Finding Valuation using Quantitative Analysis

Most investors try their best to use complex mathematical formulas to determine the true value of a Company (price per share). This is commonly known as value investing because investors want to know what is the innate value of the share. I have a slightly different perspective to offer in this post that we might all consider as well.

Issues with Quantitative Methods (Problems)

• Method is too complicated for most traders and investors
• True valuation is hard to find and is always changing
• Does not take into account Technical Analysis (TA) in its calculations
• Market sentiments not taken into account for the most part
• Too many assumptions made to arrive at Valuation

Finding Valuation through Qualitative Analysis

Visible Performance

Most listed companies are front facing and visible to consumers. When researching about a particular business, take note of the following pointers

1. Service standards/attitudes of employees

I believe that employees of a company will provide many insights into the business of a company. Simply put, employees will want to stay in a company that treasures, nurtures its employees. Even though listed companies are profit driven but if they do not care for its own employees’ welfare, a company will unlikely grow as fast as companies that cares for their employees.

2. Purpose of Promotions 

Some companies are trying to give out freebies for the sake of gaining attention. Such stunts signals that the company is unsatisfied with its organic draw of consumers thus trying to sacrifice profits for brand awareness and mindshare. To me that is a bad sign of the business.

If a product has a 50% price reduction during a promotional period, it not only shows that the product cost is way lower than usual price, it also shows that the company is in need of data from mass sales to restructure product offerings.

3. Services/Product Competitiveness 

Most companies will find out what’s the best deal in the market and offer a comparable pricing structure to retain or compete with newer service providers. This means that when you are trying to calculate the true value of a company, do find out their recent competitors in the market to know if their profits are likely to fall or be shared with competitors.

Even though some companies are competitive, decisions made must be sustainable and wise. For example, at some point POSB and DBS has the largest number of ATMs in Singapore for more convenient cash withdrawals. Instead of placing more ATMs around the island, competitors OCBC and UOB collaborated to provide cash withdrawals to all their customers on either bank’s ATMs to save cost. This innovative solution has saved consumers and the business lots of money down the road.

4. Business sustainability 

Many businesses are hard to sustain because of the constant lack of manpower and/or demand of high skilled workers. Conversely, it is also true that some jobs have an over supply of workers needed for expansion therefore posing less issues for business expansion.

Business expansion often means increase in overheads and capital invested in the new location or site and therefore momentarily sacrificing profits for growth. This shows that the rate of growth need to be taken into account as well when evaluating a company’s value. Do recognise that financial reports does not show all aspects of such problems faced by a company.

Over time, companies which expand too quickly will often hit a flat yield, this is because all businesses have a finite customer base for the most part. Furthermore, most productive businesses might have been overpriced when purchased by consumers on the stock market. In such cases, kindly take note of stagnation of growth of that company and reduce your valuation estimates accordingly.

Closing Thoughts

I hope this wordy post shed some insights for determination of value when purchasing a share. Knowing true valuation does not guarantee profits, however it will provide additional confidence which you have observed for a particular business. To me, this is more than just a good practice to have.