What is Quantitative Analysis?
Key Takeaways
● Quantitative analysis (QA) presents the traits of a set of numbers, the relationships between them, and their changes.
● QA is often conducted on companies' financial statements.
● Among different QA methods, mathematical modeling represents the future trend.
Understanding
QA is to present the traits of a set of numbers, the relationships between them, and their changes.
Securities analysts usually analyze the quantifiable data of a company by creating mathematical models, one way of performing QA. Through QA, they evaluate the company's operations and offer investment advice.
QA is generally used to analyze financial statements, including the balance sheet, the income statement, and the cash flow statement.
Basic methods of QA
There are basically five methods of QA.
1. Ratio analysis. It is the main method of QA.
2. Trend analysis. It is to compare a company's financial indicators over several consecutive years to track the company's growth. Through trend analysis, analysts can find out the company's development in certain aspects.
3. Vertical analysis. This method lists each item on a financial statement as a percentage of the total amount (e.g., an item on a balance sheet can be listed as a percentage of total assets or liabilities), in order to show how important the item is.
4. Comparative analysis. A comparison between economic indicators reveals their difference in value. You can compare a single indicator over two consecutive periods, indicators of different companies in the same industry, or an indicator with the standard value. Find the gap after comparison, and then further analyze the reason behind the gap.
5. Mathematical modeling. This method is widely used in modern management. It is particularly useful for forecasting and managing the economy. Because while empirical study can't be carried out in this case, mathematical modeling can still help to analyze and predict possible outcomes of certain economic decisions.
Among the above five QA methods, ratio analysis is the foundation; trend analysis, vertical analysis, and comparative analysis serve as an extension; while mathematical modeling represents the future trend.