Earnings forecast

Michelle Hsu, The China Post

The recent deep plunge in the share prices of Citicorp and J.P. Morgan should intensify investors’ anxiety on the validity of corporate financial reports. The share prices of the two international financial groups, which were reputed for their professionalism, dipped 20 percent on Tuesday alone. Investors dumped their shares because they suspected the companies of being involved in the accounting deception of the bankrupt Enron Corp.

Investors have been distressed by the series of corporate scandals in the U.S. They will become even more so if they knew financial institutions were accomplices in the scandals. The phenomenon is not limited to the U.S., as the Taiwan stock market has also been plagued with similar problems. Six companies recently made sharp reverses in their earnings forecast figures from expected earnings of tens of billions of NT dollars to multi-million losses. Among the nearly 200 electronics companies listed on the Taiwan Stock Exchange (TSE), only 49 companies have had their earnings for the first six months reach 50 percent of their annual earnings forecast. Around 70 companies saw their first-half earnings amount to less than 35 percent of their annual forecast and six even revised their forecasts from profits to losses.

The sharp deviation of the reality from the forecast has made investors skeptical about corporate credibility. Some even wander if it’s necessary for companies to make earnings forecasts.

In fact, Taiwan is one of the few countries where earnings forecasts are mandatory for public companies. Traditionally, public companies were required to publish financial reports only. The information presented in a financial report, however, is all historic data and does not reflect a company’s prospects. Regarding the idea that predictions for the future should be a valuable resource for investors, the Securities and Futures Commission (SFC) in 1991 adopted a new policy to ask all public companies to issue annual earnings forecasts.

Though it is like a prediction of future plans, an earnings forecast should not be made public unless it has been approved by the board of directors and certified by public accountants. A company should revise the forecast if there is a deviation of 20 percent, or NT$30 million, in the pre-tax earnings forecast. A company should also make the revision public so investors would be aware of the change.

Six companies have made downward revisions to their earnings forecasts, and many more may follow suit during the second half when the deviation between the real figures and their forecasts expands.

Among the six companies who made downward adjustments to their earnings forecasts, Macronix International made the biggest revision, and it even revised its forecast twice. The first time, from projected pre-tax earnings of NT$8.46 billion to NT$3.6 billion, and for the second time, to only NT$71.46 million. While the latter figure is much lower than the original prediction, it was still an over-optimistic figure as the company finally reported a loss of NT$9.655 billion.

The sharp gap between reality and predictions makes investors wonder how forecast figures are made. Actually, as the TSE statistics indicated, over 40 percent of public companies revised their earnings forecasts every year since the mid-1990s. Some companies defended themselves by saying, “the earnings-forecast policy was made under the old economy, and may not necessarily fit the new-economy era distinguished by rapid market changes.”

This statement implies the difficulties to be found in making correct predictions amid the changing markets. Some even called for a revision of the current policy, in order to make earnings forecasts optional, not compulsory.