Introduction
The guidance refers to analytical data that firms share with their investors (stockholders). This is done to keep them informed about the predicted performance in the coming days.
Guidance is also referred to as 'forward-looking statements' and 'earnings guidance'. It generally covers the estimation of revenues, estimation of capital spending, and expected earnings.
Understanding Guidance
There are no hard and fast rules that bond companies must hand out earning guidance. However, it is considered a good practice and most companies provide their investors with this information. Generally, the company's quarterly earnings report is accompanied by earnings guidance and is analysed in-depth in the board meetings of most companies.
The data given by earnings guidance reports are usually based on the market conditions, sales projection, and company spendings. Nevertheless, earnings reports are not just restricted to that as many companies cover other financial aspects, such as cash flow, units sold, inventory, cost of expansion, acquisition, additional revenue in any form, and tax refunds.
How Guidance Influence Investors?
Earnings guidance can effectively influence the rating of stocks given by analysts. This will, in turn, have a more significant impact on investors when they decide to either sell, hold, or purchase a particular security.
For instance, if a firm's management gives out guidance data that are not up to the market expectations and conditions, then analysts will go on to give a lower rating to that stock and the investors may be influenced to give up on their position.
Disadvantages of Guidance
Earnings guidance reports can sometimes be incorrect, and this can adversely impact the growth of the company as investors may decide to exit the company's holdings fearing adverse outcomes in the future.
Recently, Warren Buffet asked companies to end their practice of handing out earnings guidance reports as it leads to firms giving too much emphasis on 'making the numbers' by ignoring their long-term objective of growth and expansion.
