Qualitative Analysis vs Quantitative Analysis
Great investors develop a habit of picking one good stock after another. It becomes second nature to them. They can almost instantly differentiate between a great & a not so great company.
Great investors don’t necessarily spend a lot of time for the research. Instead, they develop a framework to help them zero in on the kind of businesses they like. So, let’s discuss how you can develop your own stock Picking framework.
Stock picking involves main two analysis,
(a) Quantitative Analysis
(b) Qualitative Analysis
Quantitative Analysis:
Stock Picking is tedious process. In stock exchange, more than 4000 company listed. It is a huge task to simply shortlist the companies that are worth analyzing. No one has the time or the zeal to read about each & every listed company.
In the stock market, it is important to have certain filters that minimize the chances of wrong stock selection.
If you have a mechanism through which you filter out the bad companies, you chances of success increase exponentially.
Before discuss the art of identifying stock for further research, here are some cautions that should to keep in mind.
(i) No stock screening method is perfect. If investing would have been too easy then everyone would have been best investors, even computer would have been the best investors. So, stock Picking is an art not science. There is no fixed formula.
(ii) Qualitative analysis can help in saving our time and providing us a list of companies that we can analyze priority basis.
(iii) Never rely soley on any stock screener for your investment decisions.
Let's start with important metric,
(1) Earnings growth:
Look for trends in a company's earnings growth. Invest in companies that are making profit consistently. It is the good indication that company is doing something right.
(2) Price to earnings ratio:
price to earnings ratio is high, it doesn't matter if company's growth is also high. It is more meaningful when compare companies with same sector.
(3) Return on equity:
In a country where the index has historically given a return of 15%CAGR. So, company's return would be of 15% P.A.
(4) Debt to equity ratio:
It is right, the company is not generating higher profits by taking too much debt. If a company less debt, so it is less chance to go bankrupt any tougher time or any time.
(5) Sales growth:
In a country where GDP itself is growing at north of 6%, it is reasonable to expected company's growth rate would be 10%
Qualitative Analysis:
Now a days qualitative analysis is much important than quantitative analysis. But many investors skip that portion.
In qualitative analysis involves lot of research. Here are important factors that need to know,
(1) Management:
Try to research who constitutes the management team and board of directors. Investors should check CEO, CFO, chairman's background. If management isn't good so that business doesn't run for long periods. So, management analysis the very important part.
(2) Business model:
The company should have soiled & well defined business model. That indicates how a company makes revenue & profits of its business.
(3) Brand Value:
Many companies have strong brand power. Such as Nestle has strong brand like meggi. Similarly trademark, patent, license have tremendous value embedded in its business.
(4) Economic Moats:
It refers to the competitive advantage. It is a structural features that helps a firm shield profit. If there is no moat, competition will eventually drive the return on capital down to the cost of capital.
(5) Promoters shareholding pattern:
If promoters shareholding is stable, that indicates company is right way. If Promoters shareholding pattern is decreased, that indicates there is something wrong in the company. Promoters shareholding pattern is crucial part is management analysis.
So, an investors would research profer way.
Good
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