What Is Company Guidance?
A public company's guidance is its report to shareholders on the earnings it expects to achieve in the quarter or fiscal year ahead. Alternatively referred to as earnings guidance or a forward-looking statement, the report typically includes revenue estimates, projected earnings, and capital spending estimates.
- Guidance is a company's estimate of its current-quarter earnings.
- It is usually published immediately after earnings for the past quarter and is the focus of discussion at a meeting between company executives and analysts.
- Company guidance often changes analysts' ratings for better or worse.
Company guidance is typically released immediately after a company releases its latest quarterly earnings report. A company may revise its earnings guidance upwards or downwards later in the quarter if its outlook changes significantly.
How Company Guidance Works
Although companies are not legally required to provide earnings guidance, it is common practice for many of them to do so. Earnings guidance is generally provided immediately after a company’s quarterly earnings reports and is often discussed in depth during a meeting between industry analysts and company executives.
The information guidance is typically based on sales projections, market conditions, and anticipated company spending. Some companies provide guidance on other aspects of their financial activities, such as inventory, units sold, and cash flow.
Guidance reports can significantly influence analysts' stock ratings, which affect many investors' decisions on whether to buy, hold, or sell a stock.
If a company's management dispenses guidance figures that fall well below market expectations, a number of analysts will probably downgrade the stock, causing many investors to dump it.
Regulations and Risks
There is always a risk that a company's guidance may turn out to be wrong. Few investors mind if the company low-balls its estimate. Many are irate if they miss their stated goals.
In the U.S., safe harbor provisions protect companies from being sued if they fail to meet their own forward-looking expectations. 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.
A Word of Warning
To further protect themselves from lawsuits, companies pair their guidance reports with disclosure statements maintaining that their projections are by no means guaranteed.
Companies are under no obligation to update their guidance after initial reports are issued, even if subsequent events render their projections unlikely. Some do, in order to get the bad news out there before the earnings release date.
Some in the investment community feel that guidance does a company and its investors more harm than good. Investment guru Warren Buffett recently called for companies to stop issuing quarterly earnings guidance. He believes that it forces companies to place too high a priority on making the numbers at the expense of nurturing the long-term interests of the business.
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.