What Is Guidance?

Guidance refers to statistical information that companies disseminate to shareholders in an effort to indicate projected future performance. Guidance, alternatively referred to as "earnings guidance" or "forward-looking statements," typically includes revenue estimates, projected earnings, and capital spending estimates.

How Guidance Works

Although companies are not legally required to provide earnings guidance, it is nevertheless common practice for many of them to do so. Earnings guidance is generally provided along with a company’s quarterly earnings reports and is often discussed during analyst meetings.

The information guidance statements provide is typically based on sales projections, market conditions, and company spending. However, some companies provide guidance on other aspects of their financial activities, such as inventory, units sold and cash flow.

Influencing Investors

Guidance reports can significantly influence an analyst's stock ratings, which may ultimately affect an investor's decision whether to buy, hold or sell a security. For example, if a company's management dispenses guidance figures that fall well below market expectations, analysts will most likely downgrade the stock, causing investors to dump their positions.

Regulations and Risks

Guidance statements carry the potential risk of being incorrect. For this reason, safe harbor provisions were instituted to protect companies from being sued, should their forward-looking expectations fail to bear out. Most notably, in 1995, Congress enacted the Private Securities Litigation Reform Act (PSLRA), which helps shield companies from securities fraud lawsuits stemming from unachieved expectations.

To further protect themselves from lawsuits, companies pair their guidance reports with disclosure statements highlighting the fact that their projections are by no means guaranteed. Furthermore, companies are under no obligation to update their guidance after initial reports are issued, even if market events render their projections unlikely.

Not everyone in the investment community hails the importance of guidance reports. Investment guru Warren Buffett recently called for companies to stop issuing quarterly earnings guidance, because he believes that it causes companies to foolishly place too much focus on "making the numbers," at the expense of nurturing long-term interests of their operations.

Key Takeaways

  • Guidance refers to information companies disseminate to shareholders in an effort to indicate projected future performance.
  • Alternatively referred to as "earnings guidance" or "forward-looking statements," guidance typically includes revenue estimates, projected earnings, and capital spending estimates.
  • Guidance reports can significantly influence an analyst's stock ratings, which may ultimately affect an investor's decision whether to buy, hold or sell a security.
  • Because guidance statements carry the potential risk of being incorrect, safe harbor provisions were instituted for the purpose of protecting companies from being sued, should their forward-looking expectations fail to bear out.
  • Companies are under no obligation to update their guidance after initial reports are issued, even if market events render their projections unlikely.


Others disagree, believing that quarterly earnings reports cause investors to become more educated about short-term results versus long-term initiatives. Proponents also believe that providing less information to the public would not inevitably reduce stock volatility.