How can investors evaluate the potential of an IPO?

Investing in an Initial Public Offering (IPO) can be an exciting opportunity, but it also comes with risks. In 2025, the IPO count has been on the lower side compared to previous years. One of the primary reasons for this is the slowdown in the economy and the correction in the Indian equity market. However, many IPOs are expected to go live in the next financial year (FY26).

If you plan to invest in an IPO, you must understand that evaluating an IPO's potential is essential for making informed investment decisions. In this article, we look at different things you can consider while evaluating an IPO.

How to evaluate the potential of an IPO?

Here is a structured approach you must follow to evaluate the potential of an IPO:

Check 1: Understand the company

Obviously, the first thing you need to do is understand the company. The first thing is to check the business model and industry - if the company operates in a growing industry and has a sustainable business model. You should also look for unique strengths like strong branding, technology, market share, or regulatory advantages. The company having consistent revenue growth and profitability is a positive sign.

Check 2: Financial Health

Next, you need to check health - health is crucial - be it yours or of the company coming with an IPO. But why? Let us understand. A company's financial strength plays a key role in determining its long-term viability. You should examine key financial metrics such as revenue growth, profit margins, debt levels, and cash flow.

A consistent increase in revenue and profitability suggests a strong business foundation, while high debt levels may pose financial risks. Cash flow analysis is essential to determine whether the company generates enough liquidity to sustain operations and expand without relying excessively on external borrowing. Evaluating these aspects helps you assess whether the company is financially stable and capable of long-term growth.

Check 3: IPO Valuation & Pricing

When you invest in listed companies, one of the essential factors to check is the valuation. The same rule applies for IPO also. You have to determine whether an IPO is fairly priced or overvalued. You should compare the company's Price-to-Earnings ratio (P/E ratio), Price-to-Book (P/B) ratio, and Earnings Per Share (EPS) with industry peers to assess its valuation.

A lower P/E ratio than competitors may indicate an attractive entry point, while a significantly higher valuation could signal overpricing. Additionally, analyzing Discounted Cash Flow (DCF) projections, if available, helps in estimating the fair value of shares based on future earnings potential. You should also assess whether the IPO price allows for sufficient upside potential post-listing or leaves little room for growth.

Check 4: Purpose of the IPO

Companies go public to raise capital, but the intended use of these funds can signal their future growth prospects. If the proceeds are allocated toward business expansion, research & development, or acquisitions, it's a thumbs up. It indicates a growth-oriented approach, which is generally positive for investors.

However, if a significant portion is used for debt repayment or to provide an exit for early investors and promoters, it may suggest financial distress or a lack of confidence in long-term prospects. A well-structured IPO with a clear strategic vision for capital utilization is more likely to create shareholder value over time.

Check 5: Management & Promoters

You should assess the track record, experience, and leadership team credibility, including the CEO, CFO, and board members. A management team with a history of successfully running businesses or scaling companies is a positive indicator. Additionally, strong corporate governance practices, transparency in financial reporting, and ethical business conduct are essential to avoid risks related to fraud or mismanagement.

Evaluating the promoter holding is also important - a high promoter stake signals confidence in the company’s future, while consistent promoter selling may raise red flags. You should also check for related-party transactions and any past regulatory or legal issues involving key executives to gauge trustworthiness.

Check 6: Industry & Market Conditions

The last point is industry and market conditions. A favorable macroeconomic time, such as strong GDP growth, stable inflation, and supportive government policies, can enhance an industry's prospects. Additionally, sector-specific trends—like rising demand for renewable energy, increased digital adoption, or a boom in infrastructure—can drive long-term growth.

Regulatory frameworks, competition intensity, and global market trends impact the industry's profitability and sustainability. Moreover, overall stock market sentiment affects IPO success, as bullish markets often see higher investor participation, while bearish markets may lead to lower valuations and weak listings. Hence, you should assess how resilient and scalable the industry is before investing in an IPO.

Before you go

Evaluating an IPO is not too different from evaluating a listed company - the basics remain the same. The main difference is that for IPOs, the available information on the company could be limited but you will have to evaluate the company on the same parameters with the available information.

If the IPO shows strong fundamentals, fair valuation, and high demand, it could be a good investment. If it is overvalued, in a weak industry, or has governance issues, it is better to avoid it.