What Is Quantitative Analysis?

Definition and Example of Quantitative Analysis

Quantitative analysis is any type of analysis that relies on quantitative factors, namely things such as a company’s revenues, price-to-earnings ratio, and other metrics. The goal is to identify trends or characteristics that may indicate an opportunity for gains.

This contrasts with qualitative factors, such as a business’s reputation or the quality of its management team, which can’t really be distilled into a mathematical formula.

For example, someone using quantitative analysis to try to decide whether to purchase a stock may calculate the business’s revenue growth over the past few years, or look at the company’s ratios and how those ratios compare to other, similar companies.

Some popular stats quantitative analysts use include price-to-earnings (PE) ratios and earnings-per-share (EPS). According to quantitative analysis, if there are two similarly valued companies and one has a higher EPS or a lower PE ratio, that may be the better investment opportunity.

How Does Quantitative Analysis Work?

Quantitative analysis is used in many aspects of investing and business. One common way it works is by comparing data sets. If a quantitative analyst can look at economic data such as GDP growth or inflation and identify a similarity to a pattern that occurred in the past, they may be able to predict what is about to happen to a company’s stock.

Other types of quantitative analysis include financial modeling, optimization, and data mining. For the individual, “quant” investing can be a matter of one or two metrics, whereas an investing firm could use voluminous amounts of data to make buy and sell decisions.

Anything for which data can be collected and tracked is open to some type of quantitative analysis. These days, massive amounts of data are created and stored every day. Many quantitative analysts use powerful computer programs and models to try to find the most useful data and to identify patterns or correlations.

Quantitative Analysis vs. Qualitative Analysis

Source of Information

Investors using quantitative analysis rely on hard numbers and other reliable forms of data. Things such as revenue numbers, share prices, and other factual information are the inputs they use when performing an analysis.

By contrast, qualitative analysis relies on things that are difficult to quantify or for which people might have differing opinions. Investors using this method of analysis may try to determine a company’s reputation or the effectiveness of a business’s management group. This can involve things such as surveys or focus groups to quantify consumer sentiment.

Useful for Analyzing Investments

While some may feel qualitative analysis is inferior to quantitative analysis because it does not rely on hard facts and figures, both play important roles in investment research.

Consumer and investor opinions both play major roles in the performance of a company, just as its revenue, profits, and other financial numbers do. Investors can gain valuable insights from both forms of analyses.

Pros and Cons of Quantitative Analysis

Pros Explained

• Relies on numbers and data: Quantitative analysis often looks at factual information, which means it is easy for investors to learn about and calculate.
• Available techniques range from simple to complex: Even beginners can use simple techniques, such as finding a business’s PE ratio. However, more advanced investors use quantitative analysis to look at much larger and more complex amounts of data.
• Low cost: The data that an individual investor can use for quantitative analysis is typically freely available on any number of financial websites.

Cons Explained

• Not everything can be distilled to numbers: Quantitative analysis excludes things that are hard to convert to simple numbers, such as consumer and investor sentiment, quality of management, or company culture.
• No quant method is perfect every time: Quantitative analysis is one tool investors can use to predict future results, but even if an investor identifies a pattern that is similar to one that has occurred in the past, there is no guarantee that the future will play out the same way.

What It Means for Individual Investors

Everyday investors probably use simple quantitative without even realizing it. If you’re looking at things like a business’s revenue and expenses, or popular ratios such as EPS or PE ratios, you’re already using quantitative analysis.

Basic quantitative analysis techniques are a useful tool for investors who want to research and compare companies. However, keep in mind that it excludes many qualitative factors that also play important roles in an investment’s success.