The gearing ratio you quoted (23.5%) is as you say very low - but this is based on the Net Debt/Equity ratio.
I am not a fan of assessing gearing using this ratio - especially in PRG's case.
PRG has $255.6 Million on Goodwill on it's Balance Sheet and $373.5 Million of equity. Therefore, Goodwill (which would have little cash value if the worst were to happen to PRG) represents over 68% of the company's equity.
If PRG falls on hard times (as has happened previously) and had to take a non-cash writedown on its goodwill of 50%, its Net Debt/Equity ratio would rise back to 36%.
I prefer to use a gearing ratio which compares profitability or cash flow to debt like say Net Debt/NPAT.
On this measure, last year PRG's Net Debt was 5.3 times its Net Profit (very high). This year using that same ratio, PRG's Net Debt is 2.8 times its net profit (much better and a great result by PRG).
In my opinion, the gearing ratio i quoted more accurately reflects the substantial fall in gearing, rather than asessing its gearing on a Net Debt/Equity basis where it fell from 33.7% to 23.5%. The problem with the Net Debt/Equity Ratio is that it is highly susceptible and exposed to goodwill - using a gearing ratio which compares net debt to profitability (or cash flow) solves this problem.
Horses for courses, but each to their own.
Cheers,
Baphomet
PRG Price at posting:
$2.38 Sentiment: None Disclosure: Held
