How to do Qualitative Analysis of a Company
Qualitative fundamental analysis is a method of evaluating a company by studying its business model, competitive advantage, quality of the management of the company, corporate governance and other publicly-available information. The main purpose of fundamental analysis is to determine the underlying potential of a company’s stock. In this article, we will describe all of the points so that you can easily do qualitative analysis of a company.
Business Model of a Company
A company or firm cannot produce its revenues and profits rationally, there must have some sorts of plans, models or structures it follows. A business model is such process by which the company sells its products or services to its customers and creates revenue and profits.
A good business model is one that is able to generate revenue and profits for the company over the long term. It should be able to do so in a way that is sustainable. A good business model should specify the followings: who should be the intended customer, what may the client want and how can the organization generate revenue while making a positive contribution and so on. When we consider whether a company’s model is effective or ineffective, there are numerous elements to examine.
Some of the most important factors which include:
- The business model should be able to generate enough revenue to cover the costs of running the business and to generate end result or profit.
- The business model should be capable of carrying profits for shareholders as it is a main concern of investors.
- A flexible business model (able to scale up or down) as needed, in order to meet the demands of the market.
- Despite fluctuations in the economy or industry, the business model must have to be long-lasting and self-supporting.
- A clear understanding of the company’s target market and know how to reach them is a necessary element of a business model.
- Demand forecasting strategy needed in a business model to balance the actual demand and supply in both the short-run and the long-run.
- A business model must have pricing strategy that allows them to make a profit. Besides, model with feasibility is also required, so that an organization can enjoy an innovative culture and it should be constantly searching for new ways to enhance.
If a company possesses all of these implements, it is likely that it does have a sound business plan. If a company is not generating enough revenue or profits, or if it is not able to scale or sustain itself over the long term, then it is likely that the business model is not appropriate for the company.
Management of the Company
The question of how to know a company’s management is good is one that is often debated. There are various indicators that may be used to assess the effectiveness of a company’s management, but some believe that the most significant aspect is the business’s financial performance. Others believe that the most important factor is the company’s ability to attract and retain top talent. However, a good management must have devoted and efficient management body members that can guide the firm towards a positive and superior long-term development. A company must have a team of dedicated management bodies who are also passionate about their work.
Company’s stock price is a one of the indicator to evaluate management efficiency. If the stock price is rising, it is generally a sign that the company is doing well. But stock performance is not only the reflection of a good management. Another way to assess a company’s financial performance is to look at its financial statements. If the company is consistently profitable, available with cash inflow, it is generally a sign that the company’s management is stable.
Company’s further progress can underlie on recruiting the best and effective management staffs. If a company is able to attract and retain the best employees, it is generally a sign that the company’s management has a long vision & mission which is a good indication. It is also important to consider that how long the top management has been performing their jobs.
Also, MD&A (Management Discussion & Analysis) provides information about a company’s previous fiscal year performance, its current financial condition and management’s plans for future prospects. This section helps investors understand how the company operates and the company’s key financial fundamentals by following management’s decision-making process.
Ultimately, there is no single factor that can be used to determine whether or not a company’s management is good. Instead, it is important to look at a variety of factors in order to get a well-rounded picture.
The first thing you need to do is understand what a competitive advantage is. A competitive advantage is an advantage that a company can have/achieve by developing something that is more effective than its rivals. This can be in the form of a product, a service, or a process. It can also be in the form of a customer base, a location, or a team of employees.
After a good understanding of what a competitive advantage is, you need to start looking for signs that a company has one. The first place to look is the company’s financials. If a company is consistently outperforming its competitors, it’s a good sign that it has a competitive advantage. Another place to look is the company’s customer-base who are willing to stay with buying company’s products or services and it can be a great competitive advantage over its rivals.
Once you’ve identified a few companies that you think may have a competitive advantage, you need to start digging deeper. Talking to customer service representatives, salespeople, and anyone else who interacts with the company’s products or services can be a better informative way to know about the company’s actual performance and prosperity. Ask them what they think sets the company apart from its competitors.
Then you’ve gathered all of this information, you need to start analyzing it. Look for patterns and commonalities. Are there certain products or services that the company offers that its competitors don’t? Are there any certain customer groups that are particularly loyal to the company? Once you’ve identified the company’s competitive advantage, you need to start thinking about how you can use it to your advantage.
If you’re a customer of the company, you can use its competitive advantage for your benefit. For example, if the company has a great return policy, you can use that to your advantage by returning items that you’re not happy with. If the company has a loyalty program, you can use that for your advantage by becoming a loyal customer and getting rewards.
In the end, the best way to know if a company has a competitive advantage is to do your research. Talk to people who work for the company, talk to customers, and look at the company’s financials. If you can find a consistent pattern of the company outperforming its competitors, then you can be pretty confident that it has a competitive advantage.
Corporate governance is vital because it helps to guarantee that a business is operated ethically and responsibly. It also aids in the protection of shareholders’ and other stakeholders’ interests, including as workers and consumers. It is concerned with policies and procedures that ensure a firm is administered in such a way that it fulfils its goals while also giving stakeholders confidence and also offering the platform for those in charge of running businesses to make better decisions.
The components of corporate governance
There are four main components of corporate governance:
- Board of directors: The board of directors are elected to set the company’s strategy on behalf of the shareholders. They are also responsible for overseeing what the management is doing. To protect the company’s goals and interests, the board of directors should act as monitor.
- Shareholders: Shareholders are the owners of the company and have the ultimate say in how the company should run. Shareholders of a firm might be individuals, groups, or corporations. The success or failure of a corporation has an immediate impact on its shareholders.
- Management: Management is also an important aspect of corporate governance. A good management ensures that the company’s goals and objectives are achieved by sustaining everyday operations and overseeing the company’s long-term development.
- Stakeholders: Any company’s stakeholders might be both internal and external. Stakeholders are primarily those individuals and/or groups who are directly affected whether a firm succeeds or fails. Such as employees, suppliers, shareholders, and so on.
What are the benefits of good corporate governance?
Good corporate governance has evolved as an important frame for firms attempting to position themselves positively in the face of a difficult economic environment. This has become vital since it allows for the establishment of chances for growth and a chance to compete. If a corporation maintains good governance, it may have more opportunities to generate additional advantages than it previously had. There are many benefits of good corporate governance such as:
- Enhanced company performance: Good corporate governance can improve a company’s financial and non-financial performance by helping to prevent and resolve conflicts of interest, ensuring efficient use of resources, and protecting shareholders value.
- Improved risk management: The board & as well as management identify all kinds of risks and make recommendations about how to manage them effectively.
- Greater transparency: Corporate governance can make a company more transparent in its dealings, which can enhance public trust and confidence.
- Accountability: The board must explain the company’s various business objectives and the consequences of its conduct. If the company’s leadership are responsible for evaluating a company’s capabilities, potential and performance, it takes important decisions for the interest of shareholders.
After obtaining all of the evidence and finishing the study, you must come with a decision on the firm’s stock value. This is where your opinion comes into play. You need to determine what you think the company is worth and then compare that to the current market price. If you think the company is undervalued, then it may be good for investment. If you think the company is overvalued, then you may want to avoid it.
Fundamental analysis is a great way to get an idea of a company’s true value. However, it is important to remember that it is only one tool in the investment toolbox. You should always use multiple methods when making investment decisions. Hope your investment decisions goes well and you become a good investor in the market.