You notice an IPO being mentioned all over. The deal is oversubscribed, people are talking about it on social media and there seems to be an endless list of applications. The temptation to invest in such IPOs is high; however, popularity does not necessarily mean that an IPO will be profitable. It is important for one to think twice about what he or she is investing in. Here are some factors to consider:

1. Know the Business Model

This is basic. What products/services does the company sell? To whom does it sell them? How does it make money? Unless you have a clear understanding of the company’s business model, do not invest in it yet.

2. See If There is Revenue and Profit Growth

See how well the company has been doing financially over the past years. Is there steady growth of revenue and profits? It is not enough to consider figures from the last year only.

3. Examine Its Debt

Even though a company makes good revenues and profits, it might also have high debt levels. Examine its debt and find out whether the cash flow of the company is capable of supporting it. High debt becomes even more problematic during tough periods for the industry.

4. Understand Where the Money from IPO Will Go

All IPO funds do not necessarily have the same destination. A company may decide to use them for expansion, investments in new projects, repayment of debt, creation of working capital and so on. Knowing this information may help you assess the value of the offering in terms of future company’s development.

5. Make a Valuation Comparison

Even if a company is a great one, it doesn’t mean that its stock is relatively cheap. Comparing the valuation of the IPO with listed companies helps you to understand whether the company is valued in a realistic way compared to others.

6. Be Aware of the Risks Involved

Never ignore the Risk Factors section of the IPO document. It might list risks that include reliance on a limited number of customers, fierce competition, change in regulation, lawsuits against the company, dependence on a limited number of suppliers or a certain market. Such risks might not be evident from the company’s ads and publicity.

7. Never Jump on the Bandwagon

While oversubscription is often an exciting sign, it does not say anything about the company’s future prospects in relation to the IPO value. You should ask yourself if you would buy into the company if there were no buzz about its IPO.

The Valuation of an IPO: An Illustration

Let us consider a situation where Company A has decided to go for an IPO at a higher value than the one that its counterparts in the industry have achieved. Initially, the firm looks attractive due to its high growth rates in terms of income. Before making any application for the shares of Company A, however, the investor needs to ask himself what makes Company A special compared to the others in the same industry.

IPO Application Checklist – Points to Consider Before Applying for IPO

• Have a good understanding of the business model and sources of income.
• Have an overview of income statement, profits, margins and cash flows over several years.
• Assess whether the company is in debt and able to meet its obligations.
• Be clear on how IPO funds would be utilized.
• Compare the valuation with similar companies listed in the stock exchange.
• Read the risk factors of the IPO document.
• Do not apply just because the IPO is hot and oversubscribed.

Make Your IPO Investment Decision with Much More than Hype

An IPO offers the chance to invest in the company early on its listing process; however, all IPOs cannot offer investors the chance to make money. Investors need to think twice before putting their money in the IPO by considering much more beyond the grey market hype and social media talk about IPOs.

Explore Aetram, if you are looking to make more informed investment decisions.

FAQs

1. What is an IPO?
An Initial Public Offering (IPO) is when a private company offers its shares to the public for the first time.

2. Is every IPO a good investment?
No. An IPO should be evaluated based on the company’s business, financials, valuation, growth prospects and risks.

3. What financials should I check before an IPO?
Look at revenue, profit, cash flow, debt and margins over multiple years.

4. What is IPO valuation?
It refers to the value at which the company is offering its shares to investors. Comparing it with listed peers can help assess whether the price appears reasonable.

5. Should I apply for an IPO only if it is oversubscribed?
No. Oversubscription shows investor demand, but it does not necessarily indicate that the company is fundamentally attractive or fairly valued.