Earning Guidance? Pro & Contra

The figures speak for themselves: According to a Q4 report, more and more listed companies are publishing an annual earning guidance. According to this report, the number of companies issuing such earnings forecasts increased sixfold between 1995 and 2007. The number of companies that issue quarterly earning guidance has even increased sevenfold. What are the advantages and disadvantages for a company to make such earnings forecasts?

On the one hand, an improvement in earnings forecasts is mentioned as an advantage. According to the report, there is also an increased volume and reduced volatility. Today, almost everyone agrees that more information and transparency is a good thing. Approximately 94% of the 360 respondents in the 2016 NIRI Earnings Process Guidelines Study offer some form of guidance. Not necessarily a single metric such as free cash flow, ROIC or EBITDA margin needs to provide the best guidance. Other key figures on which the company and its shareholders rely are conceivable.

However, many CEOs stress that focusing on quarterly performance – and thus on publishing a quarterly earning guidance – is often counterproductive and therefore a disadvantage. It does not promote “right” management behavior. For the long-term success of a company, long-term decisions, the right investments, the development and continuous training of employees or the long-term growth of the company are important. Short-term earning guidance cannot reflect this.