CFO, take control of the profit forecast

Why profit forecasts matter so much
Analysts and investors use profit forecasts to calculate what a company is worth. They build valuation models to project how much money a company is expected to make in the future. For fast-growing companies, for whom much of their value depends on what happens in the long-term, a small change in the forecast today can have major consequences for overall valuation.

For example, suppose a tech company expects strong growth over the next five years. Much of its current share price is based on that future growth. If the company now says growth this year will be weaker than expected, investors won’t just think that this applies to this year. They’ll ask: “Does this mean growth will be lower in the coming years, and if so, how much lower?”

Investors don’t just look at the numbers that CFOs share with them in isolation. They try to interpret what those numbers mean for the company going forward. If a company revises its profit forecast downwards, investors rarely think, “Okay, this year is a bit weaker.” Instead, they often think: “Something may be wrong at this company—maybe there is more bad news to come”.

The market reaction is amplified by the way modern markets work. Computers are often programmed to sell automatically shares of companies when they detect certain words like “reduced outlook” or “disappointing results.” Algorithmic trading effectively means that even small downward revisions in profit forecast can trigger significant sale volumes.

Large investment funds (so called momentum funds) that follow market trends can make the problem worse. Once the price of a stock begins to drop in response to revisions in profit forecast, they can trigger sales of that stock, intensifying the drop in share price. As analysts don’t want to be the only ones still optimistic if everyone else turns pessimistic, they may sooner or later choose to revise their forecast models and recommendations downwards. The result: a small adjustment in your forecast can snowball into a significant decline in stock price.

From quick recovery to escalating uncertainty
How much a downward revision in profit forecast can cause declines in share price depends on what investors think is happening with the company. The illustrative examples below outline how markets can react differently to revisions in profit forecast. The examples are based on company generating a cash flow of 100 in year one, growing by 2.0% per year, which announces a downward revision in its profits in year one by 25%.

• Quick recovery: If investors perceive the cause of the downward revision to be temporary, affecting the profits of year one only, then the above downward revision can result in an overall decline in the valuation obtained by a discounted cash flow model (DCF) (at 10.0% discount rate) of only 2.5%. For example, a company’s share price dropped nearly 20% in August after tariff-related bad news. But recovered within a week when investors realized that measure wouldn’t impact the company.
• Slow recovery: In this scenario, investors think the recovery in cash flows will take longer affecting the cash flows of the next four years. The valuation obtained by a DCF model in this case drops by 5.5% as investors must wait longer for a recovery but still believe in a full rebound.
• Permanent loss of value: This scenario is more serious. If investors believe lower profits are here to stay, expectations for all future years will be revised downwards. Take for example, a company that reports strong Q3 2024 results but reports weak Q4 2024 guidance due to lower demand expectations. The stock price falls sharply and stays at low levels because investors think: “this is the new normal, there is a permanent loss of value, it’s unlikely the share price will recover anytime soon.”
• Escalating uncertainty: This represents the worst-case scenario, where investors expect profits to decline year after year. In such circumstances, the company’s fundamental value, and consequently its share price, can fall sharply. A loss of investor confidence may prove critical, making it far more difficult for the company to attract new investment.

The role of communication

CFOs can take several steps to prevent an unnecessary and unwanted decline in share price following revisions to profit forecasts. The most important is maintaining clear and transparent communication with the markets.

• Use ranges: Instead of communicating in absolute terms, for example, stating “€10 million profit”, it is often better to present forecasts as ranges, such as “between €9 and €11 million.” This approach acknowledges the inherent uncertainty in forecasting and prepares investors for potential deviations. It also helps analysts model different scenarios more effectively. The drawback, however, is that some investors may focus on the lower end of the range.
• Build trust: A track record of realistic forecasting builds investor trust, creating a buffer when downward revisions become necessary. However, repeated disappointments can quickly erode that trust.
• Explain what’s happening: It is important to distinguish between temporary issues and structural changes. If the challenge is temporary, explain the cause and indicate when it is likely to be resolved. If it is structural, outline the steps being taken to address the problem and move towards recovery. For example, a company may report poor results in February 2025 and revise its forecast downwards again in March, leading to a sharp drop in share price. By August 2025, however, the share price may (partly) recover if management has consistently explained the situation and maintained regular communication with investors.
• Keep the message consistent: Whether speaking to journalists, analysts, or at investor days, keep your story aligned. Contradictions cause confusion and harm credibility.

The hard choices
As a CFO you face tough dilemmas:

• The timing dilemma: When should bad news be shared? Announcing it too early may trigger an unnecessary drop in company value, even if the effect proves temporary as markets adjust. Waiting too long, however, risks damaging credibility, leading to a loss of value that can be far more lasting.
• The scope dilemma: How much should you disclose when the full picture is still unclear? Understating the bad news may lead to further downward revisions later, eroding investor trust. Overstating it, on the other hand, can drive the share price down too sharply and risk disappointing long-term investors.

Different market reactions to forecast revisions
Practice shows wide differences in how markets react to revisions on profit forecast. Some companies suffer sharp sell-offs in reaction to minor downward revisions because years of optimism and patterns of overly rosy forecasts have left their valuations fragile.
Some companies recover quickly from setbacks. Their strength lies in consistent, realistic communication with the markets, which builds what can be called “credibility equity”, a reserve of trust with investors. When these companies revise profit forecasts downward, investors are more likely to view it as a responsible management decision rather than a cause for alarm.
Some companies are surprised when markets react strongly to what they perceive as minor changes. This reaction often stems from a lack of understanding of how investors think and interpret revisions to profit forecasts.

Trust as a valuable asset
Revisions to profit forecasts are inevitable, and every company will face them at some point. What matters most is how they are communicated. Poorly handled, they can amplify negative impacts on the share price; managed well, they can reinforce investor confidence.
Careful assessment, clear explanations, and a credible recovery plan help preserve trust. In this way, revisions become a tool for guiding investors rather than a source of additional problems for CFOs.
For CFOs, credibility with investors is as valuable as money in the bank. It underpins access to capital, a critical factor in turning future plans into reality.
The lesson is clear: if companies do not take control of how their forecasts are communicated, the market will draw its own conclusions, and those may diverge from the intended message, with costly consequences.

Essay by Costas Constantinou, Partner at Oaklins and Gerbrand ter Brugge, Partner and Global Head of ECM at Oaklins. Published in Management Scope 08 2025.