VEM’s top 10 rules of earnings guidance

If you are thinking about giving earnings guidance, or are already doing it, there are some important issues to consider. Here are VEM’s top 10 rules of earnings guidance:

1. There is no right or wrong answer on whether to give explicit guidance.

2. You can't ignore the issue. Under ASX listing rules, you need to consider whether your results will vary a material amount (more than 10% to 15% for most companies) from the previous year or the market consensus – and if so, disclose this to the market. This also begs the question of what exactly is the "market consensus".

3. Before you give guidance, think about the fact that you will be training the market to expect guidance into the future. Go to Point 10 and consider a scenario in which you would be likely to turn off the earnings guidance tap, and how.

4. Look at your track record of meeting internal (or public) estimates.

5. Look at your internal estimates and ask what could go wrong. Don’t publish internal (stretch) budget estimates. Look at least initially to “under-promise and over-deliver” – it’s always better to upgrade forecasts, which can be done as the year progresses.

6. Look at the volatility of past results, for example a 12-month moving total around an average and/or prior estimate.

7. Provide a range rather than a specific point estimate – such as an EPS forecast of 10% to 15%. This is far more realistic given the assumptions in forecasts. Note that the ASX has indicated it would prefer companies didn't use terms such as “single-digit” or “double-digit” growth.

8. Provide the important assumptions and background information to allow an appreciation of the performance drivers of the company.

9. Update the forecast on a regular basis, either to reaffirm or vary it. This applies the economist’s motto – “if you are going to forecast, forecast often”.

10. If for some reason, you decide to “turn off” the earnings guidance tap, make sure you give the market notice (at least one reporting period) and a very good reason for doing so.

Finally, if you are having difficulty weighing up the issue, or want to obtain an objective perspective, you may wish to obtain the advice of an experienced IR consultant such as VEM. An independent consultant may provide valuable assistance in the areas of (a) setting the most appropriate guidance for a company in a particular industry, relative to its peers, and (b) a practical risk assessment of the guidance, before it is issued.