Qualitative Fundamental Analysis for Traders

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Contributor, Benzinga
July 27, 2021

When discussing stock analysis, the numbers will likely be the 1st things that pop to mind. You will hear about concepts like price and earnings, return on assets, earnings before interest, taxes, depreciation and amortization. The numbers are easy to explain and, most importantly, published every quarter.

Yet, a good analysis includes qualitative factors that are not so obvious. Read on to learn what those are and how to use them to create a well-rounded stock analysis.

What is Qualitative Fundamental Analysis?

Qualitative fundamental analysis considers all the nonquantifiable aspects of the company that still impact the performance and, thus, the company’s value.

Qualitative factors are difficult to gauge because they are somewhat subjective. Nonetheless, this presents an opportunity for a perceptive eye to catch on to something that the broad market might have missed.

Examples of qualitative factors include:

  • Employee satisfaction: Usually measured through surveys, but there are qualitative ways of evaluating employee satisfaction. The most direct route would be to ask the employees yourself. This is an underappreciated but advantageous method for brick-and-mortar companies or other companies that interact with the end customers.

Alternatively, you can use online services like Glassdoor and read through employee reviews to get an outlook on the company.

  • Management's competence: While employees build the company, management steers it. Knowing management’s experiences, previous accomplishments and factors like personality and management style or the compensation structure will all be insightful to speculate on the company’s future direction.
  • Brand value: Often the most important intangible asset on the balance sheet, brand value can sometimes be perceived as premium over nonbranded alternatives. Yet, to a consumer, it can be much more. Some brands have embodied themselves so deeply into certain cultures that they achieved close to religious status. Evaluating brand value comes in handy, especially when entering into new ventures or new markets.
  • Supplier relationships: Full vertical supply chains are rare within the same corporation. Most companies have to rely on the network of specialists, rarely sitting at the beginning of the chain, sometimes at the end — but most often somewhere in the middle. Knowing what these relationships are and how they are managed helps to understand the supply chain’s resilience.
  • Customer satisfaction: A measure that shows how happy customers are with the company's products and services. Just like with employee satisfaction, this data is the best when gathered directly from users. Alternatively, review web services got popular in recent years, but they are prone to manipulation and often give skewed results. Customer satisfaction is one of the leading indicators for the future of the company.
  • Institutional participation: While there are no guarantees, institutional participation gives a blessing to the endeavor. Institutional investors like hedge funds or mutual funds usually employ armies of analysts to perform due diligence before investing in a stock. Although institutions still make mistakes, the lack of their stake in a large company certainly raises some questions.

What Adds to Your Analysis?

  • News: Staying informed is the cornerstone of qualitative fundamental analysis. Always double-check your sources, but collect the data yourself whenever possible. The most beneficial sources of secondary data will be quarterly investor presentations and Securities and Exchange Commission (SEC) documents. The 2 essential SEC forms are the 10-K (comprehensive yearly report about financial performance) and the less-detailed quarterly 10-Q report.
  • Corporate actions: These include events initiated by a public company that could bring a change. They are usually voted on by the board of directors and authorized by shareholders. They include stock splits, dividend changes, mergers and acquisitions, right issues and spinoffs. While some corporate actions are merely out of convenience (like stock splits), others like mergers or spinoffs can fundamentally change the way the company operates.
  • Secondary sources: At times, you will have to rely on secondary sources. For example, if you invest in a company that doesn't operate in the domestic market, it will be harder to collect the data yourself. Furthermore, assessing the intangibles like brand value can be expensive and requires specialized knowledge. So, you will have to rely on services like Glassdoor, Statista or Brand Directory.

Is Qualitative Fundamental Analysis Foolproof?

Qualitative fundamental analysis carries a high degree of subjectiveness. In that regard, it is far from foolproof.

Yet, the greatest weakness is also its greatest strength. Subjective perception creates market inefficiencies, which in turn create profitable investment opportunities as value eventually catches up.

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Hidden Value Quickly Adds up

Qualitative analysis requires patience and experience. The information needed is often hiding in plain sight. Additionally, it can be hard to interpret the information the company publishes correctly. You should be careful not to overthink and spend too much time on minor details.

While anyone can easily calculate financial ratios from the balance sheet, evaluating whether the public doesn't like the features on the latest product or finding out reviews from disgruntled middle management complaining about a new CEO is not the most visible information. Nonetheless, it is valuable in formulating an accurate, well-rounded opinion on the company.

Frequently Asked Questions


What are the steps in fundamental analysis?


Fundamental analysis can fit in these simple steps:

  1. Screen using the financial ratios: Using a screener like Finviz, you can scan thousands of companies by filtering through their financial ratios.
  2. Understand the business model: How does the company make money? Investors like Warren Buffett refuse to invest in businesses they do not understand.
  3. Address the key financial reports: A public company will publish an earnings statement every quarter in addition to the yearly outlooks. Remember to study the balance sheet, profit and loss statements and cash flow statements.
  4. Assess the debt: Debt is not always bad (especially when the interest rates are low), but it has to be used responsibly. Check whether the cash flow well covers the interest on the debt.
  5. Analyze the external environment: A valuable business will have a solid economic moat, but there will always be competition. Look for the points of competitive advantage and study the competition to determine whether the company can respond to it.
  6. Evaluate prospects: While speculative, a simple evaluation of the future of products or services will go a long way toward deciding whether the company will still be successful in the long run.

What is a qualitative analysis example?


The rise of online platforms in recent years created businesses around qualitative business analysis.

The best example of it is Glassdoor. Although it quantifies user feedback, the value added is in qualitative descriptions of companies — workplace satisfaction, interview reviews or management feedback.

An investor can spot shifts in employee satisfaction by observing the trends and using that information to manage the investment. Employee satisfaction is a leading indicator of a company’s future.