Question

To what extent do you think that complementing the quantitative analysis of financial ratios with qualitative analysis would make the interpretation more worthwhile? If you agree, what are the qualitative measures that can be used ?

Answer 1

It is very important to complement the quantitative analysis of financial ratios with qualitative analysis, it makes the interpretation more worthwhile. Quantitative analysis involves looking at the hard numbers: anything from comp sheets (comparable companies) and financial ratio analysis to complex discounted cash flow models and more. You’re looking at profits, margins, sales trends, present and future values and such to gain insight into the meat and potatoes of the company’s business operations.

Qualitative analysis, on the other hand, requires digging beneath the hard numbers to discover the qualities of the business because those qualities are ultimately what produce the quantitative results.

Qualitative analysis involves asking yourself questions like “Do I understand the business and its competitive environment?” "Are the employees happy working here?" "Is the businees harming it's surroundings?" “Does management have a lot of integrity and talent?” “Are management’s interests aligned with my own?” “Am I under the influence of any psychological biases?” “Why are these numbers the way they are?” “What is the company’s competitive advantage and how durable is it?”

The qualitative measures which can be used are understanding the competitive environment, internal environment, management interests, social works of the business, welfare of employees and the society etc.