Free cash flow and capital structure is a widely covered topic, with several studies conducted in previous years and markets. We set out to examine the possible effects of free cash flow and capital structure on the Stockholm Nasdaq OMX between the years 2018 and 2022. Regarding this period, no previous studies had been conducted that consisted of a population encompassing an entire market. We decided to employ a deductive approach to perform our quantitative research.

Using the ORBIS database, we gathered data regarding variables free cash flow, debt ratio, debt-equity ratio, asset turnover ratio, return on equity and return on assets. Return on equity and return on assets worked as our dependent variables, with free cash flow, debt ratio, debt-equity ratio and asset turnover ratio as independent variables. After testing the data for heteroskedasticity and autocorrelation, a fixed effects regression model was both constructed and examined along with a Pearson’s correlation test. 

Our results indicated a significant negative relationship between free cash flow and return on equity, as well as a significant positive relationship between asset turnover ratio and return on equity. From these results, we gathered we had detected evidence to support the financial slack theory, which is a theory that highlights the importance of keeping an excess of resources to use when needed. The theory advocates using additional resources and not allowing an overflow of assets to gather dust in inventory.