Oppenheimer Holdings Inc (NYSE:OPY) is trading with a trailing P/E of 16.4x, which is lower than the industry average of 16.6x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Oppenheimer Holdings

Breaking down the Price-Earnings ratio

The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for OPY

Price-Earnings Ratio = Price per share ÷ Earnings per share

OPY Price-Earnings Ratio = $26.8 ÷ $1.637 = 16.4x

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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to OPY, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 16.4x, OPY’s P/E is lower than its industry peers (16.6x). This implies that investors are undervaluing each dollar of OPY’s earnings. Therefore, according to this analysis, OPY is an under-priced stock.

A few caveats

While our conclusion might prompt you to buy OPY immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to OPY. 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 OPY, 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 OPY to are fairly valued by the market. If this does not hold, there is a possibility that OPY’s P/E is lower because our peer group is overvalued by the market.

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.