- What is guidance in business?
- Why do companies provide guidance?
- When is it provided?
- Where do you find a company’s guidance?
- Is issuing guidance compulsory for ASX companies?
- How does it influence investors?
- What happens if a company exceeds its guidance?
- And what if it falls below?
- Why monitor company guidance?
Providing financial forecasts or projections, commonly known as company guidance, serves as a beacon in the world of investing, shedding light on a stock's anticipated financial trajectory.
But why do companies open this window into their fiscal future? Understanding the motivations behind this practice is crucial for both shareholders and the businesses themselves.
In this article, we look at why companies issue guidance, how it shapes investor expectations, and what happens when actual results differ from the advice.
What is guidance in business?
Company guidance refers to the practice of public companies providing financial forecasts or projections regarding their future performance. This often includes estimates of revenue, earnings per share (EPS), and other key financial metrics.
Essentially, it's a company's way of offering its best guess about where it's headed financially. These projections are typically based on the company's internal analysis and market conditions.
Notably, a company can revise its guidance up or down if the outlook changes. This might occur due to a change in economic or market conditions, operational challenges, fluctuating exchange rates and commodity prices, or the effect of acquisitions or divestitures, among other reasons.
The timing and frequency of revisions depend on the company's industry, the volatility of its operating environment, and the accuracy of its initial forecasts.
Stakeholders closely monitor revisions to gauge a company's adaptability and its ability to navigate changing conditions effectively.
Investors can contrast company guidance to estimates generated by external analysts based on their models, projections, and evaluations. Consensus estimates of company earnings comprise estimates from several analysts.
Having estimated a company's future earnings, analysts can use cash flow discounting to approximate a fair value of equities, which in turn gives target share prices.
Why do companies provide guidance?
Companies issue guidance for several reasons. One of the primary reasons is to enhance transparency. Disclosure of guidance allows companies to communicate their expectations to shareholders, analysts, and the general public.
This transparency and disclosure helps in building trust and credibility with stakeholders.
Investors often rely on guidance when making investment decisions. It provides a benchmark against which they can compare a company's actual performance. This helps shareholders make informed choices about buying, holding, or selling shares.
Companies also provide guidance to manage the expectations of the market. By setting sensible targets, they can avoid situations where shareholders might have unrealistic expectations.
Companies are not legally required to provide guidance, but many choose to do so to manage expectations. Disclosure of earnings guidance can signal management's confidence in its potential growth and stability.
Even if a company doesn't provide guidance, investors will judge financial results against consensus estimates. When companies refrain from providing guidance, stakeholders may think management is not confident in its ability to control the company's financial performance.
When is it provided?
Company guidance is often provided immediately after a company releases its latest financial reporting, annual report, or quarterly earnings.
It can include short-term estimates of revenue, earnings per share, earnings before interest tax, depreciation and amortisation (EBITDA), and net profit after tax (NPAT), among other metrics. The most popular guidance method is to provide a range within which the company expects a particular metric to sit.
Guidance can also be a fixed estimate or information about the direction the company expects specific metrics to head in.
A company may provide a 'forward-looking statement' outlining how it expects to perform in the months ahead. In addition to statistical information, many companies will disclose their strategy in their earnings guidance.
This will typically cover the priorities and issues the business expects to address in the coming months.
Where do you find a company's guidance?
Knowing where to access company guidance is essential for informed investment decision-making. Various sources allow interested parties to discover guidance issued by equities listed on the ASX.
- Company reports: Most companies release guidance in annual reports, financial statements, or investor presentations. These documents are accessible on the company's website or through the stock exchange site on which the company is listed.
- Analyst reports: Financial analysts and research firms often compile and publish reports summarising company guidance, making it more accessible to investors.
- Earnings calls: Many companies discuss their guidance during quarterly earnings calls. These are often open to the public and can include a Q&A session with financial analysts.
- Stock exchange platforms: You can find guidance for ASX-listed companies on the ASX website, where you can access company announcements1.
Is issuing guidance compulsory for ASX companies?
While ASX-listed companies are encouraged to provide guidance, it's not compulsory. Unlike some other stock exchanges globally, the ASX does not mandate that companies must offer this advice. The decision to provide guidance is ultimately at the discretion of each company, considering their unique circumstances, strategies, and preferences.
The lack of compulsory guidance issuance on the ASX allows companies to decide on the most appropriate approach based on their specific industry, market conditions, and competitive landscape.
While some companies may find value in issuing guidance to manage investor expectations and attract potential investors, others may prefer to avoid making specific projections.
Ultimately, the decision to provide or not provide guidance depends on the company's management, its assessment of the potential benefits and drawbacks, and its commitment to fostering transparency and trust with the investing community.
How does it influence investors?
The guidance a company provides can significantly impact investor sentiment and decisions. Here's how:
- Investor expectations: When a company's guidance aligns with or exceeds investor expectations, it often results in increased confidence and, consequently, has a positive impact on the stock price.
- Market reactions: The market often reacts swiftly to companies exceeding or falling short of their guidance. Stock prices can experience sharp short-term fluctuations based on these outcomes.
- Investor sentiment: Guidance can influence investor sentiment. Positive guidance can attract more investors, while negative direction can deter them.
- Risk assessment: Investors use guidance to assess the risk associated with a particular investment. Meeting or exceeding guidance may suggest a lower risk level.
What happens if a company exceeds its guidance?
When a company exceeds its guidance, it typically indicates that the company is performing better than expected.
This can lead to a rise in the company's share price. Shareholders are generally pleased with outperformance, and this can attract more capital. Outperformance can also boost investor confidence in the company's management and strategy, potentially attracting long-term investors.
Companies that consistently exceed their guidance over the long term also typically receive favourable media coverage, which can further boost their reputation.
And what if it falls below?
On the flip side, if a company falls short of its guidance, it raises concerns among shareholders. This can lead to a decline in the stock price if investors sell shares in response to the disappointing performance.
Financial analysts may downgrade the stock and issue adverse reports, which can deter potential investors. Repeatedly missing guidance can erode trust in the company's leadership and negatively impact its reputation.
Why monitor company guidance?
Company guidance is vital for investors to understand a business's anticipated performance and make informed investment decisions.
While not mandatory for ASX-listed companies, guidance plays a pivotal role in shaping investor sentiment and stock price movements.
Monitoring a company's ability to meet or exceed its guidance can provide valuable insights into its financial health and management's ability to execute its strategy.
Companies typically provide guidance in their annual reports, financial statements, and investor presentations, which are available on their websites. Many companies also discuss guidance during quarterly earnings calls, which can be open to the public. You can find guidance for ASX-listed companies on the ASX website, where company announcements are posted.
Profit guidance is a specific type of company guidance that focuses on projected earnings or profitability. It includes estimates of future revenues, expenses, and net income. Companies provide profit guidance to give investors and analysts insights into their financial health and expected profitability. This information helps investors assess the company's potential for generating earnings, which is a critical factor in determining the stock's value.
When a company lowers its guidance, it indicates that its expectations for its future financial performance have become less optimistic. This can result from various factors such as changing market conditions, economic challenges, operational issues, or unexpected events. Lowering guidance suggests that the company may face difficulties in achieving its earlier projected financial targets. Investors often interpret lowered guidance as a signal of increased risk and potential challenges ahead, which can negatively impact the company's stock price.