By When you are analysing a stock, besides looking at the numerical aspects of a company’s statements, there’s a whole set of other factors that you should be considering and that’s the qualitative factors. These primarily include the people and technology involved in the company., which is essential when deciding stocks to invest in.
Qualitative analysis in stocks deals with the management philosophy and technological factors of the company. Not all the factors that determine a company’s actual value can be quantified. Suppose a pharma company that has weak financials develops a cure for COVID-19 and gets the approval for the same, this factor, in itself, can help the stock prices to soar.
Qualitative analysis in stocks deals with factors mostly based on soft variables rather than justifiable hard numbers. Like in a job interview, besides looking at the record of your accomplishments in various examinations, an interviewer also tends to analyse your soft skills on the required parameters to make a final decision.
How to perform a qualitative analysis of stocks?
Management factor: The management philosophy of the company constitutes a major factor in the qualitative analysis of a stock. It helps in understanding:
- The return on capital employed by the management
- The key officials of the company and the expertise they bring with themselves
- Key stakeholders’ vision for the company
The same can be extracted from different management filings and interviews, an exercise that is prudent to undertake when making stock market investments.
Employee factor: Employees represent the way a stakeholder is managing the company. These are relatively easy to calculate and comprehend. The same can be calculated using the retention and employee turnover ratios. Employee satisfaction has gained a lot of prominence with time.
Vendor factor: Vendors of the company also play a vital role in qualitative analysis. While vendors should be chosen for quality and competitive pricing, a competitive vendor’s view of the company, with a reputation in the market, should be given ample weightage.
Technological factor: When you are screening stocks to buy today, you should also look at the technological factors that the company has employed; a premier technology not available otherwise can lead to commendable success in operations and thus can help the share price to rise.
Institutional investment factor: Another important factor that helps in the qualitative analysis of a stock is the quotient of investment by institutional participants. Institutional investors do a comparatively robust analysis, considering diverse variables, which is generally not possible for a retail investor to carry out.
Related party factor: When a company has a major stake holding by a handful of parties, an eye should be kept on how transactions with related parties are shaping up. Related party factor helps in understanding if there are any charges for fraud or unlawful transactions.
Conclusion
Qualitative analysis of stock requires the gathering of data from sources like business journals, annual reports, annual general meetings, the official company website, and other filing reports. These factors do not have clear-cut definitions, so this kind of analysis is more of an art than science to know how much weightage is to be given to what factor. It’s important to remember that qualitative and quantitative analysis should go hand in hand. So, while deciding upon your stock market investment, make sure to give due importance to each.
