Valuation of shares

Qualitative data analysis

If historical data collection was all about collecting financial figures of the past years, qualitative analysis is about using subjective judgment based on nonquantifiable information, such as management expertise, industry cycles, strength of research and development, labour relations etc..

The difficult part in qualitative data analysis is to analyse and arrange the data collected into meaningful information. This is the most important part in analysing stocks, since you are trying to form an opinion about the future prospects using scattered information available from different sources, some of which may be biased.

Quality analysis should be done in two levels. One, at the company level and two, at the industry level.

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Eight point checklist for history scan

In the last article I gave broad guidelines about where to find the data. Collecting the historical figures of a number of companies is a definitely a time consuming task. The internet is full of information that leaves most of us confused! Now; let me give out a specific list of data to be collected. A powerful Eight point check list through which we can identify companies with an Excellent Financial Track record.

The Eight point check list.

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History Scan – An introduction.

‘Past is a fact. Future is just an opinion, estimate or a hopeful thought’.

The financial history of a company, however great, is not a guarantee of any sort that it will continue to perform so in the future. However, History is the only factual material we have and studying the past data provides insights into lot of factors – qualitative and quantitative – that may help to form an opinion about the company.

SOURCES TO COLLECT HISTORY.

The data to be collected includes dividend payment history, stock splits, bonus, historical highs and lows, volume of shares traded history about management and so on…You have to collect at least 5-10 years historical data of a particular company.

The first source would be the documents and updates that companies themselves put out. Take the annual report. These are usually treasure troves of information on financials, material developments through the year, management strategies and outlook.

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Sources to pick stocks for valuation.

The most practical issue for a beginner is to find out potential companies that are worth investigating. There are more than 7000 listed companies in the Indian stock exchange and it’s definitely a daunting task.

Although, later, you may be a totally independent stock picker- free of all biased views- in the initial stages, one has to make some smart moves to find sources from where he can pick stocks for analysis. That’s my opinion.

SOURCES TO PICK STOCKS.

  • 1.Indices:

One method to find companies is to locate them from the indices. These include –

  • General indices like Sensex,  and nifty,
  • Capitalization wise indices such as mid cap index and small cap index,
  • Sector wise indices like Bankex , auto, reality etc..

A stock is included in the index only if it meets many quality criteria set by the stock exchange. For example, if you are trying to spot a blue chip stock, better select a company that has been included in the index.  This gives you a ‘reasonable assurance’ that the company is worth in a particular sector and that it is a company that complies with all the legal requirement set by the SEBI and the stock exchange.

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