IPO Investing Tips for a Beginner for Best Returns

Initial Public Offerings (IPOs) are quite popular in India and a lot of people try to make money by investing in IPOs. However, before making any investment in IPOs, one should go through this checklist and answer yourself all these questions:

Is this is an IPO or OFS?

IPO: In initial public offerings, the company decides the price band and the secondary market decides the true price after the stock is listed after analysing the company.

OFS: An offer for sale (OFS) is the way by which stakeholders of a company sell their holding. OFS enables promoters to dilute their holdings in listed companies in a transparent manner with a wider participation through exchange based bidding platform.

Background of the Promoter/Company

• Check if there are any criminal proceedings against the company or its promoters

• Check if the company has defaulted in the past

• Check if there has been any legal complaint against the company or its promoters

Performance of the company in the past

• Check how long the company has been into the business

• Growth rate of the company over the years

• Size of the company

Financial Health of the Company

• Go through the changes made by the company in accounting policies

• Be cautious of bloated profits

Financial Ratios

Earnings Per Share (EPS)

EPS is an indicator of the company’s profitability. EPS is calculated by dividing the net earnings by the number of shares in the issue. Investors also tend to calculate the future EPS in order to get an idea how much profit they will earn in the future.

Price to Earnings Ratio (P/E)

The P/E ratio indicates how the company is priced - whether it is cheap or expensive. It is calculated by dividing the share price of the company by it earnings per share. If the P/E ratio of a particular company is higher as compared to other companies in the same sector, it means that the shares are overvalued.

Return on Capital

Return on capital is the profitability ratio of the company. If the return on capital of a particular company is higher, it means that the company is growing and is successful. This ratio is calculated by dividing the EBIT (Earnings Before Interest Tax) by capital employed.

Objects of the Issue

Check where the money raised from investors will be utilised. Whether it will be used for any of the following:

• Diversification of business

• Acquisition

• Open new branches

• Fund subsidiaries

• For general corporate purposes