When it comes to investing in an Initial Public Offering (IPO), many investors focus solely on financial numbers—sales growth, profitability, and financial ratios. While these metrics are undeniably important, Genesis Kelly Lontoc, a Registered Financial Planner, argues that numbers alone aren’t enough to truly assess an IPO’s potential for long-term success. To make informed decisions, investors must also consider other critical factors, including the company’s heritage, vision, and resilience.
“The numbers matter, but they don’t tell the whole story,” Lontoc told Financial Adviser PH. “You can have a company with impressive sales and high-profit margins, but if the company’s vision isn’t clear or its management strategy isn’t solid, those numbers won’t sustain long-term growth.”
The Key Ratios to Watch
While Lontoc emphasizes the importance of broader factors, he also explains the key financial ratios that provide insight into a company’s current health:
Profitability Ratios: These ratios show how well a company can manage its costs to generate profits. A company that has strong sales but low or negative profit margins may be heading for trouble, even if its revenues are growing.
Liquidity Ratios: Liquidity ratios, such as the current ratio, measure a company’s ability to meet its short-term obligations. A ratio above one is ideal, but a low ratio could indicate financial strain.
Leverage Ratios: These ratios show how dependent a company is on debt. Companies with high leverage may struggle to weather economic downturns, making them risky investments.
Efficiency Ratios: Investors should also examine how efficiently a company uses its assets. High inventory turnover and asset turnover ratios indicate that the company is efficiently managing resources, which is a positive sign for growth.
Beyond Numbers: Company Heritage and Vision
While these ratios provide valuable insights, Lontoc insists that investors must also consider the company’s heritage and reputation. “A company’s history and its resilience during tough economic times speak volumes about its potential for long-term growth,” he says. Understanding how the company has handled adversity—such as economic downturns or industry disruptions—can help assess its future prospects.
Additionally, a clear vision and strategy outlined in the IPO prospectus is critical. A company that is transparent about its long-term goals, including plans for innovation and market expansion, is better positioned for sustained growth.
The Takeaway:
Investing in IPOs is not just about crunching numbers—it’s about understanding the broader picture. By combining financial ratios with an analysis of the company’s heritage, vision, and market resilience, investors can make more informed decisions that align with their long-term financial goals. As Lontoc told Financial Adviser PH, “The right IPO can deliver financial gains, but only if you take the time to evaluate the company beyond just the numbers.”
