IPO valuation is not an easy task for every investor. These wonderful tips to know and evaluate IPO valuations can help you to a great extent.
You can’t analyze an IPO simply by evaluating one or two factors. You can evaluate an Initial Public Offering (IPO) only by considering multiple factors together to find rightly priced IPOs.
Some of the critical factors affecting IPO valuations include investor’s sentiments, profitable business scenario, competitor’s current valuations, etc.
According to a recent post published in CNBC, lack of IPO activity in the tech sector IPOs is making it much more difficult to judge what valuations starts-ups are actually worth.
Therefore, a company or investment bankers can also go for wrong IPO valuations either intentionally or unintentionally. If they fail to include even a single factor during IPO valuation then it can lead to wild moves on listing day.
Excess or higher valuations can cause disaster for the investors. Here are 10 wonderful tips to understand and analyze IPO valuation:
[You can also watch an exciting video on this post from GetUpWise channel on YouTube.]
(1) Higher IPO Grading Doesn’t Indicate If IPO Issue Is Priced Fairly
It is one of the most important tips to know and evaluate IPO valuations. IPO grading is the grade assigned by credit rating agency registered with SEBI (in India) or SEC (in US). These grading are generally assigned on a five-point scale.
Generally, a higher score (IPO grade 5) is assigned to a fundamentally strong company. However, a lower score (IPO grade 1) is assigned to a fundamentally poor company.
Therefore, grade given by credit rating agency can be a good indicator of company’s prospects. But, grading doesn’t indicate if the IPO issue is priced at a fair level or not.
For example, a high graded company ‘Galaxy Surfactants’ awarded with a CRISIL rating of 4/5 had withdrawn its IPO. Therefore, it is not wise to completely rely on grading or other ratings alone. It is because they have nothing to do with IPO stock valuation.
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