Permian Resources' (NYSE:PR) Conservative Accounting Might Explain Soft Earnings

The market was pleased with the recent earnings report from Permian Resources Corporation (NYSE:PR), despite the profit numbers being soft. However, we think the company is showing some signs that things are more promising than they seem.

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How Do Unusual Items Influence Profit?

To properly understand Permian Resources' profit results, we need to consider the US$262m expense attributed to unusual items. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Permian Resources to produce a higher profit next year, all else being equal.

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.

Our Take On Permian Resources' Profit Performance

Because unusual items detracted from Permian Resources' earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Permian Resources' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Permian Resources at this point in time. Case in point: We've spotted 2 warning signs for Permian Resources you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Permian Resources' profit. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.