Qualitative Company Analysis: What It Is and Why It Matters in Finance

Financial figures are only half the truth when considering investing in a company or making a merger, acquisition or analyzing the performance of the company internally. Spreadsheets, earnings reports and ratios are admittedly important but they do not tell the whole story of what is happening between the numbers. It is then that the qualitative aspects of company analysis in finance come to play. These are other components that affect the present and the future of a business which are non- numerical but are equally powerful.

Qualitative analysis is the overview of such aspects as leadership performance, company culture, brand reputation, competitive advantages, company strategic direction. Such considerations are able to have a considerable influence on the long-term performance of a company and, often, even on the balance sheet. Qualitative factors are important in providing an analyst, investor and any decision maker with a balanced view of how a business is performing.

Qualitative vs Quantitative Analysis: Key Differences in Company Evaluation

A qualitative vs quantitative analysis should be distinguished to perceive the company evaluation as a whole. Whereas quantitative analysis centers on figures; levels of revenue, net income, rate of returns on equity, and debt ratios, the qualitative analysis considers some aspects that cannot be merely valued such as the maturity of the management, the disposition of the employees, the consumer satisfaction and their approach to competition.

To use an example; two companies may be identical when it comes to both their profit margins but in the case of the former, the CEO is future-oriented and has an excellent track record whereas in the case of the latter, the top management has high turnover rates and a very toxic work culture. The figures may sound identical, yet the qualitative contrast may mean a significant difference to future performance and trust in the investor.

Thus, to understand how qualitative and quantitative analysis are different in business, the characteristic of the type of data used should be mentioned. One is numeric and organized in a way whereas one is descriptive and commonly subjective. Nevertheless, a perfect combination of the two views can make the best investment choices.

How to Perform a Qualitative Analysis of a Company’s Management and Culture

The leadership team of a company is probably one of the most significant spots in qualitative analysis of the company. Visionary leaders, who are strong, usually have a competitive advantage that cannot be simply copied. Assessing a business, one should consider the background, track record and decision styles of senior executives. Are they industry experienced? Are they able to usher the company through market dictations or crisis? Such questions will help to learn about long-term potential.

Then evaluate the company culture. Does the organization have a reputation of being innovative, developing employees and being customer oriented? Or have there been some reports of high turnover with low morale? This cultural understanding is useful particularly when determining whether a firm can be able to attract and recruit talent or abide by changes that occur within the industry.

Communications between companies and investors, reviews performed by employees of such websites as Glassdoor, and interviews with the leaders published in media may provide some understanding of such qualitative sides of company analysis.

Importance of Qualitative Data in Financial Decision-Making

Why then is there importance of qualitative data in financial decision-making? Since the financial measures are backward-based measures, they inform you of what has happened. However, a qualitative analysis tends to be futuristic. It assists investors and analysts to forecast the risks and opportunities in the future.

As an example, when one company depends much on one and the same product, it may be a red flag in terms of qualitative evaluation, despite the financials being good at the moment. In the same manner, a company with high R&D investments, visionary management, and an innovative culture could be on the path to success, whereas the present profits could be not so great.

This understanding is important in strategic finance. It assists in letting you know the red flags before they show up in the numbers and enable firms to make more long-term decisions.

Comparable Company Analysis Explained for Beginners

An approach that is useful and involves both qualitative and quantitative information is a comparison analysis of similar companies, which is common in investment banking, equity research, and corporate development. It entails rating the target company against other comparable businesses in size, industry and growth opportunities as well as risk factors.

Although relative company analysis is mostly a quantitative approach, which entails such numbers as price-to-earnings ratios or EV/EBITDA, it depends on more qualitative matters as well. An example will be, are these firms working on similar rule? Are they so strong in terms of leadership or brand recognition?

Comparable company analysis in plain terms refers to identifying peer firms and basing valuation or performance estimates based on its information. These comparisons however lead to misleading when they are not made based on qualitative judgment. A case in point, two companies might have identical revenue but the lack of history or stable culture of a small start up would pose a completely different risk picture compared to a more established competitor.

Qualitative vs Quantitative: Using Both to Make Better Decisions

Ultimately, the qualitative vs quantitative analysis debate should not turn out to be a struggle between the two. The best combination will be their usage. The evidence and patterns are remote in the numbers; the details of why the trends are present are dealt with in the qualitative component. In quantitative terms a company might demonstrate five years of straight growth but when it is dependent upon a patent that is soon to be expired, risk can hide in the qualitative area.

Similarly, a short-term loss in business may not appear appealing to the figures. However, when its CEO is a recognized leader initiating a new strategy which seems potentially successful, the qualitative view may suggest that there is an opportunity to turnaround.

Composing the two methods increases the precision in the analysis of the stock to the business plans. It provides analysts with an entire tool set to get a deeper insight into not only the present of the business, but also its possible direction.

Conclusion

In the modern convoluted finance industry, one cannot afford to underlook financial statistics only. The qualitative elements of firm analysis in finance are useful to bring out the intangible forces of business performance management ability, corporate culture, innovation, brand strength and customer loyalty.

Knowledge of the distinction between the qualitative and quantitative analyses in business permits more comprehensive investment and business decision-making. Either when analyzing a company management, its culture, or other similar company analysis, to improve the results there is no other option but to combine the results of both types of data information.

Finally, practitioners with skills to construct stories that bridge numbers and narratives will be in a better place to take actions that create value not only to companies, but also to their stakeholders.