Earnings Guidance - Needed?

A majority of the companies across the world provide earnings guidance. It's in the form of a target number that the company projects it will reach in terms of revenue, profit, growth etc. It is provided by companies because providing guidance increases liquidity for companies that might otherwise be ignored, and liquidity helps to reduce volatility. Also companies like to tell their stories themselves rather then letting analysts speculate. Another reason is earnings are a key part of corporate performance. Such information is important for the market to know.

And yet, the evidence continues to build that the theory of earnings guidance is all wrong. There are many who look at guidance in a negative light. They contest that it imbeds perverse incentives (to manage the numbers rather than the business), relies on dubious assumptions (that earnings should be stable), and feeds into a short-term mentality. The stock market existed for centuries before guidance became common practice in the early 1990s, so it can certainly function without it. Also research by McKinsey actually suggests that for large companies earnings forecasts actually increase volatility because the fact of hitting or missing creates trading action.

Earnings guidance is not knowledge. It is just an educated guess, or rather, an aspirational one that far too many companies will fold, spindle or mutilate themselves to meet. Take the example of Enron for the worst-case scenario of guidance gone amok. Companies like the New York stock Exchange (NYSE), Berkshire Hathaway, Google, and JP Morgan Chase do not provide a earnings guidance. Good economic performance is a process, not a number. All these companies provide other details to the market like medium-to long-term goals for each of its businesses, return on equity, company's priorities, strategy, issues and finances. Even the Chinese Communist Party gets this concept. Like Warren Buffett and the gang at Google, China has come to recognize good management requires that numbers be servants, not masters. Their newest five year plan does not feature an economic growth target.

Companies ought to re-look at the need to provide earnings guidance and see if other parameters can be provided instead.

Innovation at the railway station

Baba went to Bhadrachalam last night and all of us along with Ahan went to the station to see him off. It was after a long time that we went to see off Baba and it felt nice. He too felt nice and it was the first time that the entire family was together in the new car.

Yet again gettting a platform ticket at the station was a time consuming affair. The counters for getting a platform ticket ought to be different from the ones where you get train tickets. I did notice a novel idea though. I am sure we all know of the weighing machine at the station. Well this one at Secunderabad station had weight, height, BMI and platform ticket all in one for Rs.5/-. Pretty novel idea I must say. Three bucks for the platform ticket (valid for 2 hours) and two bucks for the other services being provided. There is need for more such innovation to be brought to the common man. A commendable effort on this one.

Ahan starts turning on his stomach

Since yesterday Ahan has started turning on his stomach! Yesterday he turned 4 months and 12 days old. He is mostly turning on his left hand side. Its a pleasure to see your baby growing up and Geeta and I look at each other with a sense of accomplishment and pride each time he does something new.

The EV/EBITDA ratio

An alternative to the P/E ratio that is often used is the valuation multiple or enterprise multiple called EV/EBITDA. EV stands for Enterprise Value and takes equity as well as debt into consideration. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The advantage of this ratio over P/E ratio is that it takes debt into account in the numerator and the denominator is not distorted by the effects of individual countries' taxation policies. The enterprise multiple looks at a firm as a potential acquirer would. Obviously, a company with a low enterprise multiple can be viewed as a good takeover candidate.

Keep in mind though that enterprise multiples can vary depending on the industry. Therefore, it's important to compare the multiple to other companies or to the industry in general. High growth industries command higher enterprise multiples and slow growth industries have lower multiples.

Ahan comes home!

I brought Geeta and Ahan home today from my in-laws at Bangalore. Atti and Vishu (my mother in law and brother in law) also accompanied us. We reached early morning at 4:40am and Ashwin came to receive us at the station with the new car. The journey to Hyderabad was pleasant, especially so for me since it was the first time in the last few months that I was not traveling alone! Plus this was also the first time that I was traveling with Ahan!

We visited the Ganesh Temple on our way home. Ahan entered the house after the traditional "aarti". Geeta's "oti bharane" then followed. Baba will be home this evening from tour and we are all eagerly awaiting him. He called and we spoke this morning and I could make out he is just counting minutes. We missed Aai today. She would have been so happy to receive Ahan home. Anyway, I am sure she is overlooking all this and making it happen.

Now that Geeta and Ahan are home, time spent at home will be all the more special. There will be reason to come home as early as possible and weekends would be awaited that much more. I am looking forward to spending time with MY family! :)