What To Consider While Looking At An IPO?

  • Nov 12, 2018 AEDT
  • Team Kalkine
What To Consider While Looking At An IPO?

Business to have good prospects with IPOs being reasonably priced: A company comes up with an initial public offering (IPO) to raise money that can then be used further to grow the business. In the IPOs, the shares are offered to the investors followed by the listing on the stock exchange like the ASX. Through an IPO, the investors get the opportunity to buy shares at a set price before the company begins trading on a stock exchange in an anticipation that those shares will rise over time. An IPO normally includes a minimum number of shares that are offered to the investors for purchase.

To invest in a particular IPO, the investors should have a look on the business of the company. The business should have good prospects, and also, the IPOs should be reasonably priced. For this, the investors should have a look on the industry in which the company is operating, what is the long term growth prospect of the business, projected balance sheet strength after the float (IPO), predictability of earnings in the next five years, free cash flows and the prospects for company earnings in the current scenario and the broader sector. The investors should also understand the top management way of utilizing the funds and overall managing of the business. Moreover, the investors need to analyze whether the company has fulfilled the criteria of the stock exchanges. For example, the company to be added to ASX, should have posted an aggregate profit of A$1 million from continuing operations from the past three years and consolidated profit of A$500,000 from continuing operations for last 12 months to date with not more than two months before the application for the admission to the official list of ASX. Sometimes, an asset test becomes important against the above profit test. Additionally, the investors should check who the auditor of the company is and whether the company has been audited on a timely basis. This is necessary to find out whether the company has genuine accounts and profits.

Performance of the Industry: While choosing for an IPO, the investors should check the performance of the industry, what is their demand, what are the entry and exit barriers, whether the industry is highly regulated, what are the prospects of the industry, average valuation of the industry, and how many players are there in the industry etc.

Risks: The investment in an IPO should be evaluated by looking at different risks compared with a company that has a long history of being listed. There is also the risk that the company will not able to raise the required funds. Then the company may have to go for other ways to raise funds either for the capital expenditure or for any acquisitions or mergers. Moreover, it is possible that upon listing the value of the shares falls and the investors will not get the profit from investment in an IPO. Therefore the companies may offer shares at a discounted rate or they may offer some form of added value to compensate investors for the risk of buying shares in an unproven listed company.

Timing of the IPO: If the IPO has come at a time when the economy is undergoing recession, then the investors should be more prudent in terms of looking at the IPO considering the risks. The investors should analyze the global environment before investing in an IPO.


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