Qualitative analysis for stock selection

What is the qualitative analysis?

Qualitative analysis is the another type of analysis in the fundamental analysis. 

Qualitative  analysis is the analysis the company based on different factors such as nature of the business, who are the Promoters, how efficiently is the company  managed, corporate governance practice etc. 

The qualitative  analysis has been becoming more popular.

          

Here are few qualitative aspects that should need to keep in mind.

Qualitative analysis for stock selection or analyze 

(a)Background of management: 

Checking the background of the top level management such as promoter, CEO, CFO, CTO etc is the first step in the assessment of the management of a company. It includes qualification of the key managerial persons, do they have experience to run the business, do have any criminal case against the Promoters etc. 

As an investor checking the management's strategy, past track record and determining whether they are in the best interest of the shareholders. If you see there is something wrong in the company then one should stay away from such companies.

       

But how we know this factors? Let's discuss, first go to google search bar and type Promoter's background, background of CEO in ABC company etc. So, this is way to know the management and in company's annual report, read about qualifications and experience of the key managerial persons.

(b)Business ethics: 

Business ethics is the business policy. It includes bribery, unfair business practice, corporate governance etc. So, it is important to know in business, is the management involves in scam, bribery, unfair business activities etc.

If you realize the management is doing wrong activities then you should stay away from such companies.

        

How we know? First go to google search bar and type scam ABC company like this. Then you can know about the company's wrong activities.

(c)Remuneration of key managerial persons: 

Managerial remuneration is an expenses for the company. As per section 197 of the companies act, 2013, remuneration paid to the directors and the key managerial persons should exceed 10% of the net profits of the company. Any increase in managerial remuneration without rise in the profit of the company, affect the earnings of shareholders. 

Ideally remuneration paid to them stands between 2%-5% of the profit of a company. So, checking managerial remuneration paid is a key factors in judging whether the management is the shareholders friendly or not.

          

How we know? Go to google search bar and type XYZ company's MGT-9 form.

(d)Related party transaction: 

Related party transaction refers to the transaction between the company and any entity who is directly to management. Significant number accounting scandal have occurred because of the related party transactions like satyam. There is chance that it may effect shareholders interest.

         

Example: ABC Ltd and XYZ Ltd are two companies. Mr. A is CEO of ABC ltd and his friend Mr. B holds 30% stake in XYZ ltd.

Suppose, XYZ ltd is in bad financial position and no bank giving loans to it and decided to take loan on its name and then pass it on to XYZ ltd, then it will called related party transaction.

          

You should analyzed deeply.

(e)Promoters shareholding: 

Promoters are the main part in management analysis. Generally they are founder of the business. If Promoters are increasing their shareholding, it can be considered as a positive sign, it signifies that they are optimistic about company's growth since they know the best about the company's future opportunities and strategies. 

Other hand, a decrease in Promoter's shareholding can be taken as a negative sign. Sometimes Promoter's shareholding decreases for some other reasons. If Promoter's shareholding decreases without clear reasons. you should investigate deeply. Promoters shareholding stands in MGT-9 form.

(g) Minority Shareholders: 

A minority shareholders refers as a shareholders who does not exert control over a company. If a company does not treat well with minority shareholders and  not giving shareholders importance when taking corporate action, so stay away from such companies. 

If don't show what is happening in the company, that company may fraud with the investors. You should stay away from such companies.

(h)Corporate governance: 

Corporate governance refers to the set of rules, regulations, policies etc. governing a company. Corporate governance of a company is generally taken up by the board of directors of the company. It basically refers to how ethical, transparent and compliant the company is in its day to day activities.

(i) Political Affiliation:

If a company or its Promoters too close to a political party or the business require constant political support, so this company is good to the investor. So, smart investors or analysts should avoided such companies.

       

Qualitative analysis is not easy task to find out that is why read about all the terms very carefully.