How to Evaluate a Company Before Its IPO
As an investor, you must always be on the lookout for instruments of higher returns. IPOs in India have long been pursued as a means of earning high returns through early investment. IPO investment is one of the popular ways to generate wealth in the long term or sometime in the short term as well.
You get an opportunity to participate in the early stage of a company’s growth. This undoubtedly facilitates you to grow your wealth. However, there have been several instances where companies either perform amazingly well in the stock exchange or fail significantly when their shares are listed.
For this reason, it is crucial to conduct an exhaustive analysis of the IPO before you consider investing in it.
Topics Covered
- Process of IPO Valuation
- How to Analyze an IPO?
- Conclusion
Process of IPO Valuation
In order to carry out effective decisions related to an IPO, companies go through all the financial data regarding the assets, liabilities, revenue generation, and performance of the company. These data are thoroughly assessed before proceeding towards the final audit.
Based on the audit, a prospectus is created and filed with the authorized stock exchange. Later on, the shareholders schedule the issuing date and determine the price of the IPO.
How to Analyze an IPO?
Conducting an overall analysis of an IPO involves the overall inspection of the issuing company. Here's a comprehensive process that you should follow to ensure that you are investing in a good IPO:
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Access to the Prospectus
To analyze an IPO and strengthen the chances of IPO allotment, it is essential to go through the financials and other information about the issuing company. For that matter, you need to access the prospectus of companies that wish to offer stocks and bonds to the public.
The prospectus is essentially an important document that entails information related to an investment offering to the public. It contains all the financial and non-financial information about the issuing companies and their upcoming IPOs.
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Check Financials
It is essential to gauge the financial health of the company that is planning to go public. Before deciding to invest in the IPO, consider it is a sound company having good cash reserves.
Moreover, it looks like the issuing company has a consistent flow of revenue. A good way to analyze the financials of a company is to determine its ratios like debt-to-equity ratio, cash flow ratio, PB ratio and PE ratio.
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Consider the Objectives of the IPO
One of the best ways to analyze an IPO and check its viability is by determining the purpose and objectives of that company. Looking out the future plans of the company and what it wishes to accomplish from the IPO discloses the prime objective of the form. You can easily find this information in its prospectus.
Ideally, you should choose to invest in the IPO of such a company that uses its proceeds to expand its business operations rather than pay off its debts.
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Gauge the Public Demand for the IPO
Public demand is an effective way to analyze an IPO. You can gauge it by determining its GMP (gray market premium). GMP meaning an IPO is the premium that investors pay over the issue price. The IPO gray market is an unofficial market where an issuing company sells an IPO before going public in the stock market.
If the demand for a public issue is high, investors tend to pay the premium. Contrarily, if the demand is low, they are less likely to pay the premium. Thus, investing in undersubscribed shares is not an ideal choice as they are not much of public interest.
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Analyze the Future Prospects of the IPO
Lastly, try to analyze the future prospects of the IPO in order to make an informed decision regarding IPO investment. Consider the future prospects of the IPO company by determining if it is working towards the expansion of its business. If the company is not working towards competing with its rivals, it is considered to have bleak future prospects.
Conclusion
Now that you are aware of the process by which you can analyze an upcoming IPO, implement your knowledge before subscribing to any IPO. Check if the IPO is worth considering to invest in public issues. However, do make sure that you open a Demat and trading account.
Almondz Trade offers a free demat account that makes investment a convenient and hassle-free process. You can open a free investment account by visiting the official website of Almondz Trade. We bring the investment process to your fingertips, preventing you from the hassles of hefty paperwork.
Disclaimer: This blog is posted solely for educational purposes. The securities mentioned are examples and not recommendations. It is based on various secondary sources from the internet and is subject to change. Please consult an expert before making any related decisions.
