IPOs - Speak The Basics (Very Good Reading) (14)

Working capital deficit --


This is when a company's liabilities, or debts, are greater than its assets.

This is not uncommon for a new issue, but it should be explained and should disappear on an "as adjusted" basis after the completion of the offering.

Details can be found in "Summary Consolidated Financial Data" and an explanation is in "Liquidity and Capital Resources."



Other financial red flags --

A number of other problems can be found on a company's balance sheet or income statement.

Things such as inventories or accounts receivable rising more rapidly than revenue, high interest expenses, or extraordinary charges should be explained.

Found in "Selected Consolidated Financial Data" with more detail in the "Index to Consolidated Financial Statements."



Over-reliance on one customer --

A clear danger sign.

Several IPOs have imploded after the companies announced they were losing one of their major customers.

Of course, like all of these warning signs, there are exceptions.

Found in "Risk Factors."



Supplier reliance --

A company can be too reliant on its suppliers as well as its customers.

Make sure a firm can switch from one supplier to another rather easily.

Suppliers that double as competitors are another danger.

Found in "Risk Factors."