The Effect of Cash Flows on Firm’s Profitability of Construction Sector in Malaysia

Abstract

This research investigates the effect of cash flows towards firm’s profitability using the data collected and analysed from listed firms in construction sector on Bursa Malaysia. The sample comprises of 98 firms and the data is for 6 years throughout January 2009 to December 2015. For the purpose of this analysis, a discriminatory panel regression and Pearson correlation are used to test the hypotheses. This research uses cash flow from operations (CFO), cash flow from investments (CFI), and cash flow from financing (CFF) activities as independent variables to measure cash flows. In order to measure the firm’s profitability, this research uses Return on Assets (ROA) as the dependent variable. The result from this research reveals that cash flows from operations (CFO) and cash flow from investments (CFI) has a significant and positive impact on the profitability of the firms. The findings also show there is a negative relationship exists between cash flow from financing (CFF) and firm’s profitability.Thus, taking all into consideration, this research provides insights to the business managers in overseeing the cash for ongoing operations, controlling the investing strategy and tracking the financing activities for survival and growth of the organisation. On the other hand, other stakeholders of the business use historic cash flows in this information set to make projections for future cash flows investment decisions.