Improving cash flow management

Oct 13, 2025 by talynt.org 126 views

Analysis of the Effect of Free Cash Flow to Firm and Dividend Payout Ratio on Stock Prices in Companies that have the Sri-Kehati Index on the Indonesia Stock Exchange

Introduction

The Indonesia Stock Exchange (IDX) is one of the largest stock exchanges in Southeast Asia, with a vast array of companies listed on its platform. Among these companies, those that have been included in the Sri-Kehati Index are considered to be leaders in their respective industries, known for their commitment to sustainability and social responsibility. However, despite their reputation, these companies are not immune to the fluctuations of the stock market. In this study, we aim to examine the influence of two important variables, namely Free Cash Flow to Firm (FCFF) and Dividend Payout Ratio (DPR), on the stock prices of companies listed in the Sri-Kehati Index on the Indonesia Stock Exchange.

Methodology

This study employed a quantitative approach, using multiple linear regression analysis to examine the relationship between FCFF, DPR, and stock prices. The sample consisted of 13 companies listed in the Sri-Kehati Index, selected through purposive sampling. The analysis was conducted using panel data, which allowed us to account for the time-series nature of the data.

Free Cash Flow to Firm (FCFF) and its Negative Effects

FCFF is an indicator that measures cash flow available for all fund providers in the company, both shareholders and creditors. The results of this study showed that FCFF had a negative effect on stock prices. This may be interpreted as follows: high free cash flow is not always accompanied by an increase in stock prices. This could be due to market perceptions that companies may not manage their free cash flow efficiently, or the market is worried about poor investment potential for cash that is not used.

For example, if a company has a large cash flow but is unable to invest it in a profitable project, investors may see this as a sign that the company is less innovative and risky, leading to a decline in stock prices. This highlights the importance of effective cash flow management in maintaining investor confidence and stock prices.

Dividend Payout Ratio (DPR) and its Positive Influence

On the other hand, the DPR, which shows the proportion of profits distributed to shareholders in the form of dividends, had a positive effect on stock prices. When companies have a high DPR, this is usually considered a positive signal by the market, indicating that companies have good financial health and are able to provide returns to investors. High dividend announcements can increase investor confidence, causing an increase in stock prices.

Investors tend to appreciate certainty in the form of regular dividend payments, especially in unstable market situations. This created a greater request for the company's shares, which ultimately boosted stock prices. This highlights the importance of dividend decisions in attracting investors' attention and maintaining stock prices.

Conclusion and Implications

This research provides insight into the importance of cash flow management and dividend decisions in attracting investors' attention. Companies that are active in managing FCFF well and able to provide attractive dividends tend to be more successful in maintaining their share prices. For stakeholders, especially investors and company managers, understanding the influence of FCFF and the DPR on stock prices is very important.

With the right investment strategy, investors can use this information to make smarter decisions in investing in the stock market, especially in companies listed in the Sri-Kehati index, which are known to pay attention to aspects of sustainability and social responsibility. This study contributes to the existing literature on the relationship between FCFF, DPR, and stock prices, providing valuable insights for investors, company managers, and policymakers.

Recommendations

Based on the findings of this study, we recommend that companies listed in the Sri-Kehati Index prioritize effective cash flow management and dividend decisions. This can be achieved by:

Improving cash flow management: Companies should focus on investing their cash flow in profitable projects, rather than holding onto it.
Increasing dividend payments: Companies should consider increasing their dividend payments to attract investors and maintain stock prices.
Communicating with investors: Companies should communicate effectively with investors about their cash flow management and dividend decisions to maintain transparency and trust.

By following these recommendations, companies listed in the Sri-Kehati Index can improve their stock prices and maintain investor confidence.

Limitations

This study has several limitations that should be noted. Firstly, the sample size was limited to 13 companies, which may not be representative of the entire population of companies listed in the Sri-Kehati Index. Secondly, the study only examined the relationship between FCFF, DPR, and stock prices, and did not consider other factors that may influence stock prices.

