The quantitative and qualitative nuances of fundamental analysis

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Fundamental analysis of stocks, as you know now, helps you get to know the company better. But just what kind of information does it offer you? Or, in other words, what kind of information should you look for? Broadly speaking, you need to analyse the quantitative and the qualitative aspects of a company before deciding on whether it’s a good investment option. 

Let’s understand this better with an example we’ve already seen in the previous chapter. Remember we looked at a situation where you had to pick a destination for your vacation? Let’s classify the metrics that you considered in that scenario as quantitative or qualitative aspects.

Picking a destination for your vacation

Possible choice

Nature of the metric

What time of the year do you want to head out on your vacation?

3 months from now, when it’s summer

Quantitative

Do you want a beach vacation, a city vacation, or perhaps a trip to the mountains?

A beach vacation

Qualitative

How many days do you plan to take a vacation for?

7-10 days

Quantitative

What kind of weather do you want to enjoy?

Sunny, breezy weather

Qualitative

How many people will be accompanying you?

3 people

Quantitative

Is there any specific cuisine that you want to try?

Mediterranean, perhaps?

Qualitative

What is your budget for the flight prices?

Rs. 60,000 or so

Quantitative

Do you want a laid-back vacation or an adventurous, action-packed trip?

Adventurous and exciting

Qualitative

You see how you look at both quantitative and qualitative aspects when you plan your next vacation? Much like this, even when you’re analysing a company, you’ll need to weigh in both these kinds of factors. 

What are the quantitative and qualitative details that equity fundamental analysis reveals?

When you apply the techniques of fundamental analysis of shares to evaluate a company, you get to learn many details about the entity. Some of these are quantifiable, while others are more abstract. For instance, here are some of the metrics that equity fundamental analysis reveals.

Quantitative nuances

Qualitative nuances

What is the company’s revenue?

How efficient are the company’s operations?

How much profit has it made in the past year?

What is the quality of its key management personnel?

How much capital does it have?

How does the company’s brand value appear?

How is the company using its cash?

Does the company use any proprietary technology?

What does the company spend on?

What socially responsible initiatives is the company undertaking?

How much debt does it owe its creditors?

What is the company’s vision like for the future?

To gather all of these insights, fundamental analysis of stocks requires you to take a look at the financials of a company, its annual report, and various other analyst reports and filings. We’ll get into these details in the upcoming chapters in this module.

What about the company’s historical performance?

As you’ve seen, fundamental analysis of shares focuses a great deal on the present and the possible future of the company. What about the company’s historical performance then? Is that not relevant? If that’s what you’re wondering, then here’s your answer. 

Historical price and volume movements of a company’s shares can give you a lot of information about how the company may move in the future. In fact, there’s a separate technique that focuses primarily on analysing the historical trends in the price and the trading volume of the company’s shares. 

This is known as technical analysis.

And unlike reports and financials, technical analysis relies heavily on charts that record and reflect the movements in the price at which a company’s shares have traded in the past, and the volume of shares traded. 

Here’s a sample chart for you.

Source: dalalstreetwinners.com

See how this chart maps the price of the asset across various years. This is just one bit of what technical analysis involves. 

Wrapping up

So, you know now that fundamental analysis of stocks looks at the quantitative and the qualitative aspects of a company, while technical analysis looks at historical price and volume movement using a variety of charts. Want to know more about how these two techniques differ from one another? That’s just what we’ll discuss in the next chapter. 

A quick recap 

  • When you apply the techniques of fundamental analysis to evaluate a company, you get to learn many details about the entity. Some of these are quantifiable, while others are more abstract.
  • Fundamental analysis helps you make sense of these quantitative and qualitative aspects.
  • The historical price and volume movements of a company’s shares can give you a lot of information about how the company may move in the future. The technique that focuses primarily on analysing the historical trends in the price and the trading volume of the company’s shares is known as technical analysis.
  • Unlike reports and financials, technical analysis relies heavily on charts that record and reflect the movements in the price at which a company’s shares have traded in the past, and the volume of shares traded.
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