Should You Be Tempted To Buy Och-Ziff Capital Management Group LLC (NYSE:OZM) Because Of Its PE Ratio?
Och-Ziff Capital Management Group LLC (NYSE:OZM) is trading with a trailing P/E of 13.1x, which is lower than the industry average of 16.2x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Och-Ziff Capital Management Group
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for OZM
Price-Earnings Ratio = Price per share ÷ Earnings per share
OZM Price-Earnings Ratio = $2.02 ÷ $0.154 = 13.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as OZM, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. OZM’s P/E of 13.1x is lower than its industry peers (16.2x), which implies that each dollar of OZM’s earnings is being undervalued by investors. Therefore, according to this analysis, OZM is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy OZM, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to OZM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with OZM, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing OZM to are fairly valued by the market. If this is violated, OZM’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on OZM, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Financial Health: Is OZM’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has OZM been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of OZM’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
