Quantitative analysis is a method of measuring financial success using a variety of techniques. Financial managers use quantitative analysis to reduce uncertainty or draw conclusions about a company, an investment or the economy. Some topics are used routinely by the financial community whereas others can be more abstract and are good for further study.
Time Value of Money (TVM)
Financial managers first learn about the time value of money (TVM) when learning quantitative financial techniques. Discounted cash flow analyzes how time degrades the value of money. For example, a car dealership may offer a 4 percent interest rate to buyers who wish to purchase a car with a five-year loan. If the car is worth $20,000, the buyer will end up paying $24,420 for the car. In essence, the dealership estimates that the $20,000 will be worth $4,420 less over the span of five years. A research topic on the time value of money might include the reasons time devalues money or the methods used to measure the time value of money.
Financial Statement Analysis
Investors, creditors and managers use financial statement analysis to measure the success of a company’s financial goals. Ratio analysis is used to compare a company’s financial measurements to those of another company, without having to worry about the difference in size. For example, a company that earns $2 million in net income compares favorably to a company that earns $5 million. This is because the first company’s sales total $10 million, for a 20 percent income-to-sales ratio while the second company’s sales totaled $75 million, meaning its income-to-sales ratio was only 13 percent. Research topics might include the different kinds of analysis or the benefits and drawbacks of ratio analysis.
Globalization of Publicly-Owned Companies
As trade barriers are eliminated and communication becomes simpler across the world, publicly-traded companies can no longer claim ownership from one country. Indeed, many companies headquartered in the United States are largely owned by investors across the globe. A research topic might detail how this globalization affects the stock market, the company’s management and the individual investor. One study finds that large foreign ownership results in a less volatile stock price for these companies, making a large foreign ownership situation a stabilizing force.
Initial Public Offering (IPO)
In corporate finance, some privately-owned businesses hope to “go public” with an initial public offering (IPO). The reasons most often cited for going public are to generate funds for continued growth and owners’ desire to “cash out.” However, a company’s business model must show that the company will continue to grow for the foreseeable future for a successful IPO. One research topic on an IPO might be an in-depth study of the differences between successful and unsuccessful IPOs.
Sara Huter is a professor of economics. Her background also includes risk management in the banking and energy industries with expertise in credit scores. Huter received an M.B.A. in finance from Texas A&M University and a B.S. in information systems from Kansas State University. She has been writing for over five years with work at Popsyndicate.com, WickedWordSmith.com and Simplejoy.com.