Three ways of looking at a listed company

When you start to take an interest in investing, you very quickly come across concepts that sound serious, but it is not always immediately clear what they really mean. You read about financial results, the business model, charts, ratios and valuation, and after a moment the impression may appear that every person explains the stock market in a different way. This is natural, because the assessment of a company can indeed rest on several different perspectives.

One of them focuses on the figures and financial data of the firm. Another lets you look at how the business itself works, who manages it and whether it has lasting foundations for further development. A third focuses on the behaviour of the share price on the chart and shows how the market assesses the company at a given moment. It is precisely from these three perspectives that fundamental analysis, qualitative analysis and technical analysis grow.

In long-term investing, merely observing the share price is usually not enough. A rising price does not have to mean that the firm is healthy and well run, just as a single weaker period does not yet have to cancel out the value of the whole business. To better understand listed companies, it is worth knowing what to look at, how to combine different information and how the basic methods of analysis actually differ. This is exactly what this topic is devoted to.

Fundamental analysis

Fundamental analysis consists in looking at a company's financial data. Its goal is to check whether the firm earns, whether it is growing sales, whether it keeps a reasonable level of debt and whether it can turn its activity into real results. It is precisely here that the financial reports and ratios appear, which you often read about in materials on the stock market.

Among the most often analysed data are revenue, meaning the value of the firm's sales, net profit, meaning what is left after subtracting costs, debt, margin and cash flows. Cash flows show whether cash actually flows into the firm from its activity. This is important, because a company may show an accounting profit and at the same time have a weaker cash situation. In fundamental analysis, therefore, it is not one result that counts, but the whole financial picture of the enterprise.

A simple comparison to a private household budget works well here. If someone says they earn more and more, but at the same time keep increasing their debts and have difficulty paying current expenses, it is hard to consider their situation really good. With a company it is similar. The mere information about a rise in revenue is not enough. You still have to check whether the firm keeps healthy proportions between sales, costs, profit and debt.

In fundamental analysis valuation ratios also often appear, for example the price-to-earnings ratio (P/E) and the price-to-book ratio (P/B).

The price-to-earnings ratio (P/E) means the share price in relation to the profit attributable to one share.

The price-to-book ratio (P/B) shows the relation of the price to the company's book value.

For a beginner Elegant Investor one thing is most important. These ratios do not serve for making quick judgements on the basis of one number. Their sense appears only when you compare a company with other firms from the same industry, or observe how a given ratio changes over time. It is precisely fundamental analysis that lets you answer the question of whether a healthy business stands behind a share. Over a long period this matters enormously, because the company's results and the quality of its finances affect how the firm develops over the years. For Elegant Investors this is a very important starting point, because long-term investing requires looking further than the current newspaper headlines or the momentary emotions of the market.

Qualitative analysis

Even good-looking figures do not yet say everything. Two companies may have similar revenue, similar profit and a comparable level of debt, and yet one of them may be a much better business. It is precisely here that qualitative analysis begins.

Qualitative analysis concerns elements that cannot be fully captured in a table. It covers the business model, the quality of the management, the competitive advantage, the way of communicating with investors, the strength of the brand, the dependence on one product or customer and the firm's resistance to changes in the economy. All of this affects the company's future, even if it cannot always be expressed by one ratio.

Imagine two companies producing cosmetics. Both have similar sales. The first develops its offer sensibly, has loyal customers, controls costs well and has been building a recognisable brand for years. The second sells a lot, but often changes its direction of action, relies heavily on price promotions and depends on a few large buyers. On paper their results may look similar. After a deeper look, however, you can see that the quality of these businesses is different.

In qualitative analysis the competitive advantage plays a large role. It is a feature that makes it harder to take away the firm's customers, market position or profitability. This advantage can be a recognisable brand, patented technology, exceptionally efficient distribution, the scale of activity or a strong position in a particular niche. The more lasting the competitive advantage, the greater the chance that the firm will keep a good position for a longer time.

It is also worth assessing the management. For a beginner Elegant Investor this may sound abstract, but in practice it is about very concrete things.

1. Does the management clearly explain the results?
2. Does it achieve the goals it announced?
3. Do the company's decisions look logical?
4. Does the firm spend money sensibly?
5. Can it admit that it made a mistake?

Such a way of observing helps you understand who really stands behind the business and how this firm is run.

Qualitative analysis matters a great deal in long-term investing, because the good results of one year may be a coincidence, while the good quality of a business usually reveals itself over a longer period. It is precisely this that often decides whether a company will be able to develop stably and keep its position on the market.

