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Qualitative analysis is the practice of analyzing something based on subjective methods apart from any factual or statistical data. In terms of finance, this type of analysis focuses on measuring potential investments based on something apart from raw numbers. Many types of strategies may be involved in qualitative analysis, including studying a company's management, analyzing marketing programs, or judging the power of a specific company's brand, just to name a few. Investors can use the gut feelings they get from this information in conjunction with the numbers to make an informed decision on a potential investment.
There is a seemingly infinite amount of statistical data that can be gained from studying a company's balance sheet or past stock performance, along with useful ratios concerning the company's debt and equity levels that measure financial strength. But these numbers can be misleading at times if taken at face value, and following them blindly can be problematic. Qualitative analysis revolves around the aspects of a business that can't be measured by numbers but still have a distinct impact on whether the business will thrive or fail in the prevailing economic environment.
As an example of a statistical disparity that shows the necessity for such analysis, imagine a new company that is aggressively trying to market its product. This marketing may be expensive, and, as a result, statistical data that measure the company's debt may look rather troubling. Yet if this marketing strategy manages to hook a large portion of the population, it's likely that the company is due for a dramatic upswing. Only qualitative analysis of that strategy could reveal this company to be such a profitable investment opportunity.
One of the most common methods of financial qualitative analysis is thorough inspection of the management of a particular company. For example, a company struggling on paper might be able to hire management candidates with proven track records at other companies. Knowing the way this management prefers to do business is also crucial, because they will likely implement their particular style upon their arrival.
Brand quality is another popular tool for those who wish to practice qualitative analysis. A company that has had proven success in the past and is a trusted name in its particular industry is more likely to pull itself out of troubling times than one without such history. In addition, knowing the competition a particular business faces is necessary to determining its potential. If a business has a lot of positives going for it but enters into an industry stocked with well-established names, it still likely faces an uphill battle for success.
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