• Category
  • >Financial Analytics

What is Qualitative Analysis of Stocks?

  • Ashesh Anand
  • Jan 20, 2022
What is Qualitative Analysis of Stocks? title banner

When you think of studying a strong company, the first image that comes to mind is most likely of a high-aptitude individual locking himself in and crushing figures all day. 


Furthermore, figures such as Total Revenue, Operating Profitability, Margin Net Profit, and so on may be brought to your attention. Is that, however, all there is to investing?


Today, we'll look into qualitative analysis, which is the other side of the coin. Here, we'll go through what Qualitative Analysis of Stocks is and how to do it.


What is a Qualitative Analysis of Stocks?


The use of non-quantifiable data in qualitative analysis is used to assess a company's investment possibilities. This data includes things like management quality, stakeholder satisfaction, ethics, brand value, and so on. Soft data is another term for this. Intangible aspects are dealt with in this soft data.


Quantitative analysis is the term for what we are used to. The emphasis is on numbers, specifically ratios derived from financial statements such as the income statement, balance sheet, and cash flow statement. 


Quantitative data may be crunched by artificial intelligence, or simply put, computers, which is the most significant point of differentiation. Qualitative analysis, on the other hand, necessitates human intervention.


(Speaking of AI, check out AI Examples)


The Fundamentals of Qualitative Analysis


The distinction between qualitative and quantitative techniques is analogous to that between human and machine intelligence. Profit margins, debt ratios, earnings multiples, and other precise inputs are used in quantitative analysis. 


These can be entered into a computational model to provide a precise outcome, such as a stock's fair value or an earnings growth estimate. Of course, for the time being, a human must develop the algorithm that crunches the numbers, which requires some subjective judgement. 


Computers, on the other hand, can execute quantitative analysis in fractions of a second once they've been programmed, but even the most bright and well-trained humans could take minutes or hours.


Qualitative analysis, on the other hand, is concerned with intangible, inexact issues that are more social and experienced than mathematical. Because factors like positive associations with a brand, management trustworthiness, customer happiness, competitive advantage, and cultural transformations are difficult, if not impossible, to capture with numerical inputs, this strategy relies on the kind of intelligence that machines (now) lack.


Watch this: Warren Buffet - Qualitative v Quantitative Analysis


Qualitative Analysis and Company Culture


Employee perceptions of the organisation and its management are critical. Do they like and respect their superiors, or do they despise them? Employee turnover rates might reveal whether or not employees are loyal. What does the company's culture say about it? 


Overly hierarchical offices foster intrigue and competitiveness while draining productive energy; a lethargic, uninterested workplace might lead to employees who are only interested in punching the clock. A lively, creative culture that draws great talent is the ideal.


(Learn about the different Ways to Leverage Sales Data and Increase Profits Fast)


Investor-Friendly Characteristics


  1. A solid business plan


The firm should have a solid and well-defined business model that demonstrates how it generates revenue and profits from its operations.


Banks, for example, generate their money primarily from interest income, which is calculated as the difference (or spread) between 'interest earned on loans/advances' and 'interest cost on deposits.' We'll go over this in further detail in the article "Know the Business You're Investing in."


  1. Brand Appeal & Value


Many businesses have strong brands. Hindustan Unilever, for example, has strong brands like Ponds, Rin, Vim, and others in its product portfolio. Patents, trademarks, and licences, for example, have immense value encoded in them and can generate revenue for years or decades. The success of the product line and the company's performance will be determined by how well these brands succeed.

  1. Competitive Advantages or Market Share


You don't want to put your money into a mediocre player; instead, you want to invest in companies that have a dominant market share and/or a competitive advantage.


If the business isn't the market leader, it should have a competitive advantage or edge over the competition in terms of product differentiation, low-cost sourcing, better distribution, higher price realisation, superior quality, and so on. If it's a high cap firm or stock, it's rather safe, but if it's a mid or small cap stock, you'll need to do a lot of research before investing.


(Suggested Read - High Frequency Trading (HFT))


  1. Dividend Payments on a Regular Basis


Investors choose companies that pay dividends on a regular basis and have a reasonable dividend payout ratio. However, this does not guarantee a high dividend yield. This just goes to prove that the corporation has a profit-sharing attitude that it follows on a regular basis.


Is it bad if a corporation generates a profit but pays a lower dividend or does not declare a dividend? Not necessarily, as long as the corporation invests wisely in future growth in businesses or initiatives that will generate higher returns. However, if the company uses extra assets to invest in unrelated or non-core businesses, this might be risky.

  1. Involvement of institutions


If you look at a company's shareholding pattern, you can see if major institutions have a stake. If Financial Institutions, domestic institutions, mutual funds, and other institutional investors hold a significant portion of a company, it is likely that they are doing so for sound reasons.


This is, however, simply one of the things to consider. It's best to avoid organisations with a little amount of institutional participation.


Despite the fact that we talked a lot about attributes, characteristics, and the like, these are all highly subjective. It's as difficult as looking for a life companion or a perfect date. However, in the case of stocks, you have financial figures to help you make easier comparisons, which makes life a lot easier.


Next time you try to invest in a stock, at the very least do some research about the company, its management, its goods, market share, and so on to ensure that your decision is sound.


Watch this: Qualitative Factors in Valuation | Top 10 Qualitative Factors You Must Know


Final Thoughts


However, the data required for quantitative analysis is difficult to come by. Computers can be configured to produce data or analysis in a fraction of a second when it comes to numbers. Stock qualitative analysis, on the other hand, is difficult and time-consuming to perform.


Analyzing whether information is relevant and what isn't is another factor. Company websites, business journals, annual reports, shareholder meetings, and other sources are some examples. 


A thorough analysis is difficult to come by, but it is only comprehensive when both quantitative and qualitative elements are taken into account. Let us know about your qualitative analysis experience in the comments section below. Good luck with your investments!

Latest Comments