Advertisement

Profit warning

A profit warning is when a listed company announces that its profits are going to be significantly lower than the market currently expects.

Listed companies must notify the market in a timely manner of any major developments or information that would, if generally available, be likely to have a significant effect on the company's share price. These rules are meant to prevent insiders from gaining an advantage over other investors by having an opportunity to trade using price-sensitive information before anyone else gets to hear about it.

Advertisement - Article continues below

Some of the major events that need to be disclosed are obvious: mergers, legal decisions that go against the company, and any changes to top management. Another situation where the company may have to make an announcement is if management realises that its profits are going to be significantly lower than the market currently expects.

In cases where the company has made official profit forecasts, or implied in conversations with analysts that it expects a certain outcome, the law is clear that it has to notify the market of any major changes. If the company has deliberately remained silent, and analysts have come to their own conclusions, it has more leeway on whether or not to disclose, especially if the new forecasts are themselves uncertain. However, many companies choose to disclose pre-emptively anyway.

Profit warnings can often look to unwary investors like tempting buying opportunities and sometimes they are. But remember that the old City saying "profit warnings come in threes" exists for a reason. The initial profit warning may simply be the start of the revelations a problem that management had originally hoped would go away may merely get worse, and you often have to see heads rolling before a genuine turnaround can begin. So do your homework before you buy a troubled stock (or "catch a falling knife", as the City jargon has it).

Advertisement
Advertisement

Recommended

Visit/glossary/technical-analysis
Glossary

Technical analysis

Technical analysts or 'chartists' attempt to predict future share price (or index) movements by looking at past movements.
5 Jun 2020
Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/spending-it/glossary/601300/quantitative-investing
Glossary

Quantitative investing

Quantitative investing uses sophisticated computer-based mathematical models to identify and carry out trades.
8 May 2020
Visit/glossary/quantitative-easing-qe
Glossary

Quantitative easing (QE)

Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
8 May 2020

Most Popular

Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020
Visit/investments/stockmarkets/601460/disease-rioting-and-mass-unemployment-so-why-are-markets-soaring
Stockmarkets

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
Visit/economy/eu-economy/601463/why-a-stronger-euro-is-good-news-for-investors
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020