Beyond the Numbers (Qualitative Analysis)

Looking solely at the Financial Statements to determine whether a company is worth your investment is definitely not enough. In this post, we would teach you how to LOOK BEYOND THE NUMBERS into the qualitative analysis of the company.

What is Qualitative Analysis ?

  • Aspects of a public company that aren’t quantifiable or easily explained by numbers.
  • Soft-Metric Analysis (Non-Mathematical)

What does one have to look out for ?

For Simplicity sake, We’ll split the analysis into two parts:

  • Internal (quality within the company)
  • External (looking at the industry/sector as a whole)

Internal Analysis

  1. Competitive Advantage
  2. Leadership and Management of the Company
  3. Business Model
  4. Corporate Governance
  1. Leadership and Management of the Company
  • Competitive Advantage

A competitive advantage is what makes a company’s product superior to all the other goods and services available in the market

Although a company may have been able to increase its earnings in the past, there is no guarantee that it can continue to do so in the future. New competitors could enter and steal market share or cause price drops, forcing the company to experience lower sales and earnings.

Concept of the Economic Moat

Like a wide moat surrounding a castle, competitive advantage protects the company’s future profits from its potential competitors. The economic moat can consist of:

  1. Powerful name Branding and consumer loyalty
  2. Huge economies of scale
  3. High barriers to entry and Market leader (impenetrable business)
  4. Special Patent, Technology, Trademark or Formula

How to identify companies with wide economic moats ?

  • The company usually sells a product or service that is a consumer monopoly
  • Its product or service is so unique and special that even a price hike will not greatly affect demand (eg. Microsoft)
  • Low Direct Competition

2. Experience and Tenure of Leadership

The board of directors and CEO should be well versed in the industry, with sufficient experience in leadership. They should be knowledgeable in the sector’s market, thereby allowing them to adopt business strategies tailor-made for the industry and have sufficient foresight on the expansion of the sector. Their experience will also allow them to calmly navigate the company when it is sailing through rough waters and escape without much financial damage.

3. Business Model

A business model is the strategy a company adopts to sustain its profits. It identifies the products or services the business will sell, the target consumers , and the expenses/costs it anticipates. Established businesses will have to continue to review and revisit their business model. If not, they’ll fail to anticipate trends and challenges due to the volatility of the market. Furthermore, they should adopt a viable and financially sustainable business model which encapsulates a plan for the company’s future.

A good track record and sustainable competitive advantage does not necessarily mean higher sales and profits in the future. This is because the company has to have the market potential with concrete plans, which will ultimately translate into the sale of substantially more goods and services. In other words, the company should be forward-thinking.

4. Corporate Governance

Corporate governance should create a transparent set of policies and rules in which both the management and its shareholders have aligned views and incentives. For many , it is not enough for a company to merely be profitable; it also requires other factors such as environmental awareness, the lack of fraudulent behavior and ethical corporate practices.

Additional Criterion: Management is holding/buying the Company Stock

Also coined as having ‘Skin in the Game’, if the management and leadership of the company are holding on to a significant amount of the company’s shares, they themselves would have vested interests to ensure that the company does well.

How does one find the material to evaluate the aforementioned metrics ?

Normally, one can have a sensing of the business model, the company’s management and its competitive advantage via the Annual Report’s initial pages. Take the time to read the CEO’s message to shareholders, its corporate profile and its management and leadership’s profiles. However, take everything you read with a slight pinch of salt as the company will always paint a rosy picture for it’s shareholders. If not, thanks to the many advancements of the internet, one could always carry out their own research with search engines such as Google.

Taken from Kimly’s AR 2018

External Analysis

  • Health of the operating industry/sector
  • Business Cycles

Health of the operating industry/sector

There are 4 phases which spans throughout a sector’s lifetime, they are:

  1. Start-up Phase
  2. Growth Phase
  3. Maturity Phase
  4. Decline Phase

Only in Phase 4, where the sector is declining and it is transitioning into a sunset industry, does one have to reconsider their options and re-evaluate their decision. The decline phase marks the end of an industry’s ability to support growth. Obsolescence and evolving end markets negatively impact demand, leading to declining revenues. Decline often signals the end of viability for the incumbent business model. (E.g. Floppy Disks and Cassette Tapes)

Business Cycles

There are many business cycles where different industries will thrive at different timings. For differing sectors, revenues generally are higher in periods of economic prosperity and expansion and are lower in periods of economic downturn and contraction. Vice Versa.

For example, during economic downturn, the airline and travel industry will suffer as less people would have the purchasing power to fund their travels and vacations. However, non-cyclical industries produce goods consumers cannot do without, such as healthcare, power and water.

We hope that the content above has allowed one to make a more well-rounded and informed decision when considering their investment options.



Stay Tuned! Till Next time….

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