For retail investors looking to participate in the stock market, understanding financial ratios is crucial—especially when evaluating a Current IPO. Unlike a Listed IPO, where historical price trends and market sentiment offer insights, an upcoming IPO relies heavily on fundamentals disclosed in the draft red herring prospectus (DRHP). One of the most effective ways to assess the financial health and valuation of a company preparing for an IPO is through key financial ratios.
Here are the most important financial ratios you should analyze before subscribing to an IPO:
1. Price-to-Earnings (P/E) Ratio
This ratio tells you how much investors are willing to pay for each rupee of earnings. A high P/E may indicate the company is overvalued, especially if it’s significantly above industry peers. Conversely, a lower P/E might suggest a reasonable or undervalued IPO, provided future earnings potential justifies it.
2. Price-to-Book (P/B) Ratio
This ratio compares the company’s market value to its book value. It’s especially useful for asset-heavy industries like banking or manufacturing. A low P/B ratio could indicate that the IPO is priced attractively compared to its net assets.
3. Debt-to-Equity (D/E) Ratio
A high D/E ratio indicates higher leverage and risk, particularly if the IPO proceeds are not being used to reduce debt. Ideal IPO candidates usually have a healthy balance between debt and equity, showing prudent financial management.
4. Return on Equity (ROE)
ROE measures how efficiently a company uses shareholders’ equity to generate profits. A higher ROE is usually a sign of a strong and well-run company. When assessing IPOs, compare the ROE with industry averages to understand competitiveness.
5. Earnings Per Share (EPS)
EPS gives a clear picture of the company’s profitability on a per-share basis. A consistent growth in EPS over the last 3-5 years (if available) is a good indicator of future potential, even if the company is making its first public offering.
6. Operating Profit Margin
This margin shows how well the company controls its operating costs. A higher operating profit margin indicates better efficiency and profitability from core operations, which is essential for sustainability post-listing.
7. Current Ratio
This ratio gauges a company’s ability to meet short-term obligations with its current assets. A ratio above 1 is generally considered healthy, showing that the company is not over-leveraged and can manage its liquidity needs.
Final Thoughts
While IPOs often generate excitement, sound investment decisions should be grounded in data. Financial ratios offer a quantitative lens to evaluate whether a Current IPO is worth investing in or if it’s better to wait until it becomes a Listed IPO with more publicly available insights. Always compare the ratios with industry standards and peers, and consider the broader economic context before subscribing. A well-informed investor is always better positioned to spot long-term winners in the IPO space.
