An Overview of Fundamental-Quantitative Analysis - Financial Statements - Part 6

Ashlar Online | July 30, 2016, midnight

After discussing the quantitative aspects of fundamental analysis, we will now try to explore qualitative aspects starting with this article. Qualitative analysis involves the study of factors concerning a company which are more or less intangible and are difficult to quantify but have a decided impact on the growth and performance of a company. These factors include brand recognition, business model, competitive advantage, quality of management and corporate governance along with several other factors.

We will discuss here some of the most important factors which form a part of qualitative analysis:

1.    Business Model:

Apart from financial statements which attempt to map the revenues, earnings, expenses and liabilities of a company, its business model is one of the key factors in determining its future growth potential. In simple terms, business model defines what the company exactly does, and how. For instance, the business model of McDonald’s is simple enough to understand, they sell hamburgers, salads and other fast food products.

In the same way, it is important to understand the business model of any company before investing in its stocks. However, the business model of every company may not be as simple to understand as McDonald’s, but it does not mean they are not worth investing in or their business model should be ignored. Depending on the nature of business for any company, business models would vary and without proper knowledge of what the company actually does, you would be in the dark about its future prospects and growth potential.

2.    Brand Recognition:

It is one of the most important factors which essentially form a part of competitive advantage but due to its special nature, deserve to be treated separately. After being in the industry for a while, a company is measured by its nature of performance, quality of its products and popularity. There can be a number of factors behind why some brands would become household names instantly recognized for their uniqueness and identified with a specific type of product.

Coca Cola is a prime example of the same, which continues to grow in popularity and mass appeal after being in the soft drinks industry for decades. However, decades of effort has gone into building its brand recognition. If Coca Cola were to go through a bad phase, it would probably still have the consumers’ trust, the most important ingredient in the recipe of success for any company and for it to regain its market share after recovering from a slump. In short, it is important for an investor to understand that a brand name sells.

3.    Competitive Advantage:

The factor we discussed above, that of brand recognition, is one of the leading competitive advantages a company might have. However, there are other factors as well which can work as competitive advantage. These are basically related to higher operational efficiency, which can either be in the form of a company performing better at doing the same thing as its competitors or by devising novel ways to undertake those operations with enhanced efficiency and long-term advantage.

It is precisely this novelty of approach that can help a company sustain its level of success in the face of fierce market competition and thus turns into a competitive advantage. It is interesting to note that most of the well-known brands today have in fact followed this strategy of creating a unique market share with its novelty of ideas, approach and operational efficiency which have worked as a sustainable competitive advantage in the longer term and perhaps that is why we find them where they are today, as market leaders in their own right in their respective industry domains.

A study of these factors would stand a potential investor in good stead when it comes to decide about investing in a company. It is always important to balance out qualitative factors against quantitative factors including financials to be better able to decide about whether or not and if yes, how much to invest in a company with what type of expectations.

blog comments powered by Disqus