Smart Ways to Analyse an IPO Before You Invest

When a company goes public, it offers shares to the public for the first time through an IPO — or Initial Public Offering. Many investors see it as a golden opportunity to invest early and earn good returns. But not every IPO turns out to be successful. So, how to analyse an IPO before investing your money in it?

In this article, we’ll explain what an IPO is, why companies launch them, and most importantly, how to analyse IPO stock in a simple and smart way. 

What Is an IPO?

An Initial Public Offering, or IPO, is the process through which a private company offers its shares to the public for the first time. When a company needs money for growth, expansion, or to pay off debts, it chooses to go public by selling a part of its ownership as shares.

These shares are sold on a stock exchange, and anyone with a demat account can apply for them. The company decides the number of shares it wants to offer and sets an IPO price or a price band (a range between the lowest and highest price).

For example, suppose a company wants to raise ₹100 crore and offers 10 lakh shares at ₹1,000 each. Investors who believe in the company’s growth can apply for these shares.

How to Analyse an IPO?

Now that you know what an IPO is, let’s understand how to analyse an IPO. Here’s a step-by-step method to evaluate whether investing in an IPO is a smart move.

• Understand the Company 

Learn what the company does. What are its products and services? Who are its customers? Is its market position strong? Understand its operations, like how it makes money and its plans for growth. A unique approach or strong customer base suggests better growth potential.

• Read the Draft Red Herring Prospectus

Before the IPO, every company issues a document called the Draft Red Herring Prospectus. This contains important details like business overview, financial performance, risks involved and purpose of raising funds. While reading the document, focus on key parts like revenue, profits, future plans, and how the company plans to use the money.

• Check the Financials

This is where you look at the company’s financial health. See how the company has performed in the past few years. Key things to check are its revenue growth over the past few years, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), debt level, net profit or loss, and cash reserves.

Also, use some financial valuation ratios like:

• Price-to-Earnings (P/E) Ratio: This ratio compares a company’s share price with its earnings per share. This tells you if the stock is overvalued or undervalued. 
• Price-to-Book (P/B) Ratio: This ratio compares the stock price with the company’s book value per share. It helps to understand if the stock is priced fairly.
• Debt-to-Equity Ratio: A high ratio can signal greater financial risk, as the company relies more on borrowed funds. A lower ratio typically reflects a healthier, more stable capital structure.

Compare these numbers with other companies in the same industry.

• Know the Promoters and Management 

Good companies are built by good people. So, check who the promoters and top managers are. Do they have experience? Have they managed any successful companies before? A strong management team increases trust and helps in long-term performance.

• Check Peer Comparison

Compare the company with others already listed on the stock market in the same sector. This helps you see if the IPO is fairly priced or too expensive. If a similar company is available at a lower valuation, it might be better to wait and invest later.

Top Upcoming IPOs to Watch (23rd–27th June 2025)

1. Kalpataru Ltd IPO
2. HDB Financial Services Ltd IPO
3. Globe Civil Projects Ltd IPO
4. Ellenbarrie Industrial Gases Ltd IPO
5. Suntech Infra Solutions Ltd IPO

Key Considerations While Evaluating an IPO

While doing IPO analysis, here are some extra tips to keep in mind:

• Why Is the Company Raising Money?

If the company is using the IPO money to grow its business, open new branches, or enter new markets, it’s a positive sign. But if it’s only paying off debts, be careful.

• Is the IPO Overhyped?

Sometimes, there is a lot of media buzz around an IPO. But hype doesn’t mean the company is good. Focus on facts, not trends.

• Big Investors’ Interest

Check if big investors or mutual funds are investing in the IPO. If yes, it usually means they trust the company’s future.

• Market Conditions

If the overall market is doing well, IPOs are likely to perform better. But in a falling market, even a good IPO may not give returns immediately.

• Size of the Offer

Check the number of shares being offered. If promoters are keeping most of the shares, it shows they still believe in the company. That’s a good thing.

Key Takeaways

Investing in an IPO can be rewarding if done with proper research. Learning how to analyse IPO stock helps you avoid poor investments and spot the winners early. Focus on understanding the business, checking the financials, and comparing it with industry peers. Never invest blindly just because everyone else is doing so. Always remember, the goal is long-term growth, not quick profits.

Looking to participate in the next big initial public offering? Begin by opening an online demat account with Torus Digital today.