What is Qualitative Analysis?

Qualitative analysis is like craving chocolate ice cream…

There’s no math involved. When you get a craving for something sweet, cold, and chocolate, that’s just what you want. You don’t have to sit down and crunch any numbers. You don’t want it because the price went down. It’s just what you feel like eating. Qualitative analysis is the same idea. It’s not the result of some complicated math problem. It’s just something you believe based on your intuition, understanding, and experience.

Qualitative analysis is a research process used to assess the value of something based on its intangible qualities. It involves using subjective judgment (educated guesses) to evaluate an investment.

When a trader uses qualitative data analysis, they try to comprehend the business rather than just its numbers. They want to understand how its products fit in with the direction society is moving. An investor might want to meet the management team, or at least listen to how they talk to people at shareholder meetings.

A qualitative analysis relies on appreciating what the company does, how it positions itself for the future, and whether it believes in its mission statement. In short, a qualitative analysis tries to read between the lines of the financial statements.

While a qualitative analysis focuses on intangible assets, quantitative methods look at the information that can be quantified (represented as a number). Computer programs can turn a company’s financial statements into all kinds of value metrics — Like a price-to-earnings ratio, debt ratio, gross profit margin, or a liquidity ratio.

It takes quantifiable data sets, such as revenues and expenditures, then converts them into other measurable information. But those programs need numbers to work. And not everything is easy to put into numbers.

There's a lot of useful information in a company’s financial statements that isn't in the numerical tables. Relying solely on the quantitative data misses just how valuable the narrative and footnotes really are.

Qualitative analysis provides insights beyond ratios and metrics. While running the numbers is an excellent way to comprehend how well a company is doing, it doesn’t do much to explain what the business does.

Investors often use qualitative analysis to supplement their numbers and get a feel for the company’s future. Qualitative analysis lets traders look beyond the dollars and cents. Sometimes, it offers a way to improve the data provided by pure mathematics by incorporating information that the numbers miss.

Qualitative studies start with data collection, which comes in the form of words rather than numbers. Qualitative data includes everything from responses in a focus group to interview transcripts of a company's management.

For a trader, the narrative sections of a company’s financial records, specifically the management discussion and analysis section, are often a good source of qualitative data about a company. Newspaper articles, social media, news outlets, and blog posts might also provide some valuable insights about a company — Although these sources are inherently less reliable than required disclosures are.

Next, in the analysis process, qualitative researchers need a way to organize the data in a meaningful way. This process usually involves some form of separating information into things they have in common. Grouping information like this typically involves assigning a code to different comments, then tagging comments with the coding scheme. For example, a comment talking about the need to reduce carbon emissions might fall under the code “climate change.”

Then it’s time to review the data, find patterns, and highlight themes. For instance, an analyst might look at which codes have the most entries to find out which issues are most important to the company. With the data well organized, the analyst can review all of the statements on each topic. Then they can report their research findings, or use them for internal investment decisions.

In reality, a qualitative analysis doesn’t need to be nearly this formal. It just requires reading through research and trying to paint a big picture of the company. The analyst wants to understand the company’s mission, how it fits in the competitive landscape, how the management operates, and how the executive team is positioning the company for the future.

There are a few types of qualitative methods analysts can use. It can be a formal, time-consuming process of sorting and reviewing information. Or it can be an informal process of reading reports and listening to earnings calls. Some of the more structured approaches have software programs that can automate the process.

Regardless of whether you use an organized process or just dive in head first, the goal is the same. A qualitative analysis relies on the analyst’s intuition, developed over years of experience, to better understand which direction a company is heading.

The concept of grounded theory stems from a 1967 book titled The Discovery of Grounded Theory: Strategies for Qualitative Research by Barney Glaser and Anselm Strauss. Grounded theory is a systematic and iterative approach to analysis, mostly in the social sciences. Through this process, a theory emerges from the data. So, the ideas are grounded in the available information.

This approach is different from the scientific method, which starts with a hypothesis and then gathers data to test its validity. Such a hypothesis is ungrounded from the data that supports or refutes it. In simple terms, grounded theory requires a researcher to review the available qualitative data first, then glean understanding from the data as they go. In other words, the researcher assembles a theory from the data during the review process.

Content analysis refers to looking for patterns in qualitative data — Including books, newspaper articles, pictures, interviews, social media posts, and even internet searches. By placing qualitative content in groups, a researcher can discover which topics are trending and how important issues are to the generators of such content. Several software programs are now available to automate content analysis.

The idea behind hermeneutics is that there's more information below the surface. It dates back centuries. In the original context, it was often applied to interpreting dreams or religious texts. Modern hermeneutic analysis tries to uncover the implicit information hiding in body language, metaphors, and word choice.

As a qualitative analysis tool, hermeneutics might describe how a person comes off as trustworthy or deceptive. It’s an informal way to put weight on what a person says — or avoids saying — as you listen to their words.

Learning from experience is perhaps one of the best ways to gain insight from qualitative data. But it requires a deliberate effort to learn. Merely living through a situation doesn’t always provide the most useful conclusions about how to improve. But looking deeply at how circumstances unfolded in the past can be a good sign of how things might play out in the future. One qualitative analysis method that leans on this idea is the case study.

A case study is a way to pick apart a business scenario. It allows the researcher to take lessons from the success or failure of others. It can be an in-depth performance evaluation of a business, or it can be a broad view across many companies. The idea of a case study as a qualitative research method is to identify how people act at various decision points. Given various states of information and conditions, the researcher can contemplate whether the outcome would have been better if the managers had made different decisions.

These business cases also provide anecdotal evidence about how situations may play out in the future. With this knowledge, an analyst can make predictions based on that baseline of information. Of course, past performance doesn’t guarantee future results.