IPO News / How to evaluate an IPO? Understand these important points before bidding

IPO News: When a company brings an IPO (Initial Public Offering) in the market to raise capital, it becomes a big opportunity for retail investors. Through IPO, investors expect that they will be able to earn good returns on the initial investment. While on the one hand this process provides capital to the companies, on the other hand it also gives equal opportunity to common investors to earn. But it is important to keep in mind that before investing in an IPO, it is necessary to evaluate it in depth, because like listed companies, there is very limited information about these companies.

The IPO prospectus contains a lot of important information that can help the investor understand the position of the company. If you analyze this information correctly, then you can decide whether it will be right to invest in this IPO or not. Let us know on what basis any IPO should be evaluated:

1. Assess the financial position of the company

Companies bringing IPO usually present financial data for the last three years. These include the profit & loss statement, balance sheet and cash flow statement. By looking at these figures, it is important to know whether the company's sales and profits are increasing continuously or not. Apart from this, also see whether the stake of existing shareholders is being diluted by the new equity issued from the IPO. Pay special attention to financial parameters like profitability, solvency ratio, and asset turnover ratio.

2. Understand the risk well

Every IPO has some risk. According to SBI Securities, all stocks can be good at a reasonable price, but not at very high valuation. If a company is already in loss, then investing in it can be more risky. Apart from this, if the valuation of the company (such as P/E ratio) is much higher than its competitors, then the possibility of returns in it may be limited. Therefore, it is important to be careful about the valuation.

3. Where will the IPO funds be used – it is important to know

For what purpose the company will use the amount raised from the IPO, this is also a big evaluation point. If the company is using this capital to increase production capacity, expansion or research and development, then it is a positive sign. But if this amount is to be used only for repaying debt, real estate investment or unclear acquisitions, then one should be cautious. In such a situation, the investor has to see whether the use of funds will really help in the growth of the company or not.

4. Consider the role of promoters and management

The promoter of any company is its real captain. Therefore, it is important to know how has been the business track record of the promoter? Do they have experience and are recognized for honesty? Apart from this, one should also see whether the company has a strong management team or not. Also, the credibility of the Book Running Lead Managers (BRLMs) and anchor investors involved in the IPO also indicate the quality of the company.

5. Analyze industry trends and competition

The industry in which the company operates, the future of that industry and how it will expand in the coming years – all these questions are important before investing. If the company is in an industry that is changing rapidly and has potential, then its future may be bright. Also, keep an eye on unexpected risks like competition, government policies and technological changes.