What It Is:

Qualitative analysis is the use of non-quantifiable methods to evaluate investment or business opportunities and make decisions.

How It Works/Example:

Qualitative analysis is often used to determine whether and when to buy and sell securities. For example, let’s assume you are considering whether to purchase shares of XYZ Company. If you were to consider the expertise of the company’s management, the taste of the product, the look of the packaging, the company’s competitive advantages, or employee morale, you would be performing qualitative analysis.

Why It Matters:

Qualitative analysis, of which Warren Buffett is a notable practitioner, is the foundation of a broad array of investment and financial decision-making methods. However, it is not the only way to determine whether an investment is worthwhile. Many investors also perform quantitative analysis of companies and investments, whereby things such as the company’s cost of capital, percentage change in sales over time, or trends in net income as a percentage of sales or other measures are considered.
 
Sound business judgment often involves incorporating both analytical methods, although there is considerable controversy about how much weight each method should receive when making particular business or investment decisions.