DEFINITION of Forward Looking
The phrase "forward looking" is a business term used to identify predictions about future business conditions, typically with publicly-traded corporations. The term is useful to stockholders, who consistently query company management about what they believe will happen in the future so that they can buy or sell shares accordingly. While no one can predict the future with absolute certainty, management is often best positioned to speak about company plans for the coming quarters, and they are often the most skilled at analyzing how future moves may dovetail with current trends.
BREAKING DOWN Forward Looking
Many companies issue disclaimers when they issue forward-looking statements. Despite an implicit understanding that certain statements are largely speculative in nature, the U.S. Securities and Exchange Commission (SEC) mandates public companies include this disclaimer on all published management materials geared toward investors. This requirement emphasizes that stockholders generally may not take legal action against company management for forward-looking statements that prove to be inaccurate.
- "Forward looking" is a business term used to identify predictions that publicly-traded corporations make about future business conditions, restructurings, earnings estimates, and other fundamental company information.
- Forward-looking statements are of particular use to stockholders, who use this information to buy or sell positions in the company.
- To reduce litigation against them, companies automatically include legal disclaimers on all outward facing investor relations materials, claiming that the forward-looking statements contained within, are merely speculative.
Example of a Forward-Looking Statement Disclaimer
An example of a disclaimer on a forward-looking statement may be found on the investor relation's section of the General Electric (GE) website. In summary, their disclaimer states that all GE public communications and SEC filings may contain "forward-looking statements" about the company's future revenues, organic growth, cash flows, cash conversions, pension funding contributions, and earnings per share--all of which may ultimately fail to come to pass.
Management may also comment on new regulation(s) and U.S. tax reform, which should likewise be taken with a grain of salt. All of these claims and many more declarations in forward-looking statements might not come to pass, but they are valuable in offering a window into how management is viewing the business environment, the company’s situation within this environment, and its goals for future growth and change.
PRIVATE SECURITIES LITIGATION REFORM ACT
In the United States, the Private Securities Litigation Reform Act of 1995, or PSLRA, provides certain safe harbor provisions against fraudulent claims, that deal with forward-looking statements. Originally passed to curb frivolous or unwarranted securities lawsuits, the PSLRA required plaintiffs to produce the specific fraudulent statements that they claim the defending party had made. Specifically, the United States Supreme Court has described several elements that a plaintiff must prove under PSLRA such as:
- The defendant made a material misrepresentation or omission
- The aforementioned misrepresentation is directly connected to the purchase or sale of a security
- Proof of loss causation, which means the transaction resulted in a loss of assets.
[Important: It is up to the discretion of each company, to determine the frequency of their forward-looking statements. Some company's offer guidance on a quarter-by-quarter basis; other on a year-by-year basis. The former model is likely to yield more accurate data.]