Quantitative analysis and Qualitative analysis

A common mistake made by beginners on value investing is too much focus on "Quantitative Analysis", but completely ignore the Qualitative Analysis.

Basically, the first one is putting all the numbers together. P/E ratio is the most common used figure. Of course, it would be very naive to just take one number to decide the fair value of a stock. Even you find out all the hidden facts behind the current earnings to get to the bottom of the future earning power. There are other factors on the balance sheet to consider, among them, three are most important:
1. Leverage. 
Very high leverage puts the company into huge risk, if the business environment or the industry outlook changes, this is the way that leads to certain death.
2. Capital requirement.
Some business requires more capital input to fuel the growth. Good business has less capital requirement, such as food. But business like airline requires huge capital input which also leads to high debt and leverage usually. Another way to look at the capital requirement is to look at the "Return on Equity". 
3. Operating Margin.
This is especially important in cyclic industries, because when industry slows down, only the one with highest operating margin can survive. For example, when housing starts decreases 66% and the whole wallboard industry is close to bankcruptcy, Eagle Material  still ears good profit.
Even these three traits on balance sheet and income statement are still part of "Quantitative Analysis". The other part: "Qualitative Analysis" is very important too. 
"Qualitative Analysis" focus on traits that are not reflected in any numbers, such as:
1. Management stewardship and ability.
2. Sustainable competitive advantages. 
3. Industry outlook and economy outlook.
These traits are usually hidden behide the scene, and requires substantial understanding of the company and business. They are the proven indicators for the future outlook, because all the numbers we get is just the past and present, without these indicators to ensure the certainty, these numbers could be widely different from the future. 
As an example, Bear Sterns was very profitable every year in the last several decades, but eventually get bankrupted suddenly. Without understanding the management and the nature of the business, it is very hard to forecast this kind of changes just based on the past earning figures.  
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