How to Read IPO Financials

1. Why Read IPO Financials?

Understanding a company’s financial statements is crucial before investing in an IPO. The financials reveal the company’s profitability, growth, stability, and risk factors. By analyzing these numbers, you can judge whether the IPO is worth your investment or overpriced.

2. Where to Find IPO Financials?

• The Red Herring Prospectus (RHP) is the official document filed with SEBI and stock exchanges. It contains audited financial statements, management discussion, business overview, and risk factors.
• You can access the RHP on the websites of SEBI, NSE/BSE, or the company’s own site under “Investor Relations.”

3. Key Sections to Focus On

• Profit and Loss Statement (P&L):
  • Shows revenue, expenses, and net profit over the past 3-5 years.
  • Look for consistent growth in revenue and profits.
  • Check for any sudden spikes or drops—these need explanation in the “Management Discussion” section.
• Balance Sheet:
  • Shows assets, liabilities, and net worth (shareholder’s equity).
  • High debt or low net worth can be a red flag.
  • Check current assets vs. current liabilities to judge liquidity.
• Cash Flow Statement:
  • Tracks actual cash coming in and going out.
  • Positive operating cash flow is a good sign; negative cash flow over several years is risky.
• Key Financial Ratios:
  • EPS (Earnings Per Share): Higher EPS indicates better profitability.
  • P/E Ratio (Price/Earnings): Compare with industry peers to check for overpricing.
  • ROE (Return on Equity): Measures how efficiently the company uses shareholders’ funds.
  • Debt-to-Equity Ratio: High ratio means higher financial risk.
  • Net Profit Margin: Shows how much profit the company makes from its revenue.
• Management Discussion and Analysis (MD&A):
  • Read management’s explanation of financial trends, risks, and future outlook.
  • Check if the company is upfront about challenges and competition.
• Auditor’s Report:
  • Look for any “qualified opinion” or red flags raised by auditors.

4. Steps to Analyze IPO Financials

1. Download the RHP and go to the “Financial Information” section.
2. Review revenue, profit, and cash flow trends for the last 3-5 years.
3. Calculate and compare key ratios with industry peers.
4. Check for high debt, negative cash flows, or inconsistent profits.
5. Read management’s commentary for explanations on any unusual numbers.
6. Look for any legal, regulatory, or auditor concerns.

5. Red Flags to Watch Out For

• Declining or unstable revenue/profit trends.
• High debt or negative net worth.
• Negative operating cash flows over multiple years.
• Unusually high or low financial ratios compared to peers.
• Auditor’s qualifications or unresolved legal issues.

6. Example Table: Comparing IPO Financials

Parameter	Company A (IPO)	Industry Peer
Revenue Growth (3 yrs CAGR)	12%	10%
Net Profit Margin	8%	11%
Debt/Equity Ratio	1.5	0.6
P/E Ratio	38	22
ROE	10%	15%

7. Summary Tips

• Always read the RHP before applying for an IPO.
• Focus on consistent growth, manageable debt, and positive cash flows.
• Compare key ratios with industry peers to check for overpricing.
• Be cautious if you spot red flags in the financials or auditor’s report.