Revenue Guidance is the New Earnings
Stock investors live for the quarterly earnings report. A few weeks after the quarter ends, a company releases its quarterly report in which it discloses its balance sheet, cash flow statement and income statement. Among other things, analysts pay close attention to the much anticipated earnings number that appears at the bottom of the income statement. When this number is greater than what the analysts had predicted, the stock price will often move higher. And of course, if this number is less than what the analysts predicted, the stock price moves lower. Nowadays, however, analysts tend to give as much weight to revenue guidance as they do earnings.
Revenue guidance takes into account management's view for the upcoming quarters. They will offer insights as to which products and services will sell well with particular emphasis on pricing and volume. In essence, they craft a total revenue breakdown based on sales volume and pricing assumptions. Analysts take this number seriously as it is the best overall proxy for a company's growth. In other words, if the revenue guidance is strong, growth is strong. Strong growth translates to strong valuation. Earnings remain an important aspect of performance yet they do not always indicate growth. For example, a company may employ various cost cutting measures such as layoffs and technological enhancements to improve a company's bottom line. While the company may earn more, their revenues may be flat or even worse, shrinking.
Cost cutting is good for profits but the impact may be limited. Eventually, no amount of cost cutting will help a company with declining revenue which is why revenue guidance is so important. Most of all, guidance is only effective when a company meets the expected numbers in the future. Forecast are good but results are better.
Reuben Advani is the president of The BARBRI Financial Skills Institute and the author of two finance books. More information on this and other topics can be found at http://legalpractice.barbri.com.