The majority of listed Swiss companies rely on short-term forecasts based on clear indicators

• 81% of the largest listed Swiss companies provide a qualitative or quantitative guidance of their future business development.
• About half of them use quantitative future-oriented targets, three quarters provide qualitative information.
• Three-quarters of the companies analysed provide guidance over a one-year horizon, taking into account the current market situation and the economic environment.

A clear majority of the largest listed Swiss companies included qualitative or quantitative guidance in their annual reports for the 2018 financial year, with a majority (55%) providing quantitative and qualitative information. In absolute terms, the proportion of companies reporting quantitative financial measures was 51%. For qualitative measures, the proportion was much higher at 74%.

Martin Meier-Pfister, Partner at IRF, comments: "Reliable forecasts for the future development of the company reduce uncertainty and thus the cost of capital. Whether and how the companies present a financial outlook depends in particular on the strategic goals, the business model and the forecasting reliability in the respective industry. What is important in any case, is that companies apply the same concept over several years. They should also transparently explain the framework conditions on which the forecasted development depends."

In terms of quantitative measures, companies commented by far the most on EBIT/EBITA/EBITDA (68%) and sales (61%). Other quantitative targets often reported as part of the guidance statements in the annual report include the future level of dividends and cash flow (26% each). Earnings or earnings per share (16%) and the expected capital ratio or return on equity (11%) were mentioned less frequently. In addition, the majority of companies providing guidance used industry-specific indicators for this purpose, such as the cost/income ratio or net new money inflow at banks, the combined ratio at insurance companies, capital expenditure at industrial companies or the vacancy rate at real estate companies.

In terms of internal performance parameters, the development of individual business areas or product groups and market benchmarks led the field. In each case, 53% of the companies commented and issued guidance on those indicators. Less frequently cited were cost-cutting programs and operational efficiency (21%) and geographic positioning (18%). Very few companies (5%) issued guidance on the future market position, whereby general statements such as "a leading position" or "one of the leading..." were not taken into account in this study.

This year's survey shows that a large majority of the companies only make short-term forecasts for the next 12 months (74%). The proportion of companies that also published medium- to long-term targets in their communication of results was much lower. 42% stated targets for the time horizon of up to three years, while longer-term targets were given by 16% of the companies surveyed. There seems to be still a clear discrepancy between the expectations of long-term buy-side investors and the short-term use of sell-side models.

In view of the current debates on climate change as well as the vigorous campaigns of both active and passive investment funds, it is to be expected that forecasts and objectives on environmental factors will increasingly be taken into account in reporting. However, its proportion was relatively low at 38%. Social indicators (43%) and quality standards (45%) were mentioned roughly as often.

A majority of the companies analyzed that provided financial guidance placed it either in a subchapter or paragraph on the outlook for the following fiscal year in the shareholders' letter or as part of the strategy discussion.

Vifor Pharma, for example, took a different approach, with its annual report containing a short and clearly illustrated separate chapter entitled "Outlook and Financial Guidance". SGS also chose an interesting path, integrating an outlook, including financial KPIs, for each business division in the annual review. In Lonza's annual report, the medium-term guidance – outlining the objectives for the current strategy period – is combined with the short-term outlook for the coming financial year on one page.

SIKA is a prime example for a comprehensive and well-structured presentation of concrete targets and their achievement, taking into account various KPIs – including ESG issues. Also Swisscom backs the achievement of objectives with clearly defined KPIs as part of the strategy discussion.

For listed companies, the following questions, among others, arise in connection with the aspect of financial guidance in the annual report:

• What additional information is required to place the forward-looking statements in a meaningful context and to identify the internal and external conditions and factors on which they depend?
• How can the short-term financial guidance and the mid- to long-term financial objectives of the corporate strategy be clearly structured and distinguished from each other?
• How can new non-financial factors relevant to investors, such as social and environmental KPIs, be integrated meaningfully into the guidance part of the reporting?
• How can the current status of target achievement be shown in the strategy discussion with relevant KPIs or milestones reached?
• What needs to be done if the framework conditions change abruptly?

In April and May 2019 IRF conducted its sixth study of the financial guidance practices of Swiss companies. The study was based on content analysis, drawing on the sections and chapters in annual reports and the presentations of 2018 annual results that contained information on corporate strategy or outlook for future reporting periods. The 47 companies in the SMI Expanded constituted the basis of the study. The SMI Expanded comprises the SMI and SMI MID indices and represents the 50 most highly capitalized securities on the Swiss stock exchange.

The full study is available to download as a PDF.