THE RELATIONSHIP BETWEEN CASH FLOW RATIOS AND FUTURE EARNINGS AND FINANCIAL COSTS OF COMPANIES LISTED ON THE STOCK EXCHANGE OF THAILAND

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1 THE RELATIONSHIP BETWEEN CASH FLOW RATIOS AND FUTURE EARNINGS AND FINANCIAL COSTS OF COMPANIES LISTED ON THE STOCK EXCHANGE OF THAILAND Titaporn Sincharoonsak School of Accountancy, Sripatum University, Bangkok, Thailand ABSTRACT The objective of this research paper is to study the relationship of cash flows, future earnings and financial costs of companies listed on the Stock Exchange of Thailand from 2007 to 2012 using multiple regression analysis to test the hypothesis. Analysis of results from all analyzed units reveal that cash flow ratios from operations to total liabilities, cash flow ratios from operations to total fixed assets, cash flow ratios from operations to sales, cash flow ratios from operations to operations earnings, cash flow ratios from operations to owner s equity, and cash flow ratios from operations to net earnings are related to future earnings and financial costs. Cash flow ratios from operations to fixed assets are related to future earnings but are not related to financial costs. Analysis of results of sub groups in each group i.e. financial group, agro and food industry group, industrials group,and property and construction group, reveal that the cash flows of each group are related differently to future earnings and financial costs. Research results are therefore useful in applying to users of financial statement in the analysis of data and in the data presentation of the financial statementof companies listed on the Stock Exchange of Thailand. KEYWORDS Cash flow, Future earnings, Financial statements, Financial costs 445

2 INTRODUCTION Financial statement is valuable and important to users of financial statement to reflect the performance and financial position of the enterprise (Kang,2002).Cash flows budgeting is a part of financial statement that shows the changes of cash flow receipts and cash flow expenses, or cash equivalent particulars of three activities i.e. management activity, investment activity, and fund procurement, which can help users of financial statement to estimate liquidity and ability to pay debts of the enterprise (Orpurt&Zang,2009). Cash flows in management activity are data that show main activities that generate revenues for the enterprise (Dechow, Kothari & Watts, 1998). This being information to communicate or messages useful to users of financial statement (Barth, Cram &Nelson, 2002) especially for investors who use the information in decision making in estimating securities (Ball & Kothari, 1991). This research, then, has an objective to study the relationship of cash flow ratios and future earnings and financial costs of companies listed on the Stock Exchange of Thailand, by studying all the analysis of units from sample groups and analysis of sub-groups of each group, which is very useful to developing countries that need funding from abroad. They may use results from this research to specify practices in accounting to obtain correct and appropriate information on the environment and investors needs. Moreover, the Stock Exchange of Thailand is a developing capital market which is trying to emphasize the importance and usefulness of disclosure of information in the financial statement of listed companies. Especially, investors who can use the analysis of the data to appropriately supplement their investment decision making.(chen & Kaom, 2004).Moreover, the office that oversees the management of the capital market can use the resulted findings to define the disclosures of important information to create reliability among investors of both Thais and foreigners, which is an important practice in investment that will have a further positive effect on to the economic stability of Thailand. 446

3 RESEARCH METHODOLOGY There are some of 585 companies, the population of this research puts aside those companies under restoration, in the service, in the consumer product, in the resources, in the technological, and companies with an accounting period other than December 31 were excluded from the population sample for this research. Therefore, the sample group consists of 470 companies. The researcher collects data from the financial statement of the companies in the Stock Exchange of Thailand (Set Smart) and from the Security and Exchange Commission from 2007 to 2012, a total of 5 years, to use in the multiple regression analysis to test the hypothesis (Zikmund, 2008). FINDINGS The analysis of the relationship of cash flow ratios and future earning and financial costs of companies listed on the Stock Exchange of Thailand. The researcher uses multiple regression analysis from all the analyzed units from the sample groups and sub-group analysis of each group. The results of the analysis are as follows: 1. The analysis of the relationship of cash flow ratios and future earnings of all analyzed units of the sample group, from Table 1, reveals that cash flow ratios from operations to total liabilities, cash flow ratios from operations to total assets, cash flow ratios from operations to operations earnings, cash flow ratios from operations to owner s equity, cash flow ratios from operations to investing in fixed assets, and cash flow ratios from operations to sales is significantly related to future earnings. As for controlled variables, which are size and risk, these are also related to future earnings. 2. The analysis of the relationship of cash flow ratios and financial costs of all the analyzedunits from the sample group, from Table 1, reveals that cash flow ratios from operations to owner s equity, cash flow ratios from operations to total assets, cash flow ratios from operations to operations earnings, cash flow ratios from operations to total liabilities, and cash flow ratios from operations to sales is significantly related to financial costs. As for controlled variable, which is size, this is also related to financial costs. 447

4 3. The analysis of the relationship between cash flow ratios and future earnings of each, from Table 2, reveals that: ( 1 ) The results of the analysis of the relationship of financial group reveal that cash flow ratios from operations to total liabilities, cash flow ratios from operations to investing in fixed assets, cash flow ratios from operations to total assets, and cash flow ratios from operations to operations earnings are significantly related to future earnings. As for controlled variable, which is risk, this is also related to future earnings. (2) The results of the analysis of the relationship of agro and food industry group reveal that cash flow ratios from operations to total liabilities, cash flow ratios from operations to investing in fixed assets, cash flow ratios from operations to total assets, and cash flow ratios from operations to sales are significantly related to future earnings. (3) The results of the analysis of the relationship of industrials group reveal that cash flow ratios from operations to total liabilities, cash flow ratios from operations to operations earnings, cash flow ratios from operations to total assets, cash flow ratios from operations to investing in fixed assets, and cash flow ratios from operations to owner s equity are significantly related to future earnings. (4) The results of the analysis of the relationship of property and construction group reveal that cash flow ratios from operations to total liabilities, cash flow ratios from operations to sales, cash flow ratios from operations to operations earnings, and cash flow ratios from operations to total assets are significantly related to future earnings. As for controlled variables, which are size and risk, these are related to future earnings. 4. The analysis of the relationship between cash flow ratios and financial costs of each, Table 3, reveals that: (1) The results of the analysis of the relationship of finance group reveal that cash flow ratios from operations to owner s equity, cash flow ratios from operations to total assets, cash flow ratios from operations to total liabilities, and cash flow ratios from operations to investing in fixed assets are significantly related to finance earnings. As for controlled variable, which is size, thisis related to financial costs. 448

