posted on 06-06-2019

Qualitative Analysis

Updated October 1, 2019

What is Qualitative Analysis?

Qualitative analysis is the use of non-quantifiable methods to evaluate investment or business opportunities and make decisions. This is different from quantitative analysis, which relies on a company's income statement, balance sheet and other quantifiable metrics.

How Does Qualitative Analysis Work?

Qualitative analysis is often used to gain insight into a company and an edge over analysts who only use quantitative measures. For example, let’s assume you are considering whether to purchase shares of Company XYZ. If you were to consider the expertise of the company’s management, the taste of the product, the look of the packaging, the company’s competitive advantages, or employee morale, you would be performing qualitative analysis.

Why Does Qualitative Analysis Matter?

Qualitative analysis, of which Warren Buffett is a notable practitioner, is the foundation of a broad array of investment and financial devision-making methods. However, it is not the only way to determine whether an investment is worthwhile. Many investors also perform quantitative analysis of companies and investments, whereby things such as the company’s cost of capital percentage change in sales over time, or trends in net income as a percentage of sales or other measures are considered.
 
Sound business judgment often involves incorporating both analytical methods, although there is considerable controversy about how much weight aMichael Milkenh method should receive when making particular business or investment decisions.