What is a profit warning?

A company often gives guidance to the analysts over what they think the profits are going to be next year, or the year after.

Analysts rely on this information coming out from companies, which is why many analysts talk to chief executives and chief financial officers, to get a gauge as to how the company’s performing.

Only when they have some guidance as to what is going to be happening to the profits can they use those profits, (future profits as well), to discount the future profits back to today, to come up with a valuation for the company.

If a company said, we think we are going to be making 100 million dollars worth of profits next year, analysts can use that figure to try and work out what the share price should be today.

But, if the company then turns around and says, you know how we told you we were going to make $100 million? – well it’s not quite that. We had some pretty awful weather, and so therefore retail sales aren’t as good as we thought they were going to be.  So instead of $100 million, it’s going to be $90 million.

So the company has issued a profit warning, and the analysts then go back, plug the $90 million back into their spreadsheets, to come up with what they think the valuation should be today.

Consequently, when a company has a profit warning, the analysts have to recalculate to think what the company is worth now, and obviously it’ll be lower than what they were previously, and the share price falls.  So a profit warning is generally accompanied by a share price fall.

Investors in PMP (ASX: PMP), Ten Network (ASX: TEN), QBE Insurance (ASX: QBE) and Myer (ASX: MYR) unfortunately all have first hand experience!

If you’re in the market for some high yielding ASX shares, look no further than our “Secure Your Future with 3 Rock-Solid Dividend Stocks” report. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

 More reading

The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, a podcast by David Kuo, originally appeared on fool.co.uk


Forget BHP and Woolworths. This "dirt cheap" company is growing like gangbusters, and trading on a 5.6% dividend yield, FULLY FRANKED (8% gross). With interest rates set to stay at these low levels for years to come, for hungry investors, including SMSFs, this ASX company could be the "holy grail" of dividend plays for 2016.

Enter your email below to discover the name, code and a full investment analysis in our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2016.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.