Should MicroCaps Issue Annual Financial or Non-Financial Guidance?
According to the NIRI 2016 survey of best practices in the US, 94% of US firms issue financial or non-financial guidance, or both. The top five metrics reported are:
1. Revenue or sales
2. Tax rate
3. Capital expenditures
5. Operating expenses/margins
Pros of issuing annual financial guidance generally come down to helping the investment community understand market dynamics, managements’ growth and profitability expectations and the sources of potential headwinds/tailwinds in the business during the fiscal year.
The most obvious disadvantage of issuing guidance is the consequence of missing that guidance. Other critics have pointed to guidance as a time distraction for management teams ‒ which could be more profitably employed running the business ‒ as well as the short-termist nature of most guidance.
Mike Piccinino, a managing director on the medical device and diagnostics team at Westwicke Partners,notes that the metrics a company will issue varies dramatically by industry and maturity. ‘For example, a pre-revenue life sciences company may guide on operating expenses or cash burn, while a mature healthcare services company may choose to guide on revenue by division, gross margin, operating expenses and tax rate.’
Piccinino continues, ‘It is important to note that providing guidance doesn’t mean giving every detail. The best approach, in our experience, is to provide the key information analysts and investors need to understand the trends of your business, not necessarily every line of the P&L.’
Lack of analyst coverage also makes guidance important for microcap public companies. If a microcap isn’t telling the market where they are headed, who will?
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