Stock Analysis

Ranger Oil's (NASDAQ:ROCC) Solid Profits Have Weak Fundamentals

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NasdaqGS:ROCC
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Despite posting some strong earnings, the market for Ranger Oil Corporation's (NASDAQ:ROCC) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

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earnings-and-revenue-history
NasdaqGS:ROCC Earnings and Revenue History March 15th 2022

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Ranger Oil expanded the number of shares on issue by 186% over the last year. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Ranger Oil's EPS by clicking here.

How Is Dilution Impacting Ranger Oil's Earnings Per Share? (EPS)

As it happens, we don't know how much the company made or lost three years ago, because we don't have the data. Zooming in to the last year, we still can't talk about growth rates coherently, since it made a loss last year. What we do know is that while it's great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn't needed to issue shares. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if Ranger Oil's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Ranger Oil's profit suffered from unusual items, which reduced profit by US$35m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Ranger Oil doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Ranger Oil's Profit Performance

Ranger Oil suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But unfortunately the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). That will weigh on earnings per share, even if it is not reflected in net income. Based on these factors, we think it's very unlikely that Ranger Oil's statutory profits make it seem much weaker than it is. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that Ranger Oil is showing 4 warning signs in our investment analysis and 1 of those doesn't sit too well with us...

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

What are the risks and opportunities for Ranger Oil?

Ranger Oil Corporation, an independent oil and gas company, engages in the onshore exploration, development, and production of crude oil, natural gas liquids, and natural gas in the United States.

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Rewards

  • Price-To-Earnings ratio (3x) is below the US market (14.9x)

  • Earnings are forecast to grow 29.44% per year

  • Became profitable this year

Risks

  • Has a high level of debt

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