Qualitative Analysis: What Makes a Company Great?

There are two types of analysis used to evaluate companies: fundamental and technical. Qualitative analysis, a subjective assessment method that is sometimes referred to as soft metrics, is part of fundamental analysis.

Qualitative analysis looks at aspects of a public company that aren’t quantifiable or easily explained by numbers. These can include things such as management’s capabilities, the quality and extent of research and development, and news about a company.

Generally, qualitative analysis is underappreciated and underutilized.

Key Takeaways

• Qualitative analysis falls into the area of fundamental analysis.
• Qualitative analysis is referred to as soft metrics, which contrast with hard metrics such as earnings per share (EPS) and net income.
• Qualitative analysis involves forming judgments about a company’s value and prospects, based on intelligence gathered by studying management, investor relations, competitive advantage, customer satisfaction, and such.
• Research has shown that companies that wholeheartedly believe in and support customer satisfaction efforts perform better than those without such conviction.
• Employee satisfaction is crucial to the financial health of a company and the upward mobility of its stock price.

The Basis of Qualitative Analysis

When conducting a qualitative analysis of a company, most investment professionals look at the business model, the company’s competitive advantage in the industry, its management, and its corporate governance, among other things.

This helps them to determine a company’s plan to make money, how it differs from its competition, which people are making the decisions, and how they treat ordinary shareholders.

Gathering all of this data can provide an idea of how a company intends to grow its business and reward shareholders.

However, it isn’t the entire picture. Other subjects, like satisfying the customer, rewarding employees, and maintaining excellent supplier relationships, matter as well.

Note

Qualitative and quantitative analyses are the two aspects of fundamental analysis, which studies economic and financial factors of a company to reveal the intrinsic value of its stock.

Look Beyond Numbers

Understanding the qualities that make a company great involves more than a simple SWOT analysis (strengths, weaknesses, opportunities and threats).

To evaluate a company’s intangibles, one must dig below the surface and beyond the 10-K. Satisfaction is the key here and successful businesses have it in abundance.

For example, if a company fails to satisfy employees, suppliers, and customers, it’s only a matter of time before its stock price implodes. Some academics believe that customer satisfaction and employee satisfaction aren’t mutually exclusive. Happy employees don’t guarantee customer loyalty. 

Zappos.com

But the late Tony Hsieh, former CEO of Zappos.com, the well-known and successful online shoe retailer, and winner of many customer service awards, said “The thing we realized … is that customer service is about making customers happy, and the culture is about making employees happy.”

“So, really, we’re about trying to deliver happiness, whether it’s to customers or employees, and we apply that same philosophy to vendors as well.”

This winning attitude may have contributed to Amazon.com’s (AMZN) acquisition of the business for $1.2 billion in 2009.

Employee Satisfaction

Any company that’s truly interested in customer satisfaction must first meet the needs of its employees; otherwise, it’s putting the cart before the horse.

JetBlue

JetBlue (JBLU) came to realize that it wasn’t doing a good job of satisfying employees when thousands of its passengers were left stranded because of a New York City ice storm.

Employee morale dropped, and with it, customer satisfaction. Up to that point, the company had surveyed employees once a year looking for feedback.

It needed to do more, so it implemented “Net Promoter,” a scoring system that calculates how many employees are actively promoting the company, both as a place to work and as a place to do business.

Once it began to look at employee satisfaction department by department, it was able to deliver programs that improved morale. Results followed.

Employees are the face of any brand. The quickest way to destroy brand equity is to disrespect them. Once you’ve lost trust, it’s only a matter of time before you lose the customer.

SAS Institute

Without customers, you have no business. It’s a slippery slope that privately owned software firm, SAS Institute, knows well.

CEO and co-founder Jim Goodnight has been in charge of the company since it’s beginning in 1976. He is known for emphasizing employee satisfaction and the company has been named for many years by Fortune as a top employer to work for.

In its corporate social responsibility report, the company stated, “If you treat employees as if they make a difference to the company, they will make a difference to the company”

“At the heart of this unique business model is a simple idea: Satisfied employees create satisfied customers.”

Public companies are no different.

Supplier Satisfaction

No matter how vertically integrated your company is, you will always have suppliers of one kind or another, and those relationships can positively or negatively impact the quality of your final product or service.

Whole Foods

One of Whole Foods’ (AMZN) seven core values is its commitment to its suppliers. By creating a true partnership with the companies it buys from, it is able to provide its customers with a fabulous shopping experience.

It’s not enough, however, to have great customer service—the food has to match. Whole Foods tends to score high on this front as well. By doing so, it is able to maintain price points that are higher than those in most grocery stores, thereby delivering greater profits.

Customer Satisfaction

The marketing industry for years has tried to quantify customer satisfaction to clarify a brand’s equity, or worth. Annual studies like the American Customer Satisfaction Index, Prophet’s Reputation Management Index, and Forrester Research’s Customer Experience Index are just three examples.

• For instance, the American Customer Satisfaction Index has shown that the stock prices of companies that rank higher in the index tend to do better than those ranked lower.
• In fact, from 2006 and 2024, the 30-35 top-scoring companies provided a cumulative return of 1,930%. That compares to 534% for the S&P 500 and 601% for the Consumer Discretionary sector.

If you’re not quite sold on the idea of customer satisfaction affecting a company’s financial well-being, consider the findings of Forrester Research, whose annual Customer Experience Index ranks the best and worst in customer service.

• According to Forrester, companies that are “customer obsessed” thrive. Their survey found that companies with high levels of customer focus had almost two-and-a-half times higher revenue growth and two times the profitability growth of those without such focus.

Why Isn’t Qualitative Analysis Better Respected?

Because many investment professionals consider that it relies too much on analysts’ impressions rather than specific proof. It can involve judgment calls and bias.

What Is Qualitative Analysis?

It is a method of researching the value of a company or stock that relies on subjective assessments of intangible features rather than on hard numbers.

Can Qualitative Analysis Be Used With Other Research?

Yes, and, in fact, it should not be relied on exclusively due to its lack of science. It can be useful along with quantitative analysis to size up how well companies operate and their future financial prospects.

The Bottom Line

Investors tend to spend most of their time worrying about quantitative analysis. Ratios like price-to-earnings and price-to-book get all the attention while numberless intangibles, like customer satisfaction and employee satisfaction, are left to annual surveys that are quickly forgotten.

We live in a quantitative world. Qualitative analysis, on the other hand, is tricky stuff, and many financial professionals find it too subjective.

However, any business whose stock price has risen consistently over time has surely satisfied all its stakeholders. As Warren Buffett has been quoted many times: “Beware of geeks bearing formulas.”