How You Can Analyse IPO
To properly analyze an IPO, it’s important to look at the business in its entirety, not just the numbers. Many investors look at the financials of an IPO to determine if it’s worth investing in, but there are also many other factors to consider when analyzing an IPO. A successful IPO can give you access to shares of stock that haven’t even hit the market yet at discounted prices, meaning huge capital gains when the company goes public.
However, this isn’t something you should rush into. If you want to buy an IPO stock successfully, you need to do your research before committing your money. This guide on how to analyze an IPO will teach you everything you need to know about the process of determining whether or not investing in an IPO is worth your time and money.
Do your research
Researching any company before you invest is essential. When you’re considering buying shares in a company that’s going public, or taking part in an initial public offering (IPO), it’s vital to understand the factors that could affect its success and how you can protect yourself from these risks. The following factors should be considered when researching an IPO:
- Make sure you take a thorough look at the business plan (or ‘prospectus’): There are plenty of online resources to help, which will tell you whether the company’s stocks will rise or fall depending on market data.
- Always compare new IPOs with other businesses operating in similar sectors: It’s not enough to check how many employees are there or how much they earn—the same goes for profitability and gross margins (profitability as a percentage of turnover.)
- Growth potential: Growth can never be predicted, but large organizations have a greater chance of expanding because of economies of scale. As a rough rule of thumb use the PEG ratio (price-earnings growth rate): divide EBITDA by expected earnings growth rate. Or revenue multiple: divide EBITDA by revenue.
- Turnover/Cash flow:
cash flow = net income + depreciation + amortization + changes in working capital Although net income provides little insight on an organization's true financial condition.
Before you begin your analysis, gather as much information as possible about a given company. This includes their annual reports, press releases and conference calls. Most importantly, look at how similar companies have performed after going public. You can check out a variety of stock quote services online to compare performance. To further compare stocks, you may want to consider ratios such as price-to-earnings (P/E), price-to-book (P/B) and dividend yield. P/E is a good way to determine how well a company is doing from its competitors.
P/B compares a stock’s market value with its book value. Dividend yield measures how many dividends per share it pays out. All three help investors evaluate how stable or risky a particular investment will be. Using these numbers together can help decide whether investing in an IPO is worth it for you. These tools are best used when done before investing. They should not be relied on alone when deciding what investments to make. Instead, they can complement other methods like technical analysis or fundamental analysis, depending on the type of investor you are.
Define your goals
If you want to understand how to analyze an IPO, start by defining your goals. Are you interested in investing for growth or income? Perhaps you’re looking for stable but lower returns? Once you know what kind of returns and risks make sense for your situation, it will be easier to evaluate different IPOs. It’s important to note that different companies have very different valuations, so try not to compare them directly. It's also smart to consider how other investors feel about a stock—even if they're famous investors—and listen closely to their reasoning. Staying aware of common pitfalls will help you stay ahead of competitors as well as avoid costly mistakes early on.
Determine your risk tolerance
Risk tolerance is a measure of how much risk, or volatility, you can stomach when investing. High-risk stocks have low price-to-earnings ratios and pay dividends if they’re not expected to grow. Low-risk stocks have high price-to-earnings ratios and don’t pay dividends. In general, investors with a higher risk tolerance will fare better with high-risk investments while investors with a lower risk tolerance will do better with low-risk investments. Taking time before choosing where to invest your money helps ensure that you won't rush into something just because it seems exciting.
You should have a mix of blue-chip stocks, risky growth opportunities, and small startups that may not have made it past that first round of funding. In general, you want as many upsides as possible but enough volatility so that you learn from those experiences as well. Just remember: you aren’t guaranteed any profits from IPOs or other types of speculative businesses because there are no guarantees when it comes to business.
As mentioned above, there are four key areas to assess: competitive position and growth rate; financial strength; management quality; and valuation. The trick is finding which of these areas carries the most weight. No single metric will give you a definitive answer as to whether or not a stock is worth buying—even those that seem good on paper often go bust.