5 Things You Should Know Before Investing in an IPO

Initial Public Offering (IPO) is a way of enlisting the company into a nation's stock exchange to offer the shares to the general public for the first time. It is a fundraising exercise for a company that can help provide them with the necessary funds for growth. With the recent surge in IPO's across India, there is quite a debacle on whether IPO investing is safe or not? IPO investments are a great way of increasing your wealth and creating a good portfolio for yourself in the long run if you do it smartly.Let's take a look at five things that can help you make your IPO investing a successful one. 5 Things You Should Know Before Investing in an IPO

• Sales and expenses
• Assets
• Debt levels
• Cash and cash equivalents

• Liquid Ratios : Liquid ratios help portray the company's flex and ability to convert the current assets into liquid cash. It can be calculated via the use of the following two ratios: Current Ratio =
  Current Assets/Current Liabilities Quick Ratio =
  Quick Assets/ Current Liabilities
• Profitability Ratios : Profitability ratios are inclined towards finding the financial efficiency and the modus operandi of the company. Here’s how you can calculate them: EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) Margin =
  EBITDA/ Total Revenue Return on Equity =
  (Net Profit/ Shareholder’s fund) *100 Return on Capital Employed =
  (Net Profit/ Shareholder’s fund) *100

1. Take a look at the company financials: Start by looking at the balance sheet, income statement, and cash flow statement of the company. The balance sheet will provide you with a thorough look at the company's assets and liabilities components whilst the income statement and cash flow statement will help shed light on the income/expenses and the level of cash inflow/outflow for the company. Look for the key components among these financial statements like:
2. Look for KeyFinancial Ratios: Financial ratios are often the best markers of the company. By using the financial ratios and comparing them with the other companies in a similar industry, you'll find the company's standing and financial stature. Check the following financial ratios:

1. Evaluate the Performance of the Company Investing requires you to put your hard-earned money into the stocks or IPO of the company. And that means you should take a word of caution before affixing your sights on investing. Thankfully there are quite a few ways to do it. You can start by taking a look at the financials of the company and evaluating the performance.
2. Method of Share Issue There are two different methods of issuing shares under IPO, i.e. fixed price issue method and book building issue method. A fixed price issue method is the one where the shares are issued at a pre-determined price, and the investor is required to pay the stipulated amount as the bid whilst the book building method provides a price band of not more than 20% with a minimum price (floor price) and maximum price (cap price) and investor bids for the IPO based on any price between the band. The final price is determined after the closure of IPO bids.The way a company offers its shares for issue provides valuable insight into their thinking and plans. Most of the present-day companies issue shares via book building method during IPO. Furthermore, a company that enlists the book building method also needs to provide a basis for the same via disclosure of the valuation method in their prospectus. Taking a look at the prospectus will reveal vital details about the company.
3. Historical Stance and the Future Prospects The market is filled with examples of great historical companies faltering down the line after IPOs. Similarly, some companies have started low and small but have become one of the best ones. It is extremely important that you keep an eye on the company's historical presence and performance and seek the future standing and the prospects of the same before deciding to invest. The term historical stance doesn't confine the definition to financials but can involve the aspects like company promoters, investors, underwriters, market standing, and more.Take a look at the director's report of the company and find the section regarding the company's past standing and plans. Try to see if there are recognisable names among the directors or promoters for the company.
4. Disclosure of Fund Usage According to the SEBI rules, any new company wanting to enlist their shares in the stock exchange should disclose the funds' usage in their prospectus. This is done to provide the investors and interested parties with knowledge of the company's performance, running, and plans.Since IPO listing is a way of fundraising for a company, they need to assure the general public about the way these funds will be utilised. Such disclosure and necessary information are enlisted in the red-herring prospectus. Don’t forget to take a look at the red-herring prospectus before opting for IPO investment. It can give you deep insights into the company's future plans and how the funds will be used. Funds utilised for operational growth can generate better returns than funds set aside to clear the Non-Performing Assets (NPAs).
5. Avoid the Hype As aforementioned, the need for IPO listing is to generate funds for the company's future operations. As a result, there are major chances of creating hype to entice the general public into investing their money and make the IPO listing a successful one. The companies appoint underwriters for the entire process of IPO listing and evaluation. Mind you, the role of underwriters is to generate traction for the successful launch of the IPO. Always be level headed and try to incorporate evaluation, comparison, and other metrics before deciding your investment.Investing in Initial Public Offering (IPO) is a great way to build up your portfolio and set yourself for long term gains. All you need to do is maintain adequate due diligence from your side, and you could benefit greatly from IPOs.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.