IPOs - Speak The Basics (Very Good Reading) (16)

Overvaluation --


A lot of factors go into determining an IPO's offering price and not all of them have to do with the price-to-sales or price-to-cash flow multiples that determine the value of most other stocks.

Unfortunately, professional investors are at an advantage since they can often find out a company's sales and earnings projections.

As a regular retail investor, you won't get any future estimates until analysts start covering the new issue about 25 days after the stock starts trading.

Still, you can compare how companies are valued to past results.

Just take the number of shares outstanding after the offering, multiply it by the expected offering price (take the midpoint of the listed pricing range),

and find out what the market value of the company will be.

Then, divide that figure by the firm's revenue and profit for the past four quarters.


Hopefully, these multiples, although rough calculations, will be comparable to similar publicly traded companies.

Number of shares outstanding is found in "The Offering," expected offering price range is usually found on the front page (but it is not always there),

and quarterly sales results are usually found in "Selected Consolidated Financial Data" (if quarterly results are not available, use results from the most recent fiscal year).