What is a Profit Warning?

A profit warning is an advance notice that a company’s anticipated earnings for the current period will not comply with the expectations previously issued by industry analysts. The warning is usually issued to investors via the stock exchange where the shares are traded, but may be in the form of a formal announcement that is mailed to each investor. Typically, a profit warning is released two to three weeks before the actual earnings for the period are made public.

While a profit warning is usually issued when earnings are expected to be below projected levels, it is also possible for a company to issue a warning when earnings are anticipated to exceed those expectations. With either application, the intent is to prepare investors for the information that will shortly be released in the earnings announcement. When estimates indicate that the earnings will be lower than previously thought, this serves to soften the shock to investors. In the event that earnings are likely to exceed previous projections, the warning serves as news to anticipate extraordinarily good news at the upcoming investor relations meeting.

The text of a profit warning may be brief and straightforward, or include a great deal of information for investors to consider. In situations where the warning serves as an advance notice of higher than anticipated earnings, the text may include general information regarding which products generated larger sales, or which measures were taken to reorganize the operation and generate the additional earnings. The warning may also provide some generalities about any factors that were involved in the reduction of earnings, providing investors with at least some understanding of what has transpired. The official earnings announcement will contain more specific data regarding the outcome of the earnings for the period cited, which in turn may be explored in more detail at the shareholders meeting.

While there are no set rules that define when a profit warning must be issued, most companies do time the release so that investors have the information in hand two to three weeks before the official earnings announcement. This is usually considered an equitable time frame, since it close enough to the final release of figures to be a reliable indicator of the final tally of earnings for the period. At the same time, the profit warning is not so far in advance of the announcement that the projection fails to consider data that is likely to have an effect on the final tally of earnings for the period.

Investors can make use of the profit warning to begin thinking of how to manage their holdings once the official figures are released. If the earnings are down, the warning provides investors with time to consider whether to sell their interests, or hold onto their shares in anticipation of improvement during the upcoming period. Should earnings be up, investors can consider purchasing additional shares and strengthen their position, or sell the shares for a higher return if the stock is anticipated to begin a downward trend in the near future.