# Does Omni Market Tide Limited’s (FRA:A4B) PE Ratio Warrant A Buy?

Omni Market Tide Limited (DB:A4B) trades with a trailing P/E of 20.2x, which is lower than the industry average of 36.4x. 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. See our latest analysis for Omni Market Tide

### Demystifying the P/E ratio

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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.

Formula

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

P/E Calculation for A4B

Price per share = A\$0.01

Earnings per share = A\$0.001

∴ Price-Earnings Ratio = A\$0.01 ÷ A\$0.001 = 20.2x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as A4B, 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. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.

A4B’s P/E of 20.2x is lower than its industry peers (36.4x), which implies that each dollar of A4B’s earnings is being undervalued by investors. Therefore, according to this analysis, A4B is an under-priced stock.

### Assumptions to watch out for

While our conclusion might prompt you to buy A4B immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to A4B. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with A4B, then investors would naturally value A4B at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with A4B, investors would also value A4B at a lower price since it is a lower growth investment. Both scenarios would explain why A4B has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing A4B to are fairly valued by the market. If this assumption is violated, A4B’s P/E may be lower than its peers because its peers are actually overvalued by investors. 