What is 'Guidance'

Guidance is information a company provides as an indication or estimate of its future earnings. It is an "expected results" issue from a company to shareholders and market watchers as to how it envisions a future period turning out. Such guidance typically includes revenue estimates, along with earnings, margins and capital spending estimates; it is also known as "earnings guidance."

BREAKING DOWN 'Guidance'

Companies are not required to provide earnings guidance; however, it is a common practice. Most companies provide earnings guidance during specific financial releases and discussions. It is commonly provided with a company’s quarterly earnings report and comments. Companies may also provide guidance with specific market transactions or during analyst meetings.

Forward-Looking Statements

Guidance is also known in the market as forward-looking statements. Guidance statements can include a variety of information typically based on sales projections, market conditions and company spending. Companies usually provide guidance in the form of expectations for revenue and earnings. However, many companies provide guidance on different aspects of their financial activities including inventory, units sold or cash flow.

Guidance reports estimating a company's future earnings can have a major influence over analyst stock ratings and investor decisions to buy, hold or sell a security. For instance, if a company's management disseminates guidance figures well below what those on the street would expect for a future period, the most likely outcome from analysts is a downgrade or at the very least lowered estimates.

Regulations and Risks

Guidance and forward-looking statements can have risks associated with them. For that reason, safe harbor provisions were instituted to protect companies from lawsuits associated with not achieving forward-looking expectations. Most notably in 1995, Congress enacted the Private Securities Litigation Reform Act (PSLRA). This Act helps to protect companies from securities fraud lawsuits that stem from unachieved expectations. It also helps to provide parameters for defining forward-looking statements.

Issuing Guidance With Clarity and Caution

Companies that issue forward-looking statements do so with a high level of clarity and caution. To protect themselves from any legal issues that may arise as a result of forward-looking statements, companies pair their statements with disclosures outlining the nature of the statements and the fact the statements are only based on potential circumstances and assumptions with no guarantee on their achievement. Additionally, companies are not obligated to provide any updates to any guidance or forward-looking statement once it is reported, regardless of market events or company actions that may cause changes to a company’s outlook or guidance.

RELATED TERMS
  1. Long Run Incremental Cost - LRIC

    Long run incremental cost (LRIC) refers to the the changing costs ...
  2. Forward Looking

    "Forward looking" is a business term for predictions about future ...
  3. Forward Earnings

    Forward earnings are an estimate of a next period's earnings ...
  4. Financial Statements

    Financial statements are written records that convey the financial ...
  5. Inherent Risk

    The risk posed by an error or omission in a financial statement ...
  6. Account Statement

    An account statement is a periodic summary of account activity ...
Related Articles
  1. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  2. Investing

    A Holiday Hangover for Target

    Target got a stocking stuffed with coal and lower-than-expected sales figures this holiday season.
  3. Investing

    What are Financial Statement Assertions?

    Understand financial statement assertions and what they mean in accounting. For investors, it is important that assertions be accurate.
  4. Financial Advisor

    Pairing Annuities and Target Date Funds: Top Tips

    The Treasury and the IRS have issued new guidance on pairing annuities with target date funds. Here's a look.
  5. Investing

    Allergan Is Playing Its Cards Close To The Vest

    Allergan gave a preview of its full year 2017 EPS and revenue guidance.
  6. Investing

    Can Micron’s Stock Rebound?

    Micron Technology Inc. reported fiscal Q4 results and gave Q1 guidance well ahead of estimates.
  7. Insights

    Navigating Government and Nonprofit Financials

    Examining government & nonprofit financials can help you trace where your dollars are really going.
  8. Investing

    Look For These Red Flags In The Income Statement

    Companies can overstate their revenues and understate their losses to boost investor confidence. Learn how to spot the these red flags in income statements.
RELATED FAQS
  1. How are the three major financial statements related to each other?

    Learn why investors analyze a company's financial statements, and how the income statement, balance sheet and cash flow statement ... Read Answer >>
  2. What is the difference between a compiled and a certified financial statement?

    All publicly-traded companies are required to provide financial statements, including a balance sheet, cash flow statement ... Read Answer >>
  3. How the income statement and balance sheet differ?

    The balance sheet shows a company’s total value while the income statement shows whether a company is generating a profit ... Read Answer >>
  4. What kind of financial reporting requirements does GAAP set out?

    Look at some of the major financial reporting requirements set forth by the generally accepted accounting principles and ... Read Answer >>
  5. What are the differences between income statements from merchandising companies vs. ...

    Learn how merchandising companies and service companies have to account for different information when preparing an income ... Read Answer >>
  6. What does financial accounting focus on?

    Learn the main tenets of financial accounting, the guidelines by which it is governed and how outsiders use it to gauge a ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center