Technical analysis

Technical analysis rests above all on the chart. It studies how the share price changes and what the trading volume looks like, meaning the number of shares that were bought and sold in a particular time. Its goal is to observe the behaviour of the market, not to assess the business itself.

In this approach concepts often appear such as an upward trend, a downward trend, a support level, a resistance level or a moving average. For a beginner Elegant Investor these names may seem difficult, which is why it is worth simplifying their sense.

An upward trend means that the price generally rises over a certain time.

A downward trend means that it generally falls.

A support level is an area at which the price previously stopped falling.

A resistance level is an area at which the price previously had difficulty rising further.

Technical analysis tries to answer the question of how market participants behave and whether the chart shows an advantage of buyers or sellers. For some investors this is a basic working tool. In the case of long-term investing it usually has less significance than fundamental and qualitative analysis, but it can still be useful.

If you are considering buying the shares of a good company, technical analysis can help you see whether the price is at a very nervous moment, whether the market has been falling for a longer time, or whether a sudden breakout has just occurred after strong emotions. It will not, however, answer the question of whether the firm is financially healthy or whether it has a good business model. This information has to be looked for elsewhere.

In practice technical analysis can therefore play a complementary role. It gives additional context about the behaviour of the price, but it does not replace the assessment of a company's quality. For a beginner reader it is very important to understand this difference, because a chart is often visually attractive and it is easy to consider it the most important element. Meanwhile, in long-term investing what is happening in the firm itself matters far more.

How to use fundamental, qualitative and technical analysis

The most is given by looking at a company from three complementary sides. Fundamental analysis shows whether the firm has a healthy financial situation and whether it achieves stable results. Qualitative analysis lets you assess whether the business itself is sensibly built, well managed and resistant to harder periods. Technical analysis helps you see how the share price behaves on the market and whether greater calm or rather clear tension can be seen around the company.

For a beginner Elegant Investor the most logical order starts from the fundamentals. First it is good to check whether the firm earns, what its debt looks like, whether the results are stable and whether revenue and profits develop in a coherent way. Later it is worth looking at the quality of the business, meaning what position the company has on the market, who manages it and whether it has lasting foundations for further development. Only at the end can you look at the chart and assess how the share price behaves. Such an approach helps you avoid one of the most common mistakes at the start of investing, meaning drawing conclusions on the basis of only one element. A low valuation is not enough to consider a company attractive. A rising share price does not yet decide the quality of the firm. A well-told story about the business also does not replace healthy finances. A fuller picture appears only when you combine the figures, the assessment of the business and the observation of the market's behaviour.

At the start of learning it is best to base the analysis on simple points of reference that lead you through a company in an orderly way.

1. Does the firm earn regularly?
2. Does it have a reasonable level of debt?
3. Is its business understandable?
4. Does it have something that makes it harder for competitors to take away its position?
5. Does the current share price seem detached from the quality of the company, or rather in tune with it?

Such a way of thinking helps you better understand the stock market and gradually build your own approach to analysis.

What fundamental, qualitative and technical analysis give you

Fundamental analysis, qualitative analysis and technical analysis do not exclude one another, because each shows a different fragment of the picture of a company. Fundamental analysis helps assess the figures and the financial condition of the firm. Qualitative analysis lets you better understand the business itself, its quality and the way it is managed. Technical analysis shows how the share price behaves on the market. In long-term investing the fundamentals and the quality of the business usually matter most, because it is they that say the most about the durability of the firm and its possibilities of development in the coming years.

At the start of learning it is worth above all understanding why you look at the financial results, the management, the business model and the chart. Such an order makes it easier to assess a company and helps tell the information that really matters apart from the information that draws attention only for a moment. When you see the role of each of these elements, it is easier to develop knowledge and find your way better in the world of the stock market.

This is what reliable investing education consists in. It is about explaining what really matters and how to look at a company more broadly than only through the lens of the current share price. It is precisely in this way that Elegant Investors teach. They show that long-term investing begins with understanding the firm, and only later moves on to assessing its place on the market.

Sources:

Investopedia (definitions of fundamental, qualitative and technical analysis, https://www.investopedia.com), CFA Institute (investor education on company analysis and valuation, https://www.cfainstitute.org), Morningstar (analysis of company fundamentals and competitive advantage, https://www.morningstar.com), Nasdaq (market data and information on listed companies, https://www.nasdaq.com), Harvard Business Review (articles on business models and management, https://hbr.org), McKinsey & Company (analysis of competitive advantage and corporate strategy, https://www.mckinsey.com), Benjamin Graham (foundational works on fundamental analysis), Philip Fisher (works on the qualitative assessment of companies), Aswath Damodaran (educational resources on company valuation, https://pages.stern.nyu.edu/~adamodar)

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