As the turn of the year approaches, listed companies are considering their earnings guidance for the coming financial year. According to the Accounting Act, the Board of Directors' report must contain an assessment of the company's likely future development.
Listed companies often publish their assessment in financial reports in addition to the board’s annual report, either as a general outlook or as an earnings forecast. Earnings forecasts may be presented either as a numerical or a verbal description.
Although not mandatory, an earnings forecast facilitates discussions with investors on the company’s prospects and ensures that investors have the opportunity to obtain fair and adequate information on matters material to the value of the share. Good earnings forecasting practices contribute to correct share price formation in the market. A numerical earnings forecast also facilitates the assessment of the need for a profit warning within the company. The Finnish Financial Supervisory Authority therefore recommends that forward-looking information is provided in the form of an earnings forecast where possible. Also, according to the rules of the Stock Exchange, if a forecast is published, it must be presented in as unambiguous and consistent a manner as possible.
It is also worth remembering that even if a company does not provide an earnings forecast, the need for profit warnings does not disappear. In this case, too, the company must constantly assess the need for a profit warning. In the absence of an earnings forecast, the assessment of the need for a profit warning should be based on what the market expects from the company on the basis of its previously published information. For early-stage and newly listed companies, this may be particularly difficult, if past performance is poorly illustrative or the nature of the business makes forecasting particularly difficult.
If analyst reports are published on the company, the analysts’ consensus forecasts may play a role in assessing the need to issue a profit warning. Not all listed companies have analyst coverage, and many have only one analyst. The assessment of market expectations may then be based on a very narrow view. If, in such a situation, the company has made only a general assessment of future developments without an earnings forecast, the forecast of a single analyst may play a major role in the analysis of the need for a profit warning.
At Bravura, we analysed the earnings guidance by companies on the Nasdaq First North Growth Market in Helsinki during autumn 2023. The situation was reasonably good, as 32 of the 50 companies had provided earnings guidance for 2023. All of those providing guidance had estimated revenue growth, with about half in verbal form (e.g. revenue will grow compared to the previous year) and the other half in a range (e.g. revenue will grow xx-xx%). Profitability guidance also varied. Profitability guidance was provided by 25 companies, and almost all had EBIT, EBITA or EBITDA as a measure of profitability. There were roughly equal numbers of verbal and numerical profitability forecasts.