The relationship between cash flow and capital expenditure in the sugar industry of Pakistan

Free cash flow and capital expenditure go side by side in industries all over the world. There appears to be a good balance between dividends to shareholders and capital expenditure in the firms. Capital expenditure allows companies to enhance production techniques and quality maintenance. Pakistan is an agriculture-driven economy and does not enjoy industrial growth and incremental GDP annually. Through this study, an effort was made to prove that free cash flow is used for capital expenditure in the sugar industry of Pakistan. Annual financial statement data for 27 sugar mills of Pakistan, listed on Karachi Stock Exchange (KSE), was taken to calculate free cash flow and annual capital expenditure over the 2000-2011 periods. Linear regression test was run on the secondary data to study the relationship between the two variables. The results hence proved that a relationship exists between the two. The study shows that free cash flow in the sugar industry of Pakistan is used for capital expenditure among other things; it can be used as dividends among shareholders or held back as retained earnings.