10 Apr What is Quantitative Analysis?
Quantitative analysis is a method for predicting events by studying and analyzing data. This technique uses mathematical and statistical techniques to make forecasts. It is commonly used by businesses in making investing decisions. Quantitative analysis is also a popular method used by investors for stock selection.
What does quantitative analysis mean?
An investor who is trying to identify a stock that has the potential for capital appreciation may use quantitative analysis. This will involve the study and analysis of the company’s data. The investor may take the following steps:
- Conduct a review of the sales growth of the company over the last five to ten years. Has the pace of growth picked up or has it slowed down?
- Are the earnings per share (EPS) increasing or have they stagnated/declined?
- What is the price-earnings ratio (P/E ratio) of the company? Is it more or less than the P/E ratio of other companies in the same industry?
It should be noted that the analysis relies exclusively on numerical data. There is no importance given to qualitative information. This means that the investor does not study the company’s products or the reputation that they have in the market. Similarly, factors like employee morale and employee turnover do not form part of the analysis.
Example of quantitative analysis
Taylor’s Coffee Shop was established in 2013. Over the years, it has built up a reputation for serving excellent coffee. It has a number of regular customers and it’s often difficult to find a place to sit there.
Paul, the owner of Taylor’s Coffee Shop, is thinking of expanding operations by opening a new branch. It takes him several months, but he finally finds the perfect location. After conducting a detailed analysis and using the experience that he has gained, he arrives at the following projections for the first year of operations for the new branch:
- Sales: $300,000
- Rent: $84,000
- Cost of supplies: $100,000
- Salaries: $60,000
- Other expenses: 75,000
His analysis indicates that he will make a loss of $19,000 ($300,000 – $84,000 – $100,000 – $60,000 – $75,000) in the first year of operations. Paul decides to drop his plans to expand.
Quantitative analysis relies exclusively on measurable data to make projections. In many instances, quantitative tools are used in conjunction with qualitative methods to arrive at business or investment decisions.