Financial Statements
The financial section of the RHP contains 3 years of audited data. This is where you verify if the business is actually worth investing in.
IPO companies present their best possible picture. Your job is to look beyond the narrative and verify it with numbers.
What's Included
Standard disclosures:
- Statement of Profit and Loss (3 years)
- Balance Sheet (3 years)
- Cash Flow Statement (3 years)
- Key Ratios
- Auditor's Report
Profit and Loss Analysis
Look for:
| Metric | What to Check |
|---|---|
| EPS growth | Earnings per share trend |
Compare growth rates: Revenue growing 20% but profit only 5%? Margins are compressing. That's concerning.
Warning Signs in P&L
- Revenue spike in the last year (managed for IPO)
- Declining or volatile margins
- Heavy reliance on "other income"
- One-time income inflating profits
Balance Sheet Analysis
Key checks:
| Item | What It Shows |
|---|---|
| Equity | Is it growing through profits? |
Debt Position
Calculate:
- Debt-to-Equity ratio
- Interest coverage ratio
- Net debt (total debt minus cash)
If a major "object of issue" is debt repayment, the company might be overleveraged. Check why debt accumulated.
Cash Flow Analysis
The truth serum of financial statements:
| Cash Flow Type | What It Shows |
|---|---|
| Financing | Debt raised or repaid, equity |
Quality Indicators
| Good Sign | Bad Sign |
|---|---|
| OCF funding investments | Debt funding everything |
Key Ratios to Calculate
From RHP numbers, calculate:
| Ratio | Formula | Meaning |
|---|---|---|
| ROE | Net Profit / Equity | Return on investment |
| ROCE | EBIT / Capital Employed | Overall efficiency |
| Current Ratio | Current Assets / Current Liabilities | Short-term health |
| D/E | Total Debt / Equity | Leverage |
| Interest Coverage | EBIT / Interest | Debt servicing ability |
Comparing with Peers
The RHP often includes peer comparison:
- Revenue and profit comparison
- Valuation multiples
- Industry positioning
Check:
- Is the company pricing at premium to peers?
- Are margins better or worse?
- Growth rate comparison
Companies choose flattering peers for comparison. Look up actual competitors yourself.
Restated Financials
RHP financials are "restated":
- Adjusted for accounting policy changes
- Made comparable across years
- May differ from annual reports
This is normal, but significant adjustments should be explained.
Auditor's Report
Check for:
- Clean opinion vs qualified opinion
- Emphasis of matter paragraphs
- Key audit matters
- Going concern issues
"Qualified opinion" or "emphasis of matter" on important items is a red flag.
Key Takeaways
- Three years of financials show real performance trends
- Look for consistent growth in revenue and profits
- Cash flow often tells a different story than profit
- Calculate key ratios yourself – don't just trust what's given
- Auditor's qualifications need investigation
Next: How do you understand what the company is really saying about risks?
Sources & Disclaimer
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
- SEBI Guidelines for Red Herring Prospectus (RHP) Format
Note: Any benchmarks (e.g., "Good ROE is > 20%", or specific P/E ranges) are simplified industry heuristics for educational purposes. True evaluation depends on specific industry context, market cycles, and individual company circumstances.