Quantitative vs Qualitative Research, How To Analyse Company

Quantitative vs Qualitative Research

Every company can be analysed using two kinds of research- Quantitative Research and Qualitative Research. In this article, we are going to talk about quantitative and qualitative research and their importance.

What is quantitative research?

Quantitative research is a method in which numerical data is used in company analysis. In our case, the numerical would be financial data like profit and loss statements, net sales, EBITA margins, balance sheet statements etc. Analysts use various quantitative data, risk models and analytical tools while researching a company.

The financial statements used during quantitative research are as follows:

1. Balance Sheet – This offers data related to various types of assets, liabilities, debt and shareholders’ equity.
2. Income Statement – This gives us information about profits, losses, expenses and revenues of the company. We also find data about operating expenses, profit before tax, depreciation and amortisation etc on the income statement. After analysing all these factors, investors better understand the business performance of the organization in that quarter. Investors can also compare it to past quarters to determine revenue growth.
3. Cash Flow Statement – This helps to find out the performance of a company during a crisis. It offers information about operating, investing and financing activities.

Where do we use Quantitative Research?

Quantitative research can be used in places where we need to analyse data and provide solutions to problems. In our case, the problem is to know whether a particular company is worth investing in or not. To find the answer to that problem and to back our results with data, quant researchers and analysts use quantitative research.

Why is Quantitative Research Important?

Quantitative research helps investors to measure past performances. Without quantitative research, it is difficult to arrive at any investment decision. Quantitative research helps investors to measure past performances. A company’s past performance is the first criterion used while selecting any company for investment purposes. It may be difficult and impractical to analyse all the companies in an industry. As a result, the ideal approach is to look at their histories and then pick a few enterprises to focus on.

Usually, a five-year review will provide a picture of the firm and its consistency in performance. If the financials of the company are good, we deduce that the business is in good shape. If the financials are terrible, no good pursuing the business. However, good financials do not necessarily imply a successful firm, as it is hard to determine the quality of such financials.

Using data from the balance sheet, income statement, and cash flow statement, quantitative analysts can generate several useful ratios. Liquidity, Solvency, Profitability, and Debt Ratios are some examples.

What is Qualitative Research?

Qualitative research is part of fundamental research. While performing company analysis, investors and analysts go through the business models, competitive advantage, management quality and many other micro and macroeconomic factors. Even with a good competitive advantage and fantastic models, some companies fail because of bad management. So, investors need to analyse all of these before investing.

1. Business Model – The phrase business model refers to a company’s profit-making strategy. It specifies the items or services that the company intends to offer, its target market, and any projected expenditures. It tells us about how an organisation generates, delivers, and captures value in economic, social, cultural or other contexts. Investing in a company that has a bad business model can depreciate the invested money.
2. Competitive Advantage – It tells us about the kind of edge a company has over its competitors. If a company does not have a competitive edge over its peers, it may perform poorly in the long run.
3. Management Quality – Even with a good competitive advantage and fantastic models, some companies fail because of bad management. So, investors need to analyse all of them before investing.

Where do we use Qualitative Research?

Research analysts, investors and fund managers do qualitative research before investing in any company. With quantitative analysis, we can know about the historical performance of the company. But that is not enough to determine future performance and that is where qualitative research comes in.

Why is Qualitative Research Important?

Qualitative research is an important part of company analysis. It involves asking several important questions to get a well-rounded idea about a company, the industry it is operating in, its customers, competitors etc. Some of these questions could be-

• What are current customer tastes and preferences?
• How is the industry’s competitiveness shaping up? Who are the new entrants, both internal and external?
• What are the business’s entrance obstacles, and will they change in the future?
• Why would a company continue to be the market leader?
• Is there a possibility of regulatory reforms in the industry?
• What are the business threats of the company?
• What are the business prospects of the company, and does the company have the execution capabilities to capitalise on those opportunities?
• How is the management quality of the company?
• What is the consumer impression of the products and services?
• Why do people purchase the products/services? Is there a solid link between the brand and the product?
• Are the distributors/retailers satisfied with the products/services they sell?
• How is the organisation organised? Is the company’s workforce content?
• What is the company’s impression among bankers and other stakeholders?
• Is the management concerned about risk management?

The list of questions and the significance of each question will depend on the type of business being examined. The goal of the questions is to have a thorough understanding of many areas of the business. This understanding helps analyse quantitative and qualitative business information and translate the analysis into sound investment recommendations.

Difference between Quantitative and Qualitative Research

Conclusion

Both quantitative and qualitative research play a major role in the investment world. Both should be analyzed carefully and given equal importance when deciding to invest in a company.

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