that all the independent
variables are giving strong influence on the dependent variable. The adjusted R square which is
the variance is 0.604, which means that the dependent variable like Labor cost, are responsible
only for 73% of change in the Profitability, and this is not a good indicator to conclude that
these independent variables has any strong influence to bring a change in the Profitability.


Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 15



The value of ANOVA is helpful to describe the importance of a research hypothesis. In this
paper is 0.781 and value of significance level is 0.01. From the Sum of squares we find that
regression is .485 and residual is .311. The F-Value is less than as compared to my alpha =0.05
it is significant linear equation and on basis of this significance level which is less than , we
accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation
74.00%.

Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 16





Table value of Coefficients gives us the (linear regression) (Y: a + bX) Driven. Thus, our forecast
equation for the research two variables is Profitability
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 17


It can be observe that the data is skewed which might be the cause of higher standard deviation
than mean.
HYPOTHESIS#4
Dividend pay out:
The regression analysis is used to achieve the result of a paper by testing the entire set of
variables. For this paper, the dependent variable, Profitability is tested with the following
independent variable dividend. After entering the data in SPSS and running the regression tool I
have received the following Descriptive Statistics table.

Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 18



Regression Statistics
Multiple R 0.999691657
R Square 0.999383412
Adjusted R Square 0.999301198
Standard Error 0.883450312
Observations 5

From the above table I have come to conclusion that Mean of Profitability, Corporate Tax,
Interest Rate, and Labor Cost and Dividend are 13.9773, 7.9636, 7.42627, 9.5775 and 3.0582
respectively. And as so the Std. Deviation of above variables, in the sequence as mentioned, is
3.01377, 2.24829, 1.97154 and 1.14063. This gives us the conclusion that the data is not equally
distributed.
The value of R which is the variance is 0.998, which means that the dependent variable like
dividend are responsible only for 88% of change in the Profitability, and this is not a good
indicator to conclude that these independent variables has any strong influence to bring a
change in the Profitability.
The value of R Square was 0.941, while the value of adjusted R square was 0.883 we can see the
value of R Square is greater than Adjusted R Square which shows that there is an improvement
required.


Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 19



ANOVA

df SS MS F
Significance
F
Regression 1 189.1540384 94.87702 12156.17 8.41346E.25
Residual 4 0.117072668 0.007805
Total 5 1.89871111




Coefficients
Standard
Error t Stat P-value Lower 95% Upper 95%
Intercept -0.73958006 0.059312128 -1.24693 0.231531 -0.20037886 0.0524621
Dividend 0.432862334 0.00686002 63.09928 1.305E.19 0.418240548 0.4474525




The value of ANOVA is helpful to describe the importance of a research hypothesis. In this
paper is 0.94 and value of significance level is 0.8413. From the Sum of squares we find that
regression is 26.808 and residual is 163.931. The P-Value is less than as compared to my alpha
=0.05 it is significant linear equation and on basis of this significance level which is less than
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 20

, we accept substitute hypothesis and Reject null hypothesis. Also there is a highly correlation
43.10%.



It can be observe that the data is skewed which might be the cause of higher standard deviation
than mean.



Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 21








Conclusion And Recommendations
In this paper, as the work was carried out, hypothesis was tested using the regression analysis statistical
technique. I have found that Finance cost, Labor Cost, and Corporate tax were over all explanatory
power, which shows a strong relationship and due to this strong relationship, the null hypothesis was
rejected @5% significance level. Because the coefficient of determination of R2 on the independent
variable has moderate relation .
The research, with the primary objective, was conducted to analyze the Economical factor impact on
profitability of Cement Manufacturing Sector in Pakistan and different variable (Dividend, Corporate
Tax, Finance Cost, Labor Cost) and result showed both are variable positive relationship (Slope) which
according to result of research hypothesis .
The results suggested that Dividend, Corporate Tax, Finance Cost, Labor Cost has strong impact on
profitability of Cement Manufacturing Sector. It is oblivious that when a firm earns a great amount of
profit, it has, as per taxation rules, has to pay more corporate tax to the government of that economy.
Similarly, when a firm earns more profit which means its business is lucrative and flourishing and its
gaining more business, which requires the firm to increase its number of units produced or to expand its
line of production. This, in resulting, requires the company to hire more labor, and invent more on the
production line. This, in straight manner, results the firm to pay more finance cost and labor cost.
Because the production line is expanded the other expenses like stock storage, utilities bills will also
increase. On the basis of my work and as the result, after the interpretation of data, suggested
significant Correlation is 0.862 which means it has significant relation among profitability of the Cement
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 22

Manufacturing sector and the corporate Tax. Though there is (moderate) relation between Profitability
and corporate tax as a result of research can say that there is significant relation among variable.
Dose Finance Cost and dividend have impact on Profitability of Cement manufacturing sector in
Pakistan?
It has a significant impact on the profitability, this in result the null hypothesis. On the analysis of the
data I have found the value of correlation as 0.904 which shows a moderate relation between the
dependent variable of profitability and the independent variable finance Cost. It is, as we can say the
relationship between the independent and dependent variable is moderate we can reject the null
hypothesis. We can conclude that the increase in finance cost has direct impact on the increase of
profitability of cement manufacturers.
Dose Labor Cost and interest rate impact on Profitability of Cement manufacturing sector in Pakistan ?
From the previous empirical studies, the relationship between labor cost and profitability was validated.
And it was found through this study that the relationship between these two variables exists. Although
the result suggested a correlation value of 0.781 which is found as moderate relationship . With this
value of correlation the null hypothesis is rejected and the relationship between the two variables is
accommodated as moderate relation.
Recommendations
In the light of my research and analysis on the topic to impacts of Economical factor on Profitability of
cement manufacturing sector in Pakistan We have found link
As for the bank loans and interest rates of the government's policy are not favourable. The need
of the developing a coherent plan for the government is to allow the type of exclusion /
excellence in the cement manufacturing sector.
Serious steps are required to be taken by the policy makers on government side for the cement
manufacturing sector in order to reduce corporate tax so that the profitability of the firm makes
the firm able to investment more in the economy which will create more job opportunities.
Determinant of Free Cash Flows Impact upon Financial Performance of
cement industry of Pakistan
2014

Muhammad Amjad Islam 57678 Page 23

Cement sector requires a high amount of energy to remain functional. Therefore the
government makes ensure that the manufacturers get uninterrupted supply of energy.
Government in collaboration of the manufacturers should introduce new technology of cement
manufacturing which will help to reduce labor and manufacturing cost.
The investment volume is not satisfactory in the cement sector as compared to the Potential
available. Government should provide more incentives to the investors so that they invest in this
sector.