Applying for an IPO can feel exciting. You may see a company coming to the stock market and think about investing in it. But before you apply, you should first understand the company’s financial position. A company’s financial accounts can tell you a lot about its business. They show how much money the company earns, what it owns, what it owes, and whether its business is growing or facing problems. You do not need to be a finance expert to understand the basics. With a little preparation, you can check the important financial information before making an IPO application.

Why Should You Check Financial Accounts Before an IPO?

An IPO means an Initial Public Offering. It allows a company to offer its shares to the public for the first time. When you apply for an IPO, you are putting your money into the company’s shares. The share price may rise after listing, but it can also fall. The company’s financial position is one of the important things you should understand before investing.

Financial accounts help you answer basic questions such as:

• Is the company making a profit?
• Is its revenue growing?
• Does it have too much debt?
• Does it generate cash from its business?
• Does the company have enough assets?
• Are profits supported by actual business operations?

These questions can help you understand the business instead of making an IPO decision only because of market excitement.

What Financial Accounts Should You Check?

Before applying for an IPO, focus on the main financial statements and related information provided in the company’s offer documents.

You can usually find important financial information in the company’s IPO documents. Read the numbers along with the explanations given by the company.

Step 1: Check the Company’s Revenue

Revenue means the money a company earns from selling its products or services. Do not look at only one year’s revenue. Compare the numbers for multiple financial years whenever the information is available.

For example, suppose a company reported revenue of Rs.500 crore in one year and Rs.650 crore the next year. This shows that sales increased during that period.

But revenue growth alone does not tell the complete story. You should also check whether the company is actually converting that revenue into profit and cash.

Look for the Reason Behind Revenue Growth

Sometimes revenue increases because the company sells more products. In other cases, the increase may come from acquisitions, price increases, or other factors. Read the company’s explanation for major changes. This can give you a better understanding of whether the growth comes from its normal business activities.

Step 2: Check Profit and Loss

The profit and loss statement shows the company’s income and expenses over a particular period. Pay attention to operating profit, profit before tax, and profit after tax. A company may show strong revenue but still report weak profits because its expenses are high.

For example, imagine a company earns Rs.1,000 crore in revenue but spends a large amount on raw materials, salaries, interest, and other expenses. Its final profit may remain quite small.

Compare Profit Over Several Years

Look at whether profits have increased, decreased, or moved up and down. Steady profit growth can provide useful information about the company’s business performance. However, you should also understand why profits changed.

A sudden jump in profit deserves closer attention. The company may explain that the increase came from a particular event or accounting item rather than normal business growth.

Step 3: Understand the Balance Sheet

The balance sheet provides a snapshot of what the company owns and what it owes. It mainly contains assets, liabilities, and shareholders’ equity.

• Assets include things such as cash, property, inventory, and receivables.
• Liabilities include loans, payables, and other amounts the company needs to pay.

The difference between assets and liabilities represents shareholders’ equity.

Check the Company’s Debt

Debt is an important area to examine before an IPO. A company may borrow money to expand its business. Debt itself is not necessarily a problem. The important question is whether the company can manage its debt comfortably.

Check the company’s borrowings and interest expenses. Also look at whether its debt has increased significantly over time. A business with rising debt and weak cash generation may require closer examination.

Step 4: Check the Cash Flow Statement

Profit and cash are not always the same thing. A company can report accounting profit while receiving less actual cash from customers. The cash flow statement helps you understand how money moves through the business. Pay particular attention to cash flow from operating activities. This shows the cash generated or used by the company’s main business operations.

If a company regularly generates healthy operating cash flow, it gives you useful information about its ability to generate cash from normal business activities. You should also check investing and financing cash flows to understand where the company is spending money and how it is raising funds.

Step 5: Check Receivables and Inventory

Receivables are amounts that customers still need to pay the company. Inventory refers to products or materials held by the company. A sharp increase in receivables can sometimes mean that customers are taking longer to pay. Similarly, a large increase in inventory may need explanation if sales are not growing at the same pace. Do not judge these numbers alone. Read the company’s explanation and compare the figures across financial years.

Step 6: Review the Auditor’s Report

The auditor’s report deserves proper attention. An auditor independently reviews the company’s financial statements and provides an opinion based on the audit work. Do not skip this section simply because it contains financial language. Look for qualifications, important observations, material uncertainties, or other matters that may affect your understanding of the accounts. If you find something you do not understand, check the explanation in the offer document before making your investment decision.

Step 7: Check Related Party Transactions

Related party transactions involve dealings between the company and certain connected persons or entities. These transactions are disclosed in the company’s financial information.

For example, a company may conduct business with an entity connected to its promoters or management.

Such transactions are not automatically wrong. However, you should understand their nature, value, and terms. This information can help you understand how the company conducts business with connected parties.

Step 8: Check Promoter and Shareholding Information

Financial accounts are only one part of IPO research. You should also understand who owns the company and how the shareholding may change after the IPO.

Check promoter holdings and the purpose of the IPO. An IPO may include a fresh issue, an offer for sale, or both. In a fresh issue, the company issues new shares and receives the funds. In an offer for sale, existing shareholders sell their shares.

Read how the company plans to use the money raised through the IPO.

Check the Use of IPO Funds

The company may plan to use IPO proceeds for business expansion, debt repayment, working capital, or other stated purposes. Try to understand whether the planned use of funds fits the company’s business needs. Do not assume that raising a large amount of money automatically makes a company financially stronger.

Step 9: Check Tax and Other Financial Liabilities

Review the information provided about tax-related matters, outstanding liabilities, and legal proceedings that may have financial implications. Companies disclose relevant information in their offer documents. You should pay attention to significant tax disputes, outstanding liabilities, and other material financial obligations. These matters may affect the company’s future finances depending on their size and outcome.

Step 10: Compare Financial Numbers With the IPO Valuation

After understanding the financial accounts, look at the IPO valuation. Do not focus only on whether the IPO price looks affordable. Compare the company’s earnings, revenue, debt, and other relevant financial measures with the valuation presented in the offer documents.

You can also compare the company with listed businesses in the same industry. This gives you context about how the market values similar businesses. Remember that companies in different industries can have very different financial structures. A direct comparison may not always be meaningful.

Mistakes to Avoid Before Applying for an IPO

• Looking Only at Profit: Many investors look at profit and ignore cash flow. Profit is important, but it does not tell the complete financial story.
• Focusing Only on Revenue Growth: High revenue growth can look attractive. But you should also check expenses, margins, debt, and cash generation.
• Ignoring Debt: A growing business may use debt for expansion. Still, you should understand how much debt it carries and how it plans to manage it.
• Reading Only the IPO Price: A low-looking share price does not automatically mean that an IPO is cheap. The number of shares and the company’s overall valuation also matter.

• Ignoring the Offer Document: Do not depend only on social media posts, news headlines, or messages from friends. Read the official IPO documents and financial information yourself.

Final Thoughts

Preparing financial accounts before applying for an IPO does not mean becoming a professional accountant. It means taking some time to understand the company’s financial health before putting your money into its shares. Start with revenue and profit. Then check debt, cash flow, assets, liabilities, and the auditor’s report. After that, understand the use of IPO funds and the company’s valuation.

Most importantly, do not apply for an IPO only because other people are talking about it or because you expect a quick listing gain. Read the available information and make your decision based on your own financial situation, risk tolerance, and investment goals. IPO investing carries market risk, and past financial performance does not guarantee future results. Always read the official offer documents carefully before investing.