The Effect of Free Cash Flow on Debt Policy

Oct 13, 2025 by talynt.org 77 views

The Influence of Free Cash Flow, Tangibility, and Financial Distress on Debt Policies on Food and Beverage Companies Listed on the Indonesia Stock Exchange (IDX) in 2014-2017

Introduction

In the business world, especially for companies listed on the Indonesia Stock Exchange (IDX), debt management is one of the most crucial aspects to achieve sustainable growth. The ability to manage debt effectively can have a significant impact on a company's financial performance and stability. This study aims to investigate the effect of free cash flow, tangibility, and financial distress on debt policies in food and beverage sector companies during the 2014 to 2017 period. Understanding the relationship between these factors can provide valuable insights for financial managers and stakeholders in the industry.

Research Methodology

This study uses a causal study method, involving 23 companies as a population and applying saturated sampling techniques that produce 92 data for further analysis. The data used in this study is secondary data, where information is collected through documentation methods. To analyze data, researchers use multiple linear regression techniques. This approach allows for the examination of the relationships between free cash flow, tangibility, financial distress, and debt policy.

The Effect of Free Cash Flow on Debt Policy

Free cash flow refers to the liquidity available to the company after all capital expenses are met. When free cash flow is high, companies have more funds to be invested or needed to cover debt obligations. In other words, companies that have excess cash tend to be more confident in using debt as an additional source of financing, so that it can grow faster. The results of this study show that free cash flow has a positive and significant effect on debt policy. This suggests that the higher the free cash flow of a company, the greater the company's ability to take debt.

The Effect of Tangibility on Debt Policy

Tangibility, which is a measure of the fixed assets of a company, does not have a significant relationship with debt policy. This may be caused by the fact that companies in the food and beverage sector are more dependent on other factors such as market demand and marketing strategies rather than just having physical assets. The lack of a significant relationship between tangibility and debt policy suggests that companies in this sector may not rely heavily on their physical assets to finance their operations.

The Effect of Financial Distress on Debt Policy

Financial distress, or financial difficulties, is a crucial factor that has a negative impact on debt decisions. Companies that experience financial distress tend to avoid taking new debt because of concerns about the ability to repay the debt. Unstable financial situation makes investors and lenders more hesitant to provide funds, which in turn limits company access to external funding sources. The results of this study show that financial distress has a negative and significant influence on debt policy, implying that poor financial conditions will reduce the company's tendency to owe.

Conclusion

Seeing from the results of this study, it can be concluded that free cash flow and financial distress have a significant influence on the debt policy of food and beverage companies listed on the IDX. While tangibility does not show significant impact. In-depth understanding of these factors is very important for financial managers in formulating the right financing strategy, in order to balance the growth and financial risks that the company might face. This study provides useful insights for stakeholders in the food and beverage industry about the importance of wise financial management and strategic planning in debt decision making.

Implications of the Study

The findings of this study have several implications for financial managers and stakeholders in the food and beverage industry. Firstly, companies with high free cash flow tend to be more confident in using debt as an additional source of financing. This suggests that companies should focus on generating excess cash to improve their debt-taking ability. Secondly, companies experiencing financial distress should avoid taking new debt to minimize the risk of default. Finally, companies should not rely heavily on their physical assets to finance their operations, as tangibility does not have a significant relationship with debt policy.

Limitations of the Study

This study has several limitations that should be noted. Firstly, the study only focuses on food and beverage sector companies listed on the IDX, which may limit the generalizability of the findings. Secondly, the study uses secondary data, which may be subject to errors or biases. Finally, the study only examines the relationship between free cash flow, tangibility, financial distress, and debt policy, and does not consider other factors that may influence debt decisions.

Future Research Directions

This study provides a foundation for future research on the relationship between free cash flow, tangibility, financial distress, and debt policy. Future studies could examine the relationship between these factors in other industries or sectors. Additionally, future studies could investigate the impact of other factors, such as market demand, marketing strategies, and financial leverage, on debt decisions. Finally, future studies could explore the implications of the findings for financial managers and stakeholders in the food and beverage industry.

References

[List of references cited in the study]

Appendix

[Appendix materials, such as additional tables or figures, that support the findings of the study]
Q&A: The Influence of Free Cash Flow, Tangibility, and Financial Distress on Debt Policies on Food and Beverage Companies Listed on the Indonesia Stock Exchange (IDX) in 2014-2017

Q: What is the main objective of this study?

A: The main objective of this study is to investigate the effect of free cash flow, tangibility, and financial distress on debt policies in food and beverage sector companies listed on the Indonesia Stock Exchange (IDX) during the 2014 to 2017 period.

Q: What is free cash flow, and how does it affect debt policy?

A: Free cash flow refers to the liquidity available to the company after all capital expenses are met. When free cash flow is high, companies have more funds to be invested or needed to cover debt obligations. The results of this study show that free cash flow has a positive and significant effect on debt policy, suggesting that companies with high free cash flow tend to be more confident in using debt as an additional source of financing.

Q: What is tangibility, and how does it affect debt policy?

A: Tangibility refers to the measure of the fixed assets of a company. The results of this study show that tangibility does not have a significant relationship with debt policy, suggesting that companies in the food and beverage sector may not rely heavily on their physical assets to finance their operations.

Q: What is financial distress, and how does it affect debt policy?

A: Financial distress refers to the financial difficulties experienced by a company. The results of this study show that financial distress has a negative and significant influence on debt policy, suggesting that companies experiencing financial distress tend to avoid taking new debt due to concerns about the ability to repay the debt.

Q: What are the implications of this study for financial managers and stakeholders in the food and beverage industry?

A: The findings of this study have several implications for financial managers and stakeholders in the food and beverage industry. Firstly, companies with high free cash flow tend to be more confident in using debt as an additional source of financing. Secondly, companies experiencing financial distress should avoid taking new debt to minimize the risk of default. Finally, companies should not rely heavily on their physical assets to finance their operations.

Q: What are the limitations of this study?

A: This study has several limitations that should be noted. Firstly, the study only focuses on food and beverage sector companies listed on the IDX, which may limit the generalizability of the findings. Secondly, the study uses secondary data, which may be subject to errors or biases. Finally, the study only examines the relationship between free cash flow, tangibility, financial distress, and debt policy, and does not consider other factors that may influence debt decisions.

Q: What are the future research directions based on this study?

A: This study provides a foundation for future research on the relationship between free cash flow, tangibility, financial distress, and debt policy. Future studies could examine the relationship between these factors in other industries or sectors. Additionally, future studies could investigate the impact of other factors, such as market demand, marketing strategies, and financial leverage, on debt decisions.

Q: What are the practical implications of this study for financial managers and stakeholders in the food and beverage industry?

A: The findings of this study have several practical implications for financial managers and stakeholders in the food and beverage industry. Firstly, companies should focus on generating excess cash to improve their debt-taking ability. Secondly, companies experiencing financial distress should avoid taking new debt to minimize the risk of default. Finally, companies should not rely heavily on their physical assets to finance their operations.

Q: How can this study be applied in real-world settings?

A: The findings of this study can be applied in real-world settings by financial managers and stakeholders in the food and beverage industry. For example, companies can use the results of this study to inform their debt financing decisions, taking into account their free cash flow, tangibility, and financial distress. Additionally, companies can use the results of this study to develop strategies to improve their debt-taking ability and minimize the risk of default.