What Is Guidance?

Guidance refers to information 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.

Although companies are not required to provide earnings guidance, it is common practice for 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. Case in point: 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.