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.

Qualitative analysis of the company

The first challenge will be to get familiar with company’s business – what they do and how they make money. Unless you get a grip on their business, you won’t understand what the company’s prospects are.  The easiest way to get the information about company’s products or services is to check their website.

A main point to be noted while going through the company’s business model is whether the company enjoys economic moats. Economic moat refers to a business’ ability to maintain its competitive advantage. Competitive advantage is any factor that allows a company to provide the same goods or services that is similar to those offered by its competitors and, at the same time, outperforms those competitors in terms of quality, customer satisfaction, cost or profits. Two major questions to be answered in this regard are – whether the company enjoys economic moats? Whether the company is doing similar activities in a better and different way than its rivals?

Quality of the management team is another area to analyse. You may have to view their interviews in channels – how they answer the questions, forthright or do they avoid clear answers like politicians do? You can also check if past plans declared by the management have been carried out on time or not.

Also, research the ownership and insider trading of company executives. If you can find managers among shareholders and if they were increasing their share lately, that may be a very positive sign.

Qualitative Data Analysis of the Industry

Apart from analysing the company, you should also get familiar with how the industry you intend to invest in, works. Areas to be researched include industry growth, competition and industry regulations.

CONCLUSION.

Qualitative analysis may be difficult. It may be subjective. It may be hard to lay down specific formulas for qualitative assessment. But, honest analysis when combined with other techniques, will give clues into the quality and health of a company.

In my next post, I will detail about where to find qualitative information and how.

You may like these posts:

  1. Technical Analysis
  2. How does IIP data affect stock markets?
  3. History Scan – An introduction.

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