How to Analyse an IPO ?

Analysing an IPO is essential for investors looking to cut through the hype and make informed decisions. With new listings hitting the market regularly, knowing how to check which IPO is good can help you avoid mistakes.

This step-by-step guide breaks down the key factors—financials, timing, risks, and investor demand—to help you assess whether a company is truly worth investing in when it goes public.

What is an IPO?

An initial public offering is the first batch of shares a former privately owned company offers to public investors. When a private company decides to raise funds through an initial public offering, it is usually funded by an investment bank or broker, which will buy some of its shares at a price determined in advance. Once these shares purchased by the underwriting corporation are made available to the public, they are sold and bought on several stock exchanges that facilitate initial public offerings (IPOs).

Historical data on performance, generally used for predicting current stability and future growth, do not exist since they have not previously traded on a stock exchange.

Analysing an IPO

If you are wondering how to choose a suitable IPO for investment, follow the steps below:

Step 1: Review the IPO prospectus
Read the Draft Red Herring Prospectus (DRHP) filed with the Securities and Exchange Board of India (SEBI). It is a legal disclosure that gives you the most transparent view of the company. It explains why the company is raising funds and how it plans to use them—whether for growth initiatives such as expansion or new technology, or for paying off existing debt. The prospectus also outlines the risks the company has identified and their potential impact on its future. It details the business model, history, leadership, revenue sources, legal proceedings, and major shareholders.

Step 2: Analyse financial metrics
A company’s financials show whether it’s profitable, sustainable, and worth your investment.

Start by checking revenue and profit trends over the past three years to see if they’re rising, steady, or falling.

Review EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) to gauge core business performance, and look at gross, operating, and net margins to spot efficiency or cost pressures.

Check debt levels using the debt-to-equity ratio, and see if the interest coverage ratio indicates the company can easily pay interest.

Finally, compare the IPO price to its Earnings Per Share (EPS) to find the Price-to-Earnings (P/E) ratio—remember, a high P/E without solid growth can mean overvaluation.

Step 3: Examine market conditions
Even a strong company may not perform as expected if market conditions aren’t supportive. Take time to review the bigger picture—how is the economy performing, and are inflation or rising interest rates affecting it? Consider global events that might influence investor sentiment, and see how other recent IPOs have been received. Then, look at the company’s sector. Is it expanding or already saturated? For example, IPOs in fast-growing areas like tech or electric vehicles may draw more attention in a bullish market, while traditional sectors might get a more moderate response.

Step 4: Analyse competitive positioning
Start by mapping the company’s direct and indirect competitors, then assess what sets it apart—whether it’s lower costs, advanced technology, strong customer loyalty, or regulatory support. Check its market share and note if it’s growing or shrinking. Companies that lead or disrupt a niche often enjoy stronger long-term potential, especially if high barriers to entry exist. For instance, a pharma firm with licences and patents may be more secure than a new e-commerce firm. Finally, review how the company tackles competition through innovation, strategic pricing, or diversifying its products.

Step 5: Evaluate investor interest
Check the level of interest the IPO is generating among various categories of investors. Look at the subscription figures for Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Investors. High QIB participation usually indicates strong institutional confidence in the company’s fundamentals. Also, read the analyst reports and opinions of brokerage firms. Many provide detailed breakdowns of whether the IPO is fairly valued, undervalued, or overpriced. Another smart move is to check if anchor investors have been allotted shares before the IPO opens to the public.

Factors to Consider When Analysing an IPO

There are multiple factors involved before investing in an IPO. Below are the factors to consider before investing in an IPO.

1. Take a look at the prospectus Preparing a prospectus is mandatory for every company participating in an initial public offering. If a company does not produce a prospectus, there is no way for it to sell shares or securities. A potential investor may need to look at this prospectus to find details on the issuing company, such as market outlook, founders, promoters, growth prospects, structure, etc.

2. Check out the financials of the company Company financial data is the strongest indicator when determining whether to proceed with an IPO. The well-established company must operate on a continuously rising trend to achieve increased revenue. The company should also have significant cash reserves and demonstrate profitable growth with low debt levels.

3. Determine your tolerance for risk and financial objectives It is the most critical part of an initial public offering analysis. You need to consider your investment goal and risk appetite before deciding. You can establish your risk tolerance and financial target by answering these questions. According to the investment objectives, you should always invest in the initial public offerings of companies.

4. Get to know the purpose and mission of the IPO You should assess the company's objectives when looking for an investor. This includes learning about the company's plans for the proceedings. Most companies are looking for ways to grow their business. Investment in undertakings that intend to use the procedure to repay existing liabilities is not advisable.

5. Assess public demand for the IPO Investor interest can influence how an IPO performs after listing, but following the crowd blindly is risky. Instead of relying on market buzz, review subscription data to gauge actual demand. Strong demand—reflected in oversubscription—can indicate positive sentiment, while low subscription levels may point to limited investor confidence. Use this information as one of several factors in your decision, rather than the only basis for investing.

6. Review the financial valuation ratios Investors should know the price at which shares are being sold. They should also know whether the stock is too expensive, too cheap, or reasonably priced. To analyse the valuation, you can assess various aspects like the price-to-earnings ratio, debt-to-equity ratio, price-to-book ratio, and the financial return on equity. This analysis can also guide portfolio diversification, helping spread risk and aim for steady, long-term growth.

7. Find out why they’re going public A key part of analysing an IPO is knowing how the company plans to use the money it raises. Review the prospectus to see the stated purpose—whether it’s funding growth, investing in new projects, reducing debt, or strengthening its financial position.

8. Develop a growth forecast for the company The company’s future growth prospects must be adequate for an IPO to perform well in the market. The company is said to have poor prospects for growth if it does not make a substantial effort to expand its business and use its profits to combat the competition by starting new products or services.

Conclusion

If you know how to analyse an IPO, now is an excellent time to check out all of the upcoming IPOs that will be available for subscription. Participating in an initial public offering can be challenging, especially for the first time. Therefore, an overview of the IPO analysis can be helpful. Remember the above points of reference if you are wondering how to analyse an IPO.

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