A:

Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. There are two sides to this method: the quantitative and the qualitative. The quantitative side involves looking at factors that can be measured numerically, such as the company's assets, liabilities, cash flow, revenue and price-to-earnings ratio. The limitation of quantitative analysis, however, is that it does not capture the company's aspects or risks unmeasurable by a number - things like the value of an executive or the risks a company faces with legal issues. The analysis of these things is the other side of fundamental analysis: the qualitative side or non-number side.

Although relatively more difficult to analyze, the qualitative factors are an important part of a company. Since they are not measured by a number, they more represent an either negative or positive force affecting the company. But some of these qualitative factors will have more of an effect, and determining the extent of these effects is what is so challenging. To start, identify a set of qualitative factors and then decide which of these factors add value to the company, and which of these factors decrease value. Then determine their relative importance. The qualities you analyze can be categorized as having a positive effect, negative effect or minimal effect.

The best way to incorporate qualitative analysis into your evaluation of a company is to do it once you have done the quantitative analysis. The conclusion you come to on the qualitative side can put your quantitative analysis into better perspective. If when looking at the company numbers you saw good reason to buy the company, but then found many negative qualities, you may want to think twice about buying. Negative qualities might include potential litigations, poor R and D prospects or a board full of insiders. The conclusions of your qualitative analysis either reconfirms or raise questions about the conclusions of your quantitative analysis.

Fundamental analysis is not as simple as looking at numbers and computing ratios; it is also important to look at influences and qualities that do not have a number value.

For further reading, see Guide To Stock Picking Strategies, Putting Management Under The Microscope and Competitive Advantage Counts.

RELATED FAQS
  1. What information should I look at on a publicly traded company for use in fundamental ...

    Learn what information is important in fundamental analysis of a publicly traded company and how to use it to assess the ... Read Answer >>
  2. How legitimate are companies that advertise debt consolidation for all my credit ...

    Learn about how fundamental analysis ratios can be combined with quantitative stock screening methods and how technical indicators ... Read Answer >>
  3. Is it better to use fundamental analysis, technical analysis or quantitative analysis ...

    Understand the difference between fundamental, technical and quantitative analysis, and how each measurement helps investors ... Read Answer >>
  4. How do banks measure the Five Cs of Credit?

    Learn about the five C's of credit and what qualitative and quantitative methods banks use to measure them when evaluating ... Read Answer >>
  5. How does fundamental analysis differ from technical analysis?

    Learn about the differences between technical analysis and fundamental analysis, such as how these investment strategies ... Read Answer >>
Related Articles
  1. Investing

    Understanding Qualitative Analysis

    Qualitative analysis is a general term describing the non-mathematical scrutiny used by investors and managers to make investment and business decisions.
  2. Investing

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  3. Insurance

    How An IPO Is Valued

    The process of determining a company’s initial share price includes quantitative and qualitative components.
  4. Investing

    What is Quantitative Analysis? 3 Quants Define It

    Quantitative analysis refers to the use of math to analyze markets and investments.
  5. Managing Wealth

    How To Recommend A Stock

    Here are the nuts and bolts of performing a thorough analysis and learning how to recommend a potentially lucrative stock.
  6. Personal Finance

    Quantitative Analyst: Job Description & Average Salary

    Learn the different job duties of a quantitative analyst and how much money an analyst makes; understand the skills needed to be successful at this career.
  7. Investing

    Using Porter's 5 Forces To Analyze Stocks

    These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet.
  8. Investing

    The Basics Of Business Forecasting

    Discover the methods behind financial forecasts and the risks inherent when we seek to predict the future.
RELATED TERMS
  1. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  2. Quantitative Analysis

    A business or financial analysis technique that seeks to understand ...
  3. Fundamental Analysis

    A method of evaluating a security that entails attempting to ...
  4. Quantitative Trading

    Trading strategies based on quantitative analysis which rely ...
  5. Fundamentals

    The qualitative and quantitative information that contributes ...
  6. Stock Analysis

    Stock analysis is a term that refers to the evaluation of a particular ...
Hot Definitions
  1. Dumping

    In international trade, the export by a country or company of a product at a price that is lower in the foreign market than ...
  2. Tender Offer

    An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the ...
  3. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  4. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  5. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center