RBR Advisory partner, Julie Palmer, explains what events typically lead up to a company issuing a profit warning, and why a company would publically declare a period of poor trading performance.
Profit warnings are issued by companies when they’re aware their earnings outlook or upcoming profit level will be lower than that forecast by the market. City analysts track companies listed on the stock exchange and receive briefings from company executives on the organisation’s performance, projecting earnings, and profit figures based on this information.
The reason this is done is because it is an offence to create a false impression of a company’s performance and it’s imperative to correct misleading information or forecasts that have been issued to investors and the general public.
If company executives know their profits won’t be as high as those forecast by the analysts, therefore, it must be publicly disclosed to shareholders and the stock market by way of a profit warning statement. The reasons why a profit warning has been announced should also be provided.
The implications of profit warnings for businesses and investors
Investors typically use a company’s earnings outlook and profit forecasts to guide their investment decisions, so the implications of a profit warning for both businesses and investors can be significant.
Profit warnings are typically announced towards the end of a financial period – perhaps two or three weeks prior to the issue of a new earnings outlook. When provided at this time they offer analysts and investors the opportunity to modify their expectations of the company’s performance.