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How to value a new IPO

IPO or Initial public offer is a great opportunity for investors in India to invest in the stock market. Since it is a time when many startups are coming into the market, there are multiple IPO offers as well.

However, as an investor, you need to understand how the companies value the IPO before investing in the same. There are certain factors that influence the IPO price determination and they are –

  • Number of shares issued
  • Administration and organizational set-up of the firm issuing IPO
  • The market price of the shares of competitors
  • Business model and revenue model – Whether financially sound or not
  • The growth potential of the firm
  • Market trend
  • Finally the demand for the product or the service that the firm is offering.

Methods of IPO value determination

  1. Discounted Cash Flow Method: The first method which is used for determining the absolute value of the firm is DCF or Discounted Cash Flow method. It is calculated by finding out the present value of future cash flows. The future cash flows are obviously anticipated taking different assumptions from the company’s aspects.
  2. Economic Value: The second method is the economic value method where the IPO value is found out by –

Value of Equity = Firm’s value + cash and investments of the firm – debt and other liabilities

It is also for finding out the absolute value.

  1. Price to Earnings Multiple: IPO value in relative terms can be found out by using the Price to Earnings multiple. Here the market cap of a firm is compared to its yearly income. The value can be derived by

Price to Earnings Multiple = Estimated Equity Value/ Net Income of the current year

  1. Value to EBITDA Multiple: Similar to the Price to Earnings Multiple, here the enterprise value is used instead of the estimated equity value and in place of net income, EBITDA is used. EBITDA stands for Earnings before interest, tax, ansd depreciation and amortization.

It is crucial for an investor to know and understand the valuing process of an IPO because the underwriters often try to look the IPO price lucrative and in such process, they turn around some financial facts and information. So, it is important for the investor to value the IPO on their own to find out if the IPO worth investing in or not.

means Initial Public Offering means any company looking for business expand financial requirements, company offer initial public and get listed for the open market.

 

It is when the share of a company is listed on a stock exchange for the first time and offered to the public in general. They apply for the IPO and shares are allotted according to the number of applications.

 Demat and trading. Check the latest offer for upstox demat account.

The next step after opening or registering on Upstox, you have to log in with the UCC ID (This is code which is provided by broker to your mail , Unique coustomer code) and the PAN card number.