Early Warnings: Graphical Techniques for Reported Reserves and Financial Data

Abstract New graphical plotting techniques forewarn impending reserves revisions and bankruptcies without pricey proprietary research software and subscriptions. Results compare existing industry financial ratios and previously proposed graphical techniques, predicting possible overstatements of reserves and companies that could experience financial distress with known reserves revisions and bankruptcies from 2009 to 2022. Prior research proposed graphical techniques that may identify companies overstating their reserves. Our research duplicated these techniques, benefited by more than a decade of information to back test and provide commentary on which worked best. Our research used a database of financial and reserves data from over 130 companies’ annual filings from 2009 to 2022. Further subdividing companies based on market capitalization provided additional insights. Detailed financial and reserves analysis shows that standard industry metrics provided by most analysts and operators do little to inform investors of elevated risk. Furthermore, investor presentations that show graphical plots of various metrics against their peers also do little to accurately compare values that may be atypical. Out of 12 graphical plots previously proposed, we found that only two aided in predicting future reserves revisions or financial hardship. We propose new graphical plots with commentary on their benefits and the shortfalls of existing graphical techniques. Using our suggested plots with free, publicly available data, engineers and financial analysts can easily recognize risks and trends that may otherwise not be visible with standard screening techniques.