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Should We Be Worried When Companies Miss A Quarterly Estimate?

Each quarter, around 35-45% of companies report earnings below consensus estimates. This can sometimes lead to a sell off in the company shares, resulting in plunging share prices. Take, for example, last month when a prominent healthcare company in Singapore reported a weaker-than-expected quarterly result. The share price subsequently tanked 13% over the next two weeks.

Investors often get cold feet when a business reports a poor quarter but are the sell-offs really warranted?

What are earnings consensus estimates?

Equity analysts monitor a company’s progress and report on how they are faring. They might provide an estimate as to what they think the future performance of the company might be. This provides investors with an idea of what could lie ahead. The company’s management team may also occasionally offer a forecast as to how they see results in the future.

These earning estimates are publicly available and the average earnings estimate is known as the consensus. Investors often make use of this consensus to figure out the price they are willing to pay for a company. If, however, a company falls short of these estimates, they may decide that the company is worth less.

Short-term estimates misses may not reflect the bigger picture

In reality, analyst estimates are only rough forecasts and are often inaccurate. This is especially so for quarterly results that are subject to many variables that could lead to weaker than expected results or vice versa.

Short-term results may also have little correlation to the company’s overall story. This is because unforeseen circumstance or temporary setbacks can distort their results. A poor quarterly result may, hence, not necessarily reflect the bigger picture.

When should we worry?

There are instances, however, when we should start to get concerned about a company’s performance.

One example is if a company reports poorer-than-expected results for a few consecutive quarters. This could mean a fundamental change in the company’s business outlook.

Another red flag that investors should look out for is if a company’s management team is overly optimistic and constantly touts numbers that are unachievable. As investors, we should be wary of companies with management that we cannot trust.

The Foolish bottom Line

Quarterly results can often lead to wild volatility in a company’s share price, especially those that are followed closely by analysts and investors. However, as long-term investors, we should take note that a single quarter result is often too short a time frame to give a good picture of a company. There can also be one-off scenarios or temporary setbacks in the business that can distort results. Therefore, as investors, we should not be overly concerned, if our investments fall short of quarterly estimates as long as the bigger picture is still intact.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.