Future Research Directions

Future research should aim to:

Examine the relationship between FCFF, DPR, and stock prices in other industries: This study only examined the relationship between FCFF, DPR, and stock prices in companies listed in the Sri-Kehati Index. Future research should aim to examine this relationship in other industries.
Consider other factors that influence stock prices: This study only examined the relationship between FCFF, DPR, and stock prices. Future research should aim to consider other factors that may influence stock prices, such as earnings per share, return on equity, and debt-to-equity ratio.

By addressing these limitations and expanding the scope of the study, future research can provide more comprehensive insights into the relationship between FCFF, DPR, and stock prices.
Q&A: Understanding the Effect of Free Cash Flow to Firm and Dividend Payout Ratio on Stock Prices

Q: What is the significance of this study?

A: This study aims to examine the influence of two important variables, namely Free Cash Flow to Firm (FCFF) and Dividend Payout Ratio (DPR), on the stock prices of companies listed in the Sri-Kehati Index on the Indonesia Stock Exchange. The findings of this study can provide valuable insights for investors, company managers, and policymakers on how to maintain stock prices and attract investors' attention.

Q: What is Free Cash Flow to Firm (FCFF)?

A: FCFF is an indicator that measures cash flow available for all fund providers in the company, both shareholders and creditors. It is calculated by subtracting capital expenditures from operating cash flow.

Q: What is the relationship between FCFF and stock prices?

A: The results of this study showed that FCFF had a negative effect on stock prices. This means that high free cash flow is not always accompanied by an increase in stock prices. This could be due to market perceptions that companies may not manage their free cash flow efficiently, or the market is worried about poor investment potential for cash that is not used.

Q: What is Dividend Payout Ratio (DPR)?

A: DPR is the proportion of profits distributed to shareholders in the form of dividends. It is calculated by dividing the total dividend payment by the net income of the company.

Q: What is the relationship between DPR and stock prices?

A: The results of this study showed that DPR had a positive effect on stock prices. When companies have a high DPR, this is usually considered a positive signal by the market, indicating that companies have good financial health and are able to provide returns to investors.

Q: What are the implications of this study for investors?

A: Investors can use the findings of this study to make smarter decisions in investing in the stock market, especially in companies listed in the Sri-Kehati index, which are known to pay attention to aspects of sustainability and social responsibility.

Q: What are the implications of this study for company managers?

A: Company managers can use the findings of this study to prioritize effective cash flow management and dividend decisions, which can help to maintain stock prices and attract investors' attention.

Q: What are the limitations of this study?

A: This study has several limitations that should be noted. Firstly, the sample size was limited to 13 companies, which may not be representative of the entire population of companies listed in the Sri-Kehati Index. Secondly, the study only examined the relationship between FCFF, DPR, and stock prices, and did not consider other factors that may influence stock prices.

Q: What are the future research directions?

A: Future research should aim to:

Examine the relationship between FCFF, DPR, and stock prices in other industries: This study only examined the relationship between FCFF, DPR, and stock prices in companies listed in the Sri-Kehati Index. Future research should aim to examine this relationship in other industries.
Consider other factors that influence stock prices: This study only examined the relationship between FCFF, DPR, and stock prices. Future research should aim to consider other factors that may influence stock prices, such as earnings per share, return on equity, and debt-to-equity ratio.

Q: What are the practical implications of this study?

A: The findings of this study can be used to inform investment decisions, dividend policy, and cash flow management. Companies can use the results of this study to prioritize effective cash flow management and dividend decisions, which can help to maintain stock prices and attract investors' attention.

Q: What are the policy implications of this study?

A: The findings of this study can be used to inform policy decisions related to corporate governance, dividend policy, and cash flow management. Policymakers can use the results of this study to develop policies that promote effective cash flow management and dividend decisions, which can help to maintain stock prices and attract investors' attention.