What is an Earnings Guidance?
An earnings guidance is the information provided by the management of a publicly traded company regarding its expected future results, including estimates of revenues, expenses, margins, and earnings. In addition, the company’s management sets up its future direction by defining its short-term and long-term goals.
The earnings guidance is important information delivered to the company’s shareholders, market analysts, and potential investors. The information is disclosed in the company’s quarterly and annual reports.
Publicly traded companies are not obligated to provide earnings guidance statements regarding future financial performance. However, the majority of public companies provide such information. Earnings guidance can affect the recommendation of a stock analyst or the decision of potential investors.
Sources of Earnings Guidance
There are several major sources of earnings guidance, including:
1. Quarterly and annual reports
Public companies are required to provide publicly available quarterly and annual reports (10-Q and 10-K in the U.S.) with past financial results and earnings guidance on expected financial performance. The most crucial part of the reports is the management’s discussion and analysis of financial condition and results of operations (MD&A). In this section, the company’s management analyzes its financial results in a given period, as well as provides insights and expectations for future periods.
2. Earnings call
An earnings call is a conference call between the management of a company, investors, analysts, and media. The earnings calls support the information provided by a company in its reports. During the earnings call, the management discusses the major financial results, while investors, analysts, and the media can ask questions about the main concepts or events. Companies usually publish the recordings of their earnings call on their respective websites.
3. Press release
Before the publication of financial reports or an earnings call, a press release becomes available to the public. In the press release, information about the dates of the reports and the conference call is disclosed. In addition, the main past financial results and earnings guidance are provided.
Reliability of Earnings Guidance
Although earnings guidance is a vital source of information from the company’s insiders, an analyst or an investor should not make his stock recommendation or investment based solely on this source.
Though the information is provided by insiders, earnings guidance is considered a subjective view on the company’s future financial performance, which is exposed to uncertainties and risks. There is no guarantee that the goals and results contained in the guidance will be achieved. The company’s reports are accompanied by cautions and disclaimers regarding the guidance and forward-looking statements to prevent any legal issues.
In the U.S., companies are protected by the Private Securities Litigation Reform Act (PSLRA). Under the law, they cannot be held liable for failing to achieve the goals and expectations outlined in the earnings guidance.
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