5 (2) The results of the analysis of the relationship of agro and food industry group reveal that cash flow ratios from operations to owner s equity, cash flow ratios from operations to total assets, cash flow ratios from operations to total liabilities, and cash flow ratios from operations to investing in fixed assets are significantly related to financial costs. As for controlled variable, which is size, this is related to financial costs. (3) The results of the analysis of the relationship of industrials group reveal that cash flow ratios from operations to owner s equity, cash flow ratios from operations to total assets, cash flow ratios from operations to total liabilities, and cash flow ratios from operations to investing in fixed assets are significantly related to financial costs. As for controlled variable, which is size, this is related to financial costs. (4) The results of the analysis of the relationship of property and construction group reveal that cash flow ratios from operations to owner s equity, cash flow ratios from operations to total assets, cash flow ratios from operations to operations earnings, and cash flow ratios from operations to total liabilities are significantly related to financial costs. As for controlled variable, which is size, this is related to financial costs. 449

6 CONCLUSION A study of cash flow ratios from operations to total liabilities, cash flow ratios from operations to total assets, cash flow ratios from operations to operations earnings, cash flow ratios from operations to owner s equity, cash flow ratios from operations to investing in fixed assets, and cash flow ratios from operations to sales is related to future earnings, showing that the operations by companies bring in cash or that the companies have high liquidity, supporting the companies in acquisition of more future earnings and helping the companies in decreasing financial costs. In the analysis of the sub-group of each, cash flow ratios to investing in fixed assets are not related to future earnings. This may be because investing in fixed assets is not efficient, produces no profits, or there is little investing in assets, which results in a reduced ability to make profits. Cash flow ratios from operations to owner s equity are not related to future earnings. This may be because cash flows from operations are not kept for accumulative profits but allocated for dividends resulting in little capital for expansion. Cash flow ratios from operations to sales and cash flows from operations to operations earnings are not related to financial costs. This may be because the companies do not put cash flows from operations into investment but rather borrow capital from other sources. The research results state that cash flows from operations are activities of changes of cash, which shows the changing of financial position of the companies (Sloan, 1996), and shows the policy in managing cash flows including the planning of future financial decision making (Casey & Bartizan, 1985), which will help the management or entrepreneurs to learn the facts relating to cash flows. Moreover, users of financial statement can use the analysis collaterally in making decisions efficiently (Barth, Cram & Nelson 2001), especially investors who can also use the research results in making decisions in investing in assets since cash flows are expected to be received by investors (Casey &Bartczak, 1985, Dechow, 1994). 450

7 TABLE 1 THE ANALYSIS OF THE RELATIONSHIP OF CASH FLOW RATIOS AND FUTURE EARNINGS OF ALL ANALYZED UNITS OF THE SAMPLE GROUP Variable future earnings financial costs CFOF β t-value Sig * CFOL β t-value Sig *** 0.025* CFOA β t-value Sig *** 0.000*** CFOS β t-value Sig * 0.036* CFOP β t-value Sig *** 0.047* CFOE β t-value Sig ** 0.000*** Size β t-value Sig *** 0.000*** Risk β t-value Sig *** R 2 = F = R 2 = F =

8 TABLE2 THE ANALYSIS OF THE RELATIONSHIP BETWEEN CASH FLOW RATIOS AND FUTURE EARNINGS OF EACH BUSINESS Variable Finance Agro & Food Industry Industrials Property & Construction CFOF β t-value Sig ** 0.002** 0.024* CFOL β t-value Sig *** 0.000*** 0.000*** 0.000*** CFOA β t-value Sig ** 0.006* 0.002** 0.047* CFOS Β t-value Sig * *** CFOP Β t-value Sig ** ** 0.002** CFOE Β t-value Sig * Size Β t-value Sig * Risk Β t-value Sig ** *** R 2 = F = R 2 = F = R 2 = F= R 2 = F =

9 TABLE 3 THE ANALYSIS OF THE RELATIONSHIP BETWEEN CASH FLOW RATIOS AND FINANCIAL COSTS OF EACH BUSINESS Variable Finance Agro & Food Industry Industrials Property & Construction CFOF Β t-value Sig * 0.023* 0.040* CFOL Β t-value Sig * 0.017* 0.032* 0.049* CFOA Β t-value Sig *** 0.000*** 0.000*** 0.000*** CFOS Β t-value Sig CFOP Β t-value Sig * CFOE Β t-value Sig *** 0.000*** 0.000*** 0.001*** Size Β t-value Sig *** 0.000*** 0.000*** 0.000*** Risk Β t-value Sig R 2 = F = R 2 = F = R 2 = F = R 2 = F = CFOF = cash flowfrom operationsto investing infixed assets, CFOL = cash flowfrom operationsto total liabilities, CFOA = cash flowfrom operationsto total assets, CFOS = cash flowfrom operationsto sales, CFOP = cash flowfrom operationsearningsfrom operations, CFOE = cash flowfrom operationsto owner's equity *Significant at the 0.05,**Significant at the 0.01, ***Significant at the

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