If you’ve ever listened in on earnings calls or examined an earnings press release, you’ve heard the terms “guidance” and/or “outlook.” Traders tend to focus more on guidance and outlook than earnings, because they want an idea of where future earnings are headed.

Here’s a look at why  That in mind, let’s take a look at why this is important

Guidance and outlook

Guidance gives investors and traders an idea of where the company believes its earnings are headed, either for the next fiscal quarter or the current fiscal year. It’s quite simply what the company expects to report for the guidance period.

With that in mind, when a company issues its fiscal results, market participants want to pay attention. Companies are not required to provide guidance, but it’s common practice in many companies.

Guidance and outlook are known as “forward-looking statements,” meaning they are predictions and projections but they’re not facts nor are they guaranteed to occur. Typically, management is giving an indication of where it thinks revenues, net income and earnings per share (EPS) are headed.

Let’s take a look at an example of a company that issued guidance.

Lowe’s Companies Inc. (LOW) reported its first quarter 2017 financial results in May 2017, and provided forward-looking guidance. From the company’s press release:

“Fiscal Year 2017 — a 52-week Year (comparisons to fiscal year 2016 — a 53-week year; based on U.S. GAAP)

•Total sales are expected to increase approximately 5 percent

•Comparable sales are expected to increase approximately 3.5 percent

•The company expects to add approximately 35 home improvement and hardware stores.

•Operating income as a percentage of sales (operating margin) is expected to increase approximately 120 basis points.2

•The effective income tax rate is expected to be approximately 37.8%.

•Diluted earnings per share of approximately $4.30 are expected for the fiscal year ending February 2, 2018; reflective of the loss on extinguishment of debt and resulting lower interest expense.”

Source: BamSEC

Therefore, investors could expect its total sales to rise about 5%; the company reaffirmed its previous guidance.

Final thoughts

Look to see whether a company offers guidance, as it gives an idea of where its future earnings and revenues are headed. Just remember that these figures are not set in stone and companies can change guidance at any point; that’s often why there are “surprises” during earnings season.

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  Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, using stocks, options and leveraged ETFs.

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