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Quantitative Factors
Since, we have discussed all qualitative factors of stock investing in the last section. Now, let us learn the different quantitative aspects of stock investing.
What are the Quantitative Factors affecting the stock price?
Quantitative Factors are ones which are capable of being measured or expressed in numerical terms. In our context, quantitative fundamentals are numeric, measurable characteristics about a business. We can extract numbers such as revenues, profits, assets, liabilities and other key metrics of a company from its financial statements.
The different types of quantitative factors we consider are:
Market Share:
The market share of a company is the percentage or proportion of the total available market or market segment that is occupied by a company. This market share is denoted as company's sales revenue (from that market) divided by the total sales revenue of all its peers. It can also be expressed as company's sales volume(In a market) divided by the total volume of units sold in that market.
Understanding a company's present market share is crucial for a better understanding of the company's business. The fact that a company possesses an 85% market share tells you that it is the largest player in its market by far. Furthermore, this could also suggest that the company possesses some sort of "economic moat," in other words, a competitive barrier serving to protect its current and future earnings, along with its market share.
A company, which continuously gains market share over its peers, performs well in the long-term and creates shareholder value.
Industry Growth:
One way of examining a company's growth potential is firstly to examine whether the number of customers in the overall market or the industry is growing or not. This is consequential because without new customers, a company has to steal market share in order to grow continuously.
In some industries, there is zero or negative growth, for example, Power & Paper sectors are growing at a snail's pace and thus the stocks in the sector have not generated extraordinary returns for shareholders (leaving few exceptions). On the other hand, sectors like FMCG, Pharma, IT, etc. have grown consistently and are expected to continue this performance for the next foreseeable future and the same can be inferred from the stock performance.
Customer:
Some companies serve only a handful of customers, while others serve millions. In general, it's a red flag, if a business relies on a small number of customers for a large portion of its sales because the loss of any single customer could dramatically affect revenues.
For example, think of an arms supplier that generates 100% of its sales from the Indian government. Any change in the government policy could potentially wipe out all its revenues. For this reason, companies will always disclose in their annual reports if any particular customer accounts for a majority of revenues.
Stocks of most of the small Indian IT companies fell drastically with the advent of Global Financial Crisis (GFC) as their clients in the US started filing for bankruptcy.
This is because most of the smaller Indian IT companies had high client concentration in the US. However, the sector leader Infosys & TCS were fairly resilient since they had a diverse client base.
Competition:
Simply looking at the number of competitors goes a long way in understanding the competitive landscape for a company. Limited barriers to entry and a large number of competing firms create a difficult operating environment for a company and subsequently lesser value for shareholders.
One of the biggest risks within a highly competitive industry is pricing power. Suppliers lack pricing power in competitive environments and hence cannot command higher margins.
Financial Statements:
After looking at all the above-mentioned qualitative and quantitative factors, the most important aspect of fundamental analysis is the financial statements analysis of a company. A financial statement of any company is its report card which shows how a company has fared in the last quarter/year and whether or not it has made money. The financial statements are used by all the stakeholders of the company while analyzing a company. So, let us understand the concept of financial statements in the next unit.
