Corporate Governance

The Heated Debate Over EPS Guidance

By Tamar Weinrib

A debate is brewing over whether the use of earnings-per-share ("EPS") guidance provides the most accurate picture for investors and whether in today's economic environment, it is irresponsible and risky for companies to emphasize short-term results rather than long term value.  As a result, in recent years, more and more U.S. public companies are shying away from issuing quarterly EPS forecasts.

In the past, EPS guidance represented a crucial aspect of share analysis and investor communications, but issuing accurate guidance has become increasingly problematic because of many factors, including trouble estimating cash flow due to difficulties with drawing down credit and predicting customer demand.  Proof lies in the fact that 80 percent of S&P 500 companies revised earnings downward this past year.

There are concerns that in the current economic climate which is screaming for increased transparency, the elimination of quarterly EPS guidance could have the opposite effect.  Opponents of EPS guidance take the contradictory view that providing EPS guidance decreases transparency and that it is more important to focus on long term metrics and business strategy.  As an alternative to providing EPS information, some companies are providing guidance as to specific line items that they can forecast with confidence, such as operating expenses, capital expenditures, and other company-specific charges and developments.  Another alternative, which may prevent the decrease in transparency threatened by the elimination of EPS guidance, is to provide qualitative disclosures as opposed to quantitative disclosures.  The bottom line is that every company's audit committee needs to carefully review any guidance prior to disclosureand determine whether providing EPS guidance is the best way for that particular company to provide transparency for the market.

Full post as published by PomTalk on June 08, 2009 (boomark / email).