In a market filled with excitement around each upcoming IPO and every current IPO, retail investors often rush to apply based on hype, media buzz, or Grey Market Premiums. But successful investing isn’t about guesswork—it’s about understanding a company’s financial health. One of the most effective tools for this is analysing financial ratios. These numbers tell you whether the business is profitable, efficient, and worth investing in.
Here are the key financial ratios that matter most before applying for an IPO:
1. Earnings Per Share (EPS)
EPS shows how much profit a company generates for each outstanding share. A consistent and growing EPS is a good indicator of financial stability. For IPO-bound companies, look at the trend over the last three years. A rising EPS indicates improving profitability.
2. Price-to-Earnings Ratio (P/E Ratio)
The P/E ratio compares the company’s IPO price with its earnings per share. A high P/E suggests the stock may be overvalued unless there’s strong growth potential. Compare the company’s P/E with listed peers in the same sector to determine if the valuation is reasonable.
3. Return on Equity (ROE)
ROE measures how effectively the company is using shareholders’ capital to generate profits. A high ROE means the company is generating strong returns on invested money—a strong green flag for investors.
4. Debt-to-Equity Ratio (D/E Ratio)
This ratio tells you how much debt the company has relative to shareholders’ equity. A high D/E ratio could indicate risk, especially if the IPO proceeds are being used to repay loans. Ideally, look for companies with manageable debt levels or a plan to improve their balance sheet post-listing.
5. Net Profit Margin
The net profit margin shows how much of a company’s revenue translates into profit. A higher margin means the company is managing its costs well. It’s particularly important in sectors with thin margins, where profitability can be a key differentiator.
6. Current Ratio
The current ratio measures a company’s ability to meet short-term liabilities with its short-term assets. A ratio above 1 is generally considered healthy. It reflects good liquidity, which is critical for operational stability, especially for newly listed companies.
7. Asset Turnover Ratio
This ratio indicates how efficiently the company uses its assets to generate revenue. A high asset turnover means the company is getting more value out of each rupee invested in assets.
Conclusion
Before applying for an upcoming IPO, taking a few minutes to review key financial ratios can make a huge difference in your investment decision. Don’t get swayed by just the buzz surrounding a current IPO—focus on the numbers. These ratios provide a snapshot of how well the company has performed in the past and how well it might do in the future. Combine financial analysis with an understanding of the business model and management quality to make smarter IPO investments.
