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.
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.