The Hindu Business Line : The quarterly conundrum

While quarterly earnings announcements are useful in monitoring the performance of the companies, the media and the analysts need not play up the event.

Yet another quarterly earnings season is upon us. Investors wait in suspense to see how the various companies in their portfolio have performed, analysts are busy working out their estimates of the performance of the plethora of sectors they track and finance departments of companies are working overtime to ensure they do not disappoint the shareholders and the analysts.

All those related to the stock market have to go through this crunch time every three months. The quarterly earnings analysis and its impact on the stock prices keep everyone up late into the night. The question is: Do we need to go through this quarterly earnings season four times in a year?

The debate is not new. There is a growing clamour to do away with the quarterly earnings announcements and the guidance issued by the companies. The latest to raise the voice against this tradition is the US Chamber of Commerce. Its press release of March 14 called for ending the practice of issuing quarterly guidance as it promotes short-term thinking and encourages executives to manage earnings. The Securities and Exchange Board of India Chairman, Mr M. Damodaran, voiced his concern on the culture of corporate guidance by saying that he preferred the industry chieftains to "strategise rather than to engineer results".

Mandatory

Quarterly earnings announcements are mandatory, as the companies listed on the stock exchanges have to publish quarterly earnings as part of the Listing Agreement. This is done to protect investor interest by ensuring adequate disclosure.

Quarterly earnings announcement are justified as investors, being owners of companies, have a right to keep tab on the performance of the corporates they are invested in.

What can be done away with is the hype surrounding these announcements. The build-up ahead of the announcement and the stock price gyrations motivated by half-baked analysis on the day of the earnings announcement are something all of us can do without.

The guidance for the subsequent quarters issued by companies is entirely optional. Many companies refuse to fall into this trap while other manage not just to issue guidance but also better it after three months.

Then there are others that spout figures with just the short-term stock price movement in mind. Whatever the motive behind the guidance, the lack of legislation to monitor it makes it open to misuse by unscrupulous promoters.

Short-term thinking

Both quarterly earnings as well the accompanying guidance promote the short-term thinking culture among the investors. With the growing reach of television and the Internet, for investors there is no escaping the figures that are bombarded on them. The impact of these announcements is so great on the stock price movement that it is difficult for the long-term investors to turn a blind eye to these figures.

Reacting to these earnings has invariably been detrimental, as the long-term growth prospects are not wholly reflected by these numbers. The earnings growth has to be monitored over at least four quarters to get even an idea of a company's growth trajectory.

Company managements too find it stressful to cope with the need to show a growth in earnings and margins, quarter after quarter.

The quarterly Profit and Loss account is scrutinised so minutely by analysts and investors that even a tiny dip in the quarter-on-quarter or year-on-year margins gets blown out of proportion causing unnecessary consternation among the shareholders.

Managements under pressure

Managements have not only to better their performance every quarter; also have to reel out guidance for the forthcoming quarters. So there is the additional pressure of at least performing to achieve the guidance issued. And then there are the various estimates issued by research outfits ahead of the earnings season. The onus is on the company to beat these estimates, if they wish to keep the stock price buoyant.

It would be possible to avoid an Enron-like debacles if the top management concentrated on the long-term strategic growth, even if it meant that the earnings take a hit over a few quarters.

The preoccupation with meeting the stock market expectations every quarter would only cause a reduction in the company's future growth prospects.

While investors need quarterly earnings announcements to monitor the performance of the companies they are invested in, the media and the analysts need to show maturity and not play up the event to such an extent that they force investors to act impulsively.

Legislation can be mooted to cover quarterly guidance so that companies are more careful while they crystal-ball gaze every quarter.

More Stories on : Corporate | Insight | Performance | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Create a land market

Budget: A welcome paradigm shift

The quarterly conundrum

Rise of China and India — Resetting the terms of world trade

Mediclaim: A premium trouble

Weird turns in a wireless deal