Profit guidance (sometimes also referred to as a forecast, outlook or projection) is when company management provide public updates to help investors improve their understanding of how the company is likely to do in its next set of earnings results.
While companies are under no concrete obligations to do this, many management teams often provide guidance ahead of reporting full earnings as a courtesy in order to provide shareholders with as much visibility as possible.
Think of this as waking up in the morning and tweeting “I’m going to have a great day today!” - this would be the “profit guidance”. Other people you encounter that day would (hopefully) have seen your declaration via tweet - they might ask you why you tweeted that, and probably adjust their behaviour towards you accordingly (with any luck, you’ll get lots of positive responses!) - think of these people as investors.
On the flip side, if you tweeted “I’m about to have a REALLY bad day today!”, people would receive this information and likely be very careful in any interactions with you that day, and you might even get a somewhat negative response from them!
Why is this important in the financial markets?
Profit guidance is a way for company management to set expectations for investors and if they provide accurate guidance, increase investor confidence in what they say. As you might have already gathered, being credible to investors is extremely important for any management team!
P.S. Ever heard of a "Profit Warning"? That's just a company in trouble providing profit guidance. Depending on the reasons behind a profit warning, share prices can drop anywhere between 5-50% in a few hours or a single day! Better not put all those eggs into one basket...
When can it get tricky?
Well, we’re glad you asked…! For companies which are surrounded by uncertainty (high growth companies, almost-bankrupt companies, or those facing large scale strikes as we tend to have so often in Europe!) - it can be very difficult for management to accurately forecast their company’s earnings before the accountants have fully done their work and produced the official set of results.
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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