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Definition: Profit Warning
A profit warning is an announcement made by a listed company to its shareholders indicating that the earnings for a given period will be lower than what was expected. It is announced to the shareholders either through the stock exchange or mailed to each investor. It is usually given two or more weeks before the company’s actual earnings announcement. It is done in order to give the investors and the market an advanced warning so that they get the time to adjust to the negative earnings.
Shareholders should be prepared to sell immediately when a company issues a profit warning as one announcement frequently follows another. Typically, shareholders may suffer a loss of about 20-50% following a profit warning. Another consequence is the time taken for investors to regain confidence in the company which may stretch up to a few years.
Procter & Gamble announced a profit warning on April 24, 2013 indicating that its profits would fall below expected levels due to increased spending for promoting several new products. Soon after the announcement, the shares of P&G fell by 